Got a question for Liam? Email your questions to liam@harmonics.ie Question My husband is 52 and is planning on retiring at 55 and I think he should start putting as much into his pension as he can for the next three years. At the moment he’s not contributing anything. He’s skeptical about putting anything in even though I’ve explained the tax relief benefit. He just doesn’t think the contributions will make much difference and will only give him a nominal amount each month, which he says, and I quote, ‘it’s probably only going to be €30 or €40 per month, and I won’t get back what I put in.’ I don’t think he’s right and is there another way I can explain this to him better? READ MORE: People of Limerick urged to calculate their 'monthly nut' to aid financial planning Answer This was a great question and was just one part of a much longer email trail which is too long to show you here, but the above summarises her ask very well. I had gone back looking for more information and when I received it, the following was my final reply. Okay, if your husband contributes 30% of his salary over the next three years, the net cost to him over that time period, after tax will be €29,700. 30% of his salary i.e. €55,000 = €16,500 and when tax relief is applied at 40%, the net cost each year is €9,900. So, if someone said to you, I’ll give you €16,500, if you give me €9,900 would you take it? Of course you would and you should, the offer is great and that’s all down to tax relief, it has nothing to do with investment returns. Which means that over the next three years €49,500 will go into his fund but it will cost him €29,700. So, without any investment return whatsoever, he’s still up +€19,800 over three years, which is a 67% gain i.e. €29,700/€49,500. Okay, he now has this €49,500 in three years, what can he do with it? He can immediately take 25% of it tax free, which is €12,375 and he can do what he wants with it. The balance would go into an Approved Retirement Fund (ARF) and if, for example, he decided to take 10% from it per year (fund would then last 10 years), that would amount to €3,713 per year, which would bring his pension up to €9,898 per year and after tax that should amount to c. €701 per month. So, the AVC fund i.e. €3,713 after tax would amount to c. €263 of the €701 per month. This figure may be slightly more or less because I don’t know your exact tax rate but it’s not a million miles away either. So, from a financial perspective it really does make sense to make those contributions even if you or your husband didn’t need the extra money and the reason I say that is because if you don’t you are leaving €19,800 in tax relief behind you over those three years or €6,600 each year. And we are all trying to reduce the amount of tax we pay or reclaim some of it and this is an example of how you can do this. Question Liam, we are a married couple earning a good income each month, but at the end of the month, we have nothing left in our account. We’re never overdrawn but we have nothing left to save either which is a concern for me. I’m pretty sure the problem is a loan we had to take out to finish a house we built three years ago. We ran out of money and had to borrow from the Credit Union and the loan repayment is costing us €735 every month. I’m thinking of taking out an equity release on our mortgage as we have enough equity to clear this loan off and run this new loan alongside our main mortgage. That should ease the pressure quite a bit and we can use the reduction in the monthly repayment to start saving because not only do we have no savings, but we also have a child that could be going to college in six years and I’m worried I won’t have any savings to help with registration fees or accommodation, and I’ll have to pay for them from income or take on more debt and I’m just very worried. If you had any advice or any thoughts on what you think I’m thinking of doing, it would be much appreciated. Answer Again, this question is one part of an email trail which is too long to show you here. I had gone back to her looking for more information and when I received it, my reply was as follows. You borrowed €39,000 from the Credit Union six years ago at a rate of 10.4%. Your monthly repayment is €735. And if you continue repaying this until its repaid in full in three years’ time, it will have cost you €13,784 in interest repayments. If you move this loan to your mortgage provider, you could finance it over 19 years (which is the term remaining on your mortgage) and your monthly repayment assuming a variable rate of 3.95% (the rate you are currently being charged) would amount to €119. So, there is quite a monthly saving from what you are currently repaying i.e. €616. But when you look at the total amount of interest you’d pay back, you’d pay about €1,061 less if you continued with the Credit Union loan. When you factor in what interest you’ve already paid on the CU loan (c. €6,892) and the interest you’d pay over 19 years with your mortgage provider (c. €8,043) it would amount to €14,935 whereas the CU will cost you €13,784 if you continue with it for the next three years. The gap is probably bigger when you factor in legal costs that you would incur if you went down the equity release route with your mortgage provider. So, the difference isn’t huge either way, but my personal preference would be to keep going with the Credit Union loan because you only have 36 more months left before it's repaid in full. I’d prefer to make 36 monthly repayments of €735 than 228 monthly repayments of €119, but that’s just my personal preference and if I can save interest repayments in the process, then that’s fine as well. But there really isn’t a correct answer here, it’s really what you’d prefer and what sits better with you. I’ll finish by saying that if you did continue with the CU loan you still have time to build up those savings for your child before they enter college. If you continued making that €735 ‘repayment’ after the CU loan was finished, but this time it was going into a savings account, in three years’ time you’d build up about €26,460 which would go a long way towards college costs. READ MORE: How should you structure your pensions and investment accounts in Limerick? Question Liam, my wife and I want to do some retirement planning, but we really have no idea if what we’re doing is okay or not. The trigger for our question by the way came from reading your recent rainbow and landmines article. The pension administrator, who looks after both of our employers' pension schemes, have some calculators that we’ve tried to use but they are very complicated, and we’ve just given up on them. We just want to know very simply what we are on track to receive at different timelines and if you can tell us in a way that we understand it would be great please. Thanks. Answer To give them a complete answer I had to go back to them and ask them things like, what their annual income was, what amount had they accumulated to date from past and present schemes, what % of their salary were they and their employer contributing, what age they were, what ages they wanted to look at retiring at, what type of funds were they invested in and on and on. Once I had gathered enough information from them, my reply was as follows: I’m basing my figures on all of the data you recently gave to me and when I factor in annual returns of 4% and account for inflation at an average rate of 1.5%, this is what you can expect/are on track to receive if you retire over different time periods: Age 60 Gross Annual Income €40,889 Net Monthly Income €3,022 Tax Free Cash €239,185 You could top up your net monthly income by using some of the funds from the tax-free cash lump sum. If you needed an income for example €4,500 per month, you could use the €239,185 tax free amount to pay yourself an extra €1,565 per month (€2,935 - €4,500) and over five years you’d need to ring fence €93,900 (€1,565 x 60 (months)) from the €239,173, which means you’d have €145,285 (€238,185 - €93,900) to do as you please with. And as you get older your income will increase because when both of you are 65, you’d be in receipt of an extra c. €12,856 from your defined benefit pensions (Mary €5,271 and John €7,585) and at 66 you’d both get the state pension which could be an extra c. €30,000 on top of the €40,889 you’d already be in receipt of from your pension funds, if activated at 60. Here are some more numbers based on different timelines: Age 62 Gross Annual Income €48,170 Net Monthly Income €3,464 Tax Free Cash €272,998 Age 65 Gross Annual Income €53,745 Net Monthly Income €3,831 This is when your Defined Benefit pensions x 2 are added to your income if you both retired at 60. Age 63 Gross Annual Income €80,745 Net Monthly Income €5,253 This is when your state pensions x 2 are added. I hope this helps and makes things easier for both of you to understand. Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie