Making Cents: More of your financial questions answered

Question
Liam, I’m 51 years old and I have a mortgage outstanding of €145,000 with 14 years remaining, and my monthly repayment is €1,200. I have a surplus of €400 each month and I’m wondering should I use that money towards clearing my mortgage faster by making a monthly overpayment or should I use the money towards my pension by way of AVC contributions? I’m not sure if I’d build up a bigger pension fund by small monthly contributions for 14 years or bigger contributions which I could make if my mortgage was gone. Hope this makes sense.

Answer
Yes, it makes perfect sense and it’s a question I’m regularly asked.

Okay, let’s look at Option 1, which is, clear mortgage off first and then focus on making larger pension contributions.

if you make overpayments on your mortgage, I calculate that you’ll reduce the term of your mortgage by four years, so you’ll be 61 if you choose this route. By accelerating the repayment of your mortgage you’ll also save €18,152 in interest payments.
If you re-direct what you were paying on your mortgage along with the monthly overpayment amount, this means you have €1,600 available that can be used towards pension contributions. And when you factor in tax relief, it means €2,667 is going into your pension fund but it’s only costing you €1,600 after tax relief.

And that €2,667 at an annual return of 2% over four years is going to amount to €128,016.

So, you’ll have saved €18,152 in mortgage interest payments and increased your pension fund by €128,016 so the two combined amount to €146,168 should you choose this route.

Option 2 is continue to pay your mortgage for the 14 years remaining but save €400 into your pension fund for 14 years.
That €400 when grossed up and allowing for tax relief means a monthly contribution of €667, so that amount invested at a return of 2% for 14 years would generate a fund of €129,193.

Because you haven’t cleared off your mortgage faster, there’s no interest saving which means clearing off a mortgage in 10 years and making bigger pension contributions over four years is more impactful than keeping your mortgage for 14 years along with making lower pension contributions over the same time period.

Question
Liam, what happens if I die without making a will?

Answer
If you die without making a will, you are said to die intestate and that means a legal act which came into being in 1965 (Succession Act) will determine who will inherit what.

For example, under this act, if you are married and have no children, your spouse will inherit everything.

If you are married with children, your spouse will get two-thirds of your estate and the remaining one-third is divided equally among your children. If one of your children has died, that share goes to his/her children.

If you have children, but no spouse, your estate is divided equally among your children.

If you are single, with no children, and your parents are alive, your estate is divided equally between them, and if only one parent is alive, your estate is given entirely to them.

If you are single, no children, and no parents alive, your estate will go your to brothers and sisters and is shared equally among them, and if one has passed away, their children will take their share.

If you are single and have no parents, brothers, sisters, nieces, or nephews alive, your estate is divided in equal parts to your next closest relatives.

And finally, if you have no living relatives, your estate goes to the state.

Question
Liam, I’m buying an investment property and the bank I am taking out the mortgage with, are insisting I take out a life assurance policy, but the monthly premium they are quoting is very high. Do I even need to take out a policy? Any advice is welcome.

Answer
Under Section 126 of the Credit Consumer Act 1995, there are four occasions when a life assurance policy is not required, when you are taking out a mortgage, and they are:

- You are over the age of 50

- The mortgage is being secured on a property that is not your primary residence

- You have been refused cover by a life assurance provider, or if approved the premium has been increased and is much higher than normal (reasons for this could be down to your occupation, existing medical condition etc. and you, are seen, as a higher risk)

- You have enough life cover in place, from other polices you own, that could pay off the loan if you passed away
Because the property is not your primary residence, you don’t have to take out a life policy, but even though there is no legal requirement for you to do so, your lender could still make it a condition of your loan approval, and insist you do. I would advise you speak with them and refer to the Consumer Act, I just referred to and ask what their reasons are, for insisting you take out such a policy?

Families with ill children supported in memory of late Limerick man

Question
Liam, is it possible to get tax relief on a mortgage protection life policy?

Answer
No, but you can get tax relief on a life policy known as Pension Term Assurance, provided you satisfy certain conditions two of which are:

- You are self-employed

- You are in non-pensionable employment i.e. your employer doesn’t have a group scheme in place or you’re not a member of their current plan

Any unused tax relief made towards pension contributions, can be redirected to a pension term assurance plan, and they will qualify for tax relief at your marginal rate of tax, like contributions to your pension do, provided both, when combined don’t exceed Revenue limits.

For example, if you are 35, the maximum you can put into a pension is 20% of your earnings up to a limit of €115,000. If you are making pension contributions of 10%, you have 10% of unused tax relief that can be used and applied to the monthly cost of a pension term assurance plan.

If a policy costs €100 per month, and you satisfy the criteria for a pension term assurance plan, the cost reduces to €60 per month after tax relief, and that’s assuming you pay tax at the higher rate. The savings over the lifetime for this type of policy can run into the thousands, and because this type of policy is not very well known, a considerable amount of people I believe are losing out on this valuable monetary benefit.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie