Your money Q&A: Should I tap pension fund to help pay the mortgage?
Q&A: Dominic Coyle
Would it be advisable to pay off my mortgage with money built up in my pension pot? Photograph: Yui Mok/PA Wire
I am 47 years old and have already built up a considerable DC pension pot of around €830,000, fully invested in equities, of which 73 per cent is by way of additional voluntary contributions.
I am conscious that I have until March 2016 to withdraw up to 30 per cent of this money at 40 per cent income tax (net approx €100,000).
I am considering doing this to pay off some of the mortgage on the family home of €280,000 at 3.55 per cent. I struggle to pay the bills each month, but my gut feeling is that it is better not to draw the AVCs down. Can you help me make an objective analysis?
Mr G.C., Dublin
There is no absolute right answer to a question like this. As a general rule, people do not save sufficiently for their pension and raiding whatever fund they have puts them at increased risk of impoverishment in retirement.
Tax relief on pensions is generous and, as you note, anything you draw down under this measure will be liable to taxation at your marginal rate. Also, you will sacrifice any further potential investment gain on that money.
If you keep it invested until retirement, you can either draw the money down as an annuity or transfer to an Approved Retirement Fund and draw down in such a manner as to minimise your exposure to income tax. Having said that, you do have a relatively substantial pension fund while, in your own words, you are struggling to pay your bills each month.
The purpose of the measure was to take pressure off people who might have built up savings in better times but were now facing a financial squeeze. There’s not much point saving for a comfortable future if the stress of living today kills you long before then.
You will be able to take one-third of your AVC fund, which you say is around 73 per cent of the pension savings – or €605,900. That means a drawdown of €181,770 – or €109,062 after tax, a sum that would certainly knock a hole in your mortgage payments.
You will still have a pension fund of close to €650,000 and time to add to it.
The choice can only be yours, and it really does come down to how tight your current financial position is and what short term prospects for improving that are. As you note yourself, there is a deadline here as the ability to tap pension savings expires in March 2016.
In terms of using any money you draw down, I would remind you that any other debts you have will probably be more expensive than the mortgage and you should pay these off first before reducing your mortgage.
One final thing I would add, in relation to the pension fund itself, is that you should probably get advice on investment. Having the whole thing in equities in what is currently a very frothy market sounds like a dangerously lopsided strategy.
Rental income and small gift exemption We have two children who go to fee paying schools. We receive €10,000 per annum approximately in income from a rented house which had been mine before we got married. Could we gift €6,000 per annum to the two children under the small gift exemption and then (perhaps a year or more later?) use this to pay towards their school fees? If so, this would have the potential to both reduce our tax bill and school costs?
Mr S.R., Dublin
The simple answer is no, you cannot. The small gift exemption is a generous relief and, because of that, the Revenue is – not surprisingly – somewhat picky on anything that suggests it might be abused.
The key thing is that the gift must be a genuine gift to the person who receives it. So, in this case, there is nothing to stop you gifting money to your children, but it then becomes their asset and cannot be used to benefit you or anyone else.
Most particularly, in this case, you cannot use money you have gifted them to pay the school fees which are your responsibility. Now, if you were to gift them money later in life and, as adults, they decided to spend some of it on a course they particularly wanted to do, that would pass. But the idea of minors paying for their own primary or secondary schooling would not be acceptable to Revenue as a valid use of the small gift exemption.
One other thing. You mention that it might have the potential to reduce your tax bill. I’m not sure how that would be the case as any money you gift under the small gift exemption would come from after tax income. In this case, your rental income must be taxed in the normal way before you go about making decisions on how to use it – in making gifts to your children or any other reason. Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email email@example.com. This column is a reader service and is not intended to replace professional advice