Financial planning


#1

So, it’s the new year and it seems like a good time to assess things financial.

Over the past year-and-a-bit I’ve bought a place and spent money bringing it up to date, so now I find myself with more disposable income that needs a good home, now that I’m no longer paying high rent and saving.

Last year I was putting spare cash into mortgage repayments (after the renovation work, of course). This year I want to be a bit more considered, as I have a fair bit of spare income (and who knows, that may not last forever).

First off, with needing cash for deposits/renovations, I haven’t been maximising my pension contributions for tax relief and I pay quite a lot of top-rate tax. I’ve already set up AVCs for the maximum 20% relief this year. I suspect that one of the best things I can do financially this year is to make a once-off AVC and claim it against 2016’s unused relief as well, which I believe I can do until October 2017. My pension is growing nicely these last few years but it’s nowhere near needing to worry about overfunding in the next decade, even with good growth.

As an aside, I didn’t know until yesterday about the Standard Fund Threshold of 2 million… for a career-long investment that is supposed to benefit from compound growth that’s a shockingly low ceiling, in my opinion. Especially given what sort of an annuity 2 million buys you, and compared with some of the defined benefit packages that people are retiring on these days. Those of us with defined contribution pensions are certainly being well screwed over in recent years between that, the reduced relief, and the levies.

So after pension AVCs for this year and last year, the question becomes what’s the best thing to do with other disposable income. I have about 190K mortgage remaining at 3.3%, and a moderate rainy-day fund in cash. With the lack of ‘safe’ returns elsewhere it seems sensible to keep putting cash into overpayments, but then of course it is inaccessible, and it’s possible that over the long term there are better returns elsewhere.

I’m starting to lean towards splitting 75% of available funds to mortgage overpayment and 25% to another investment, maybe into buying ETFs or similar.

Maybe this is the year to start thinking about getting a financial adviser - do folks here find them worth it?


#2

But the ceiling could well be increased over time. I believe it was derived from the cost of a 60k p.a. pension to give parity of tax treatment with public sector pensions.

My superficially perverse strategy is to put the risky investments in a pension. This is because the gains are tax-free (or at least tax-deferred). The low-risk portion can be in savings where there (basically zero) growth won’t be taxed.

There’s also issues of tax asymmetry. You get taxed on gains in good years but can’t claw back the losses in bad ones. I don’t know enough about ex-pension investment taxation to understand the mechanics of this fully, it’s just something I’ve read.

After maxing out pensions I would pay off mortgage, as that gives you a guaranteed 3% or whatever return, not available on any other asset class. You will be able to increase pension contributions as you get closer to retirement.

Obviously there’s no way to know how pensions will be taxed in future, but equally there’s no way of knowing how an out-of-pension investment would be treated either.


#3

personally id have 6 months net salary in a rainy day fund, make sure that you have adequate insurance in case of illness and then pay down mortgage as quickly as you can while maintaining reasonable deposits into your pension fund


#4

For ordinary stock investments it means you pay 33% capital gains tax each year. If you make a loss you can carry it forward to offset against gains in future years, but you cannot offset it against gains in previous years, i.e. you cannot carry forward a gain. Dividends are taxed as ordinary income. There are various other complications for the Irish investor concerning taxes withheld on foreign stocks which may or may not be offsettable against Irish tax depending on mutual treaties with other countries.

Then there are retail investment funds known as ETFs and UCITS which generally offer diversification over a range of assets. Like a pension, you can roll over gains and reinvest dividends tax free, but then there is an exit tax of 41%. And just to properly screw you there is a “deemed disposal” after eight years, when you have to pay the exit tax anyway, although you can offset it against future gains and losses in the same fund when you eventually exit. However, you can’t offset losses between different funds or against capital gains.


#5

OK, so if you make 10% a year for 5 straight years (up 61% gross or 41% after CGT) then the market drops to the level it was at the start, you’re down 13.5% at that point. In a pension you would have lost nothing (other than fees, which might admittedly be significant).


#6

I thought CGT was only payable when you disposed of the asset? (or after 8 years for the deemed disposal thing).
So you’d only find yourself in the situation outlined above if you sold and rebought your stocks each year. If you held for 5 years and it dropped back to the initial price and then you sold, you owe no CGT. Or am I wrong? Definitely no expert :slight_smile:


#7

Aha. It seems though that funds are treated differently in terms of CGT and income tax depending on where they are domiciled.

And “deemed disposals” are relevant.

revenue.ie/en/about/publicat … e-note.pdf

So timing of disposal is not entirely within the control of the investor.


#8

From AAM

askaboutmoney.com/threads/th … ts.188821/
askaboutmoney.com/threads/th … ts.199443/


#9

@poohbear - are you PAYE/self-employed/Director of own company? Opportunity or desire to change this status?

What about career advancements? Need further education or letters on your name?


#10

I’m a high-earning (well into 6 figures) PAYE wage slave :slight_smile:
I like where I work and I couldn’t work here as a self-employed contractor. I don’t foresee this setup changing in the short to medium term, after that who knows.


#11

Route I would probably go down would be:

6 months reserve.
Repay principal on mortgage.
Max pension contributions.
Life Assurance for both spouse’s in addition to covering the mortgage. (you can’t eat a house as Brokers like to say)
Income protection insurance especially if on a high income.

PAYE leaves you with limited scope. Being a Director of your own company gives you far more scope for tax efficiency.


#12

Right, but you can go contracting in your fifties and fill up an EPP to the max almost without any restrictions on contributions (providing that the pension rules haven’t worsened then).


#13

@Poohbear - EPP = Executive Pension Plan. Given your income, your company may be able to put you on this. Basically, company can make large contributions to your pension over your 20% limit. Have a look at the pdf on this link explaining.

standardlife.ie/1/site/ie/pe … ivepension


#14

Thanks ixus!

6 months reserve in cash - check.
Life assurance - check.
Maxing pension - check.
Income protection - check (for long term disability/illness, anyway).
Overpaying the mortgage is in progress.

I think my main issue, which is a good one to have for sure, is that the mortgage should be paid down fully within 4-5 years and then I’ll have to figure out another way to invest. Unless I buy a larger place, I guess.

Regarding EPP, worth thinking about later. I’m in my mid thirties right now, and if I continue to fund through my 30s/40s and see some growth in the funds, I could be looking at a fairly large pension pot anyway going into my 50s, and if the SFT doesn’t go up considerably then it’d hardly be worth stuffing more into a pension. But who knows, too far out to plan for that. Might be nice to spend my 50s consulting part time, or even retiring early.


#15

Am I right that you can fund one for your spouse and get the relief yourself? Doubles your SFT?


#16

I suppose the deemed disposal thing effectively treats you as though in year 8 you sell and re-buy (assuming you don’t actually sell, which I don’t think you’re obliged to). If you had made a gain at that stage and then subsequently made a loss then you’re out of luck CGT-wise I think, unless you’ve another gain on some other investment to offset that loss. Like your example above.

The tax treatment of ETFs seems really complex here, I have been trying to wrap my brain around it with only partial success, so far.
I see a lot of complaints about it on Irish investment forums about it!


#17

No idea, I haven’t got a spouse anyway :slight_smile:


#18

US domiciled ETFs (well, generally all non UCITS ETFs actually) are treated just as regular stocks. There’s a thread on AAM about it and a clarification confirming that was issued by Revenue last year.


#19

Well then, may I suggest you put as much as possible away in another country while you can! Never say a word. And if s/he ever asks what you did with it all…bad investments… Lol.


#20

Sorry to hear of your nightmare situation :laughing:

Things generally seem to be in good shape. Would you consider going on a four-day week and taking the time to spice things up somehow? Learn an instrument, volunteer somewhere, get into hillwalking…