Making Cents: Your financial questions answered

Question
Liam, I think what I’m saving into my pension is good but I’m not sure. I’m 44 and I earn €76,000 per year and I’m contributing 12% and my employer 10%. I have accumulated €115,145 to date. The statements I receive from my company's pension administrator are hard to read and follow. My goal is to semi-retire at age 60 but I don’t know what that will mean based on what I’m currently contributing. And am I missing out on a whole lot had I stayed until 65. If I knew what the difference was, I could decide, but I don’t know. Your help would be appreciated.

Answer
Okay when I ran the numbers assuming an average annual return of 4% and where you and your employer maintain existing contributions, at age 60 you’d have (a) a tax-free lump sum in the amount of €148,238 and (b) the balance of your pension fund would give you a net monthly income of about €1,334 assuming a withdrawal rate of 4%.
Now if you stayed working until 65 those two numbers would change to (a) a tax-free lump sum of €203,320 and (b) a net monthly income of c. €1,837 from the balance.
So, the big upside to working those additional five years is €55,082 more in tax free cash and an extra €503 paid into your account each month.
The difference is quite substantial, but it’s got to be substantial enough for you to continue working for five more years, and maybe it isn’t, only you can answer that question.
Here’s a suggestion that might help and perhaps one you haven’t thought about that will satisfy you retiring at 60 whilst not leaving such a gap in tax free cash and monthly income behind you and that’s by making higher contributions now.
Because if you did and you increased your contributions by 8% bringing your personal contributions up to 20%, that extra amount over the next 16 years would mean that at 60 you’d have €185,850 in tax free cash and you’d have a monthly income of €1,641.
Now the difference between what you’d get at 60 and 65 is lower but that will come at a cost to you right now which would be about €304 each month because that’s what that 8% extra will cost you.
And just a quick note on the tax relief you’d be in receipt of if you increase your contributions.
The cost to you we know will be €304 each month and that’s what you’d see your salary reduced by, but there’s €507 being lodged to your account each month. You will get tax relief at 40% on your contributions which means tax relief on an investment of €507 is €203 each month.
And if someone said to you, I’ll give you €507 each month, if you give me €304, would you do it?
Of course you would - you’d be mad not to, even if you had all the money in the world.
The other factor you have to determine is how much you are going to spend in retirement.
If you implement what I’m suggesting and at 60 you have an income of c. €1,641 but you’re spending €3,041 then you have a monthly shortfall of €1,400 that needs to be bridged and that can be made up from your tax-free cash of €185,850 or if you had plans to spend it on something, then you’d need to earn about €24,000 per year.
And you’d only have to do it for six years until the state pension kicked along with you spending that bit less as you age.
But at least you now know the numbers at age 60 and 65 and you can see what will happen if you do something or if you do nothing at all. And maybe it’s still fast-forwarding retirement to age 60 but increasing those contributions now so that what you’ll be in receipt of at 60 will be close to what you’d be in receipt of at 65 if you did nothing.

Question
Liam I have €10,000 that I’d like to get immediate access to if I needed it and I’m not sure where the best place to put it is where I’d make some sort of return. I don’t expect the rate to be great but I would like it to be making something, nonetheless. Any ideas?

Answer
There are two very good rates available which meet the parameters you’ve set and the first is with Bunq.com who are offering 3.36% on amounts from €0 to €100,000 until December 31.
And the second account is via raisin.ie who have access to many banks across Europe and one of them is a Swedish Bank, HoistSparen, who are offering an interest rate of 3.16% on their demand deposit accounts.
There’s a third bank offering 3.11% where you also have immediate access to your funds and again it's available through raisin.ie and that bank is Morrow Bank who are an online digital bank based in Norway.
The offers from Irish banks aren’t great compared to the ones I’ve just outlined i.e. An Post are offering 0.75%, AIB 0.25%, BOI 0.10% and PTSB 0.01%.
If you deposited €10,000 with say Bunq and that rate stayed the same over 12 months your after tax net return would be €225 whereas if you had the same money on deposit with say PTSB for example, the interest you’d earn wouldn’t even be a €1, it would be €0.67.
As you can see there is quite a difference so it is worth comparing different banks in Ireland and ones where you can get access to abroad as well. And maybe consider looking at locking into a short fixed term account because you could get a higher rate. Take PTSB as an example, they are offering as we know 0.01% from their instance access account but they are offering a very respectable 2% for their six month fixed term account and 2.75% for 12 months.
The Competition and Consumer Protection Commission has an excellent website where you can compare what rates are on offer and it’s www.ccpc.ie. And it’s worth having a look at it and looking at different lock in periods or not for that matter but it’s an excellent resource and one I’d recommend people use.

Question
I’m getting married next year but a friend of mine has just gotten a divorce and said he’s been left with nothing. He jokingly said he wished he had a prenup agreement before he got married. I’m not sure if this is something you can get in place before you get married, is it? And if so, is it something I should think about?

Answer
You can certainly arrange a prenup but it has no basis in law in Ireland.
And because of this, they are not strictly binding. This means that if you have a prenup agreement in place and your marriage breakdowns and you appear before the courts, the judge is not bound by the terms of the pre-nuptial agreement you both wrote and agreed to.
Having said that, what I’ve read and what I’ve been told is that the courts will look at the issue of intention i.e. what were both of you trying to achieve and/or protect when you signed the prenup.
And if the agreement makes proper provision for each party, it is more likely to be persuasive with the judge ie in situations where one person is likely to inherit a significant asset or business or part thereof, it will guide the judge in the divorce or judicial separation on what the parties’ intentions were from the outset, and how the assets will be divided in divorce.
The judge will also be influenced by the situation you find yourselves in at the time of divorce ie do you now have kids and who will have custody of them, what are their costs going to be, is one of you suffering an illness or from ill health and so on.
And importantly, you have to show that there was full disclosure at the time of signing the prenup ie you both knew everything about the other's finances and what assets they had, and very importantly at the time of signing, you both had obtained separate, independent legal advice.

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