Making Cents: Your financial questions answered

THIS week I am going to answer a number of questions from readers who have contacted me in recent weeks.

Question
Liam. I have been offered a promotion within my company, but it involves two things (a) a commute of about an hour each day and (b) moving from a defined contribution type scheme to a defined benefit one.
If I accept the role my salary will increase by about €10,000 each year, which I’m fine with and that will become about €96,000. Its the move from a defined benefit pension to a defined contribution that I’m worried about.
And I don’t know how to work out what I’ll end up with in each scenario.
I’m with the company for eight years and I’m 19 years away from retirement.
With the new defined contribution scheme the company will contribute 12% of my salary if I contribute 7%. Any thoughts or help would be much appreciated.

Answer
Okay when you run numbers to retirement age from a Defined Benefit (DB) perspective you will have (a) 27 years’ service and (b) a final pensionable salary of c. €157,000 (I arrived at this number based on your salary incrementing by c. 3.5% per year) and this would mean you’d have an annual pension paid at 65 of, €61,337.
If we look at the Defined Contribution (DC) calculation and based on a salary increasing at the same 3.5% per year and pension contributions of 7% of salary from you and 12% from your employer and assuming an annual return of 4%, I estimate you’d have a fund value at retirement of €747,000.
Which would pay you an annual salary of €29,880 and I’m arriving at this number by using a withdrawal rate of 4% which is considered the safe rate where it’s unlikely you’ll ever run out of money.
And when you add on the eight years of the Defined Benefit pension that you have already accrued and retained regardless of whether you move or not and that amount is €8,700 per annum, when combined they would give you an annual pension of €38,580 per year.
So, the difference between staying with the DB pension and being on a lower income now versus moving to a DC scheme with a higher annual income at age 65 is €22,757 per year.
The difference in monetary terms between both funds is about €568,925 i.e. you’d need to have this additional amount in your DC fund to pay yourself the DB equivalent.
And is getting this additional €568,925 possible?
I’d say extremely unlikely, and I say that because if we just straight-line this amount over the next 18 years, you would need additional annual contributions of €31,607.
And if we assumed growth of 4% per year it would need additional contributions of about €21,600 per year.
So, somewhere between €31,607 and €21,600 are the additional amounts needed to go into your DC fund on top of your 7% contribution and your employer’s 12%. And that’s just to get you on a par with the DB annual payment.
If you accepted the new role and moved to a DC pension and you mimicked the DB annual pension, you would run out of money after 12.17 years.
Lots of figures to digest and admittedly they may appear complicated, but you have to run the numbers before you accept or reject anything.
Because if you blindly accepted the increased salary, we know it would increase by €10,000, that’s an easy calculation. What’s not is your future pension in retirement, but we now know that would be €22,757 less each year.
And I guess once you know what the numbers are and what will happen, you can then make an informed decision, knowing what the outcome will be and you can now answer the question which is, can I do more with €10,000 every year right now than I could do with an extra €22,757 every year starting in 18 years’ time.
And obviously the longer you live in retirement the bigger the difference between both becomes but that is the big unknown isn’t it i.e. how long will you live?
If you live too short, then a DC fund would have been better even if it pays a lower annual amount than the DB payment and vice versa.

Question
Liam. Our five year fixed term is up at the end of May this year. We will have about 17 months remaining, and we hope to pay it off early. Is there anything to look out for? If we do pay off the mortgage in full, what should we do with the deeds?
Keep them ourselves or leave them with our solicitor?

Answer
Nothing to look out for other than making sure you request an exact redemption figure from your lender, so you know the exact amount to give them.
And they will issue you the figure in writing and the amount will typically last for 30 days, so if you are clearing your mortgage just make sure you redeem it within that time frame. If you don’t request new figures.
And in terms of getting the deeds returned, your lender may charge you a fee of c. €35 to return them to you, which is really annoying, but it is what it is.
When they do return them, you have a choice of either (a) buying a small fireproof safe and keeping them at home or (b) asking a solicitor to hold them for you. And if they agree they'll probably have a fee so ask them what it is.
I’ve begun to see more and more people decide on the we’ll keep them at home option but it’s really just a personal preference and either is a good decision.

Question
Liam. I’ve heard there are two new mortgage lenders in the market and I’m wondering are their rates any good?
I’m on a three year fixed rate with PTSB and it's due to expire at the end of the year so I’m wondering should I consider moving to these new lenders when the fixed rate is up?

Answer
You’ve heard correctly, there are two new lenders and yes you should absolutely consider them and every other lender including your existing one for that matter when your fixed rate is up for renewal later this year.
One of the new lenders is MoCo and it's owned by Austrian bank Bawag and it started accepting and processing applications last November and at the moment you can only access them through one of their approved mortgage brokers. They have a minimum mortgage amount of €125,000.
They currently have a three year fixed offering which is 3.6% if the loan to value is <60%, which is about the same as PTSB’s current 3-year fixed offering, which is 3.65%.
However, that rate can be improved with PTSB because if your mortgage is >€250,000 and the loan to value is 60% or less and the BER rating of your home is between A1 and B3, they will offer you a 3-year fixed rate of 3.35%.
The other new lender is Nua Money. And this mortgage start-up is backed by the Allen beef barons of Wexford.
They began accepting new business from July of last year again through their approved broker network.
If we look at what they currently offer for a three year fixed rate for borrowers moving their mortgage to them, their rate is 3.85% assuming a loan to value of 60% or less.
They have many different rates applicable to first time buyers, movers, switchers and they have different offerings for people who want to consolidate loans into just one which is secured on their property, or you can release equity in your home up to certain limits with no restrictions on what you do with the money.
So, it’s definitely worth checking out both websites to see what they are offering and what brokers they are using close to where you live.

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