Should we pay off mortgage or invest in AVCs?

Q&A:My husband I save regularly and have built up a substantial amount which we currently invest in prize bonds. We get a great return on them versus putting the cash on deposit.

I am now thinking of the future and putting some of our savings to good use but I’m not sure which the best option for us is with the state pension age increasing for us.

Should we:

* pay a lump sum off our mortgage which has just less than 11 years to go?

* invest in AVCs in my husband’s occupational pension. He retires in 12 years?

* invest in AVCs in my own occupational pension. I will retire in 25 years and I’m concerned that there will be no state pension at that stage?

I’d appreciate any guidance as to what area to investigate further as our age profile is unusual.

Ms S.L., Dublin

Your age profile is not that unusual. You are in your early forties and your husband in his early fifties, precisely the stage at which issues like retirement income suddenly assume a greater importance with mortgage and childcare costs generally less of a burden.

In the current climate, you are at least in the fortunate position of having a savings pot available to invest.

Your mortgage has just 11 years to go, you say. Though you don’t disclose details, it is quite possible given its outstanding term that the loan is on a tracker rate. As banks are still losing money on these, you can get some idea of just what good value they are for the borrower. Either way, home loans are generally the cheapest money you will borrow.

You appear to have no problems meeting payments at the moment; in fact, you appear still to have enough wriggle room to commit to regular savings. Thus, even if you are on a variable rate, there is sufficient breathing space to meet any rate increases. In any case, from what you say, the home loan will be paid off in full before your husband or you retire.

On the other hand, you have the option of investing in retirement income through Additional Voluntary Contributions to your pension pot. The advantage here is that you are likely to have scope to increase pension savings while availing of relief from income tax.

At your age, you are entitled to contribute a sum equal to as much as a quarter of what is called net relevant earnings to a pension pot each year and qualify for relief. For most people, net relevant earnings means your gross salary.

Your husband can contribute even more – up to 30 per cent of net relevant earnings – as he is over 50.