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Cash windfall options: pay down the mortgage or enhance our pension?

Q&A: As public servants you can invest in AVCs or purchase notional service

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Dominic Coyle
Tue Sep 28 2021 - 05:55

My husband and I built our home last year. We were lucky to qualify for the first-time buyers grant and received just under €20,000. We took out a mortgage of 70 per cent loan to value.

We have come into some money and now we would like to pay off €40,000 from our mortgage. Is there any issue in doing this? In particular from Revenue with the Help to Buy grant?

There is 23 years left on the mortgage. We are on a variable mortgage rate from the bank, so there should not be an issue from the bank.

We are both public servants but we spent six years abroad a few years ago. Due to this our pension contributions are lower than normal. Should we use the money to invest in AVCs for our pension? We are both in our late 30s.

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Ms A.N., email

Well, this can be split into the very straightforward and the anything but. The first good news is that you’ve been fortunate enough to come into a substantial sum of money at a stage where it can make a real difference to you.

The second plus is that there is nothing to stop you putting a lump sum against your mortgage. It’s interesting to hear Help to Buy referred to as the first-time buyers’ grant. It shows how it is viewed by young aspiring homeowners.

As it happens it’s not a grant at all, but a relief that allows you to reclaim money you have already paid the State in income tax and (less relevant these days) DIRT on savings paid over the four tax years before you apply. USC and PRSI cannot be claimed back under this scheme.

As of now,you can claim back the smaller of 10 per cent of the value of the home or €30,000. Those limits were introduced last July as part of the Government’s economic stimulus and are up on the €20,000 or 5 per cent which would have been the limits when you applied. The higher limits are supposed to expire at the end of this year but the current betting is that they will stay. We’ll know come budget day.

There are situations where the Revenue Commissioners can claw back that relief, and you're quite right to make sure it wouldn't apply to you before making any changes. But the good news is that there is no grounds to claw back simply because you're paying a lump sum off the mortgage – even if that accelerates bringing the loan to value below the 70 per cent threshold needed to qualify for the relief in the first place.

Clawbacks come into play only if you were: (a) found to be not entitled to apply in the first place; (b) you don’t finish the building/buying of the property; or (c) you don’t live in the property for at least five years.

In terms of putting it against the mortgage, there is no issue for you as you are on a variable interest rate. If, however, you were on a fixed rate you would be charged a penalty in most cases for lump sum payments during the period of the fixed rate. People in that position would be best advised to wait until the fixed rate expires and then make the payment before any further fix.

Some fixed rates do allow limited lump sum payments so that might be an option for certain people.

So that’s clear enough. But should you do that or put money against your pension? That’s an altogether more personal choice and not a matter of fact.

Paying off the mortgage is attractive to many people. It is generally the biggest debt one will face and that can be intimidating. On the other hand mortgage interest rates are the cheapest at which you will even borrow money. So there is little point in accelerating the paying down of a mortgage if you have – or expect you will have – additional borrowing requirements down the line.

On the flip side, putting the money into AVCs (additional voluntary pension contributions) has the advantage of allowing you to make up for the missing six years of your careers when you were abroad while getting tax relief at your marginal rate – a very significant perk.

On the downside AVC contributions go into a defined contribution fund and so are not “guaranteed” in the same way that your public sector defined benefit pension is. How they fare is determined by the investment performance of the underlying assets acquired with your money. The value of the AVCs can go down as well as up, though with around a 30-year investment window ahead of you they should have plenty of time to make up for any temporary investment blips.

There are also upper limits for pension payments attracting tax relief in any one year – a limit dependent on your age.

* Another option is to "buy back" those missing years through the purchase of notional service, which is a feature of public service employment. This also has the advantage of tax relief – subject to Revenue limits – and it gives you the certainty of knowing what your pension will be at retirement.

How much it will cost will depend on the number of years you need to hit the magic 40-year maximum, your current age, your salary and PRSI class. It is possible to buy service both with lump sum payments or by periodic deduction from your wages. With lump sum payments such as you are considering here, it will be up to you to apply to Revenue for the relief.

I cannot tell you which option is right for you: only you can decide that.

*This article was edited on September 28th to state that purchase of notional service does attract tax relief

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into

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