Getting a grip on my finances aged 57

Q&A: Dominic Coyle

Mortgage debt is, for most of us, the cheapest money we will ever borrow. Photograph: Rui Vieira/PA Wire

Mortgage debt is, for most of us, the cheapest money we will ever borrow. Photograph: Rui Vieira/PA Wire

 

I am only beginning to get a grip on my finances at the ripe old age of 57 with potentially eight more years of working life to go. I am single with no children.

I have a variable mortgage of €135,000 on a semidetached house. The term of the loan is 12 years three months. The house needs some repairs/upgrading which I can get some grants for.

I have some savings and am part of a pension scheme at work for the last 15 years. I can combine the current pension scheme with a pension I have from UCD which has been frozen since the 1980s.

When I met a financial adviser recently, the advice was to start paying AVCs and forget about overpaying the mortgage which was my first plan. Overpaying was with a view to saving on interest and getting rid of the mortgage in my early 60s – giving me a choice re part-time work and possibly generating income through a small home-based business.

The advice made sense at the time but the advisor is of course in the business of selling AVCs and not mortgages. I can grasp figures up to a point but am not able to tell which path to take or whether to do a bit of both at this stage.

Ms S.P., Dublin

Your conundrum is the difficulty in striking a comfortable balance between cold financial calculations and life choices.

Overpaying the mortgage will, hopefully, free you from the burden of debt within the next few years and allow you greater flexibility in making life choices, such as whether to continue in your current full-time job employment or look at part-time or self-employment options without the weight of that debt forcing your hand.

But mortgage debt is, for most of us, the cheapest money we will ever borrow. Accelerating payment on mortgage debt, unless you intend not to be in a position of having to borrow further down the line for other purposes does not generally make sense.

You mention the house needing repairs and upgrading. While you may be able to avail of grants for this purpose, if you also have to borrow, it makes little sense to pay more on those loans than you are saving by accelerating payments on the mortgage.

Turning to your financial adviser – investing in additional voluntary contributions for (AVCs) for your pension certainly makes sense in pure financial terms - at least up-front. Such contributions are made from your gross income – ie before you pay tax – and therefore lower your tax bill. Depending on your level of income (and the highest rate at which you pay income tax), each €100 invested in AVCs could actually cost you less than €50.

Your pension gets a €100 boost and it costs you as little as €49.

That sounds like a no brainer but, of course, the benefit of investing in a pension is that there is enhanced income for you in retirement. That depends on the money you invest growing between now and the time you retire.

As it stands, the investment climate is poor – at least it is poor unless people are prepared to take on board a higher degree of risk in where their money is invested. In your case, this position could be at odds with the trend in pensions to reduce the investment risk for clients moving closer to retirement.

Eight years is not a lot of time for pension funds to grow meaningfully in those circumstances.

And yes, you are correct in that while the adviser is obligated under Central Bank rules to act in your best interest, there is zero benefit to them in you overpaying the mortgage so, even with the best will in the world, they may be subject to unconscious bias. That certainly doesn’t mean they are wrong – only that you are correct to question their assertions.

You mention that you have eight years to retirement. That seems to point to retirement at 65. At that point, in 2024, the State pension will not kick in till the age of 67, so the chances are either that you will have to work for a couple of years longer than your current plan, or you will have to rely solely on your private pension income and/or pension lump sum for up to two years.

Ultimately, the question for you is this: will the money you invest in a pension via AVCs grow sufficiently between now and the time you want to draw it down to make it worth your while?

Yes you will have gained due to the tax relief – although this might be a lot less beneficial too you if you pay income tax only at the standard rate – but you will in all likelihood have forsaken the flexibility in your life choices. With your mortgage debt outstanding, you may well have to continue in your current employment whether you wish to or not.

Can you do a bit of both? Of course you can, but then you need to ask yourself whether you will broaden or narrow your choices – ie would any split make meaningful inroads into your mortgage AND materially increase your retirement income?

There is no simple “correct” answer. It is a balance of choices and only you can determine where your own best interest lies. Being single and without dependents does give you a little more flexibility in your choices but, on the flip-side, means there are fewer people to rely on if you cannot provide for yourself financially.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes,com. This column is a reader service and is not intended to replace professional advice.

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