Monday, August 8, 2022

Is it wise to stop saving for pensions as a way of coping with high prices?

Q The cost of living crisis has me really struggling to make ends meet. I have a reasonably good salary, but my commute is now costing me considerably more. I am in danger of falling behind on my mortgage or car loan if things continue as they are. I am currently paying 5% of my salary in my work pension, and my boss pays a matching contribution. To free up some income, I’ve decided to stop those pension contributions, is that a good idea? I am in my early forties. Sean, County Kerry

A Maintaining your current lifestyle while meeting your financial obligations should be your top priority.

He has signed financial agreements with financial institutions for a car loan to provide transportation from a rural area and for a mortgage to provide housing. Failure to repay these loans can have a significant impact on your future ability to borrow and can also make future loans more expensive. Therefore, making any chance of defaulting on those loans less likely is the right course of action.

The danger of stopping your pension contributions entirely is that you can get used to having extra disposable income each month. In addition, by stopping contribution, you are losing the tax relief available on pension contributions and you are also losing the employer contribution of 5% of salary. This is significant and this money invested correctly for 20 years or more would be important to maintain your lifestyle when you stop working.

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Instead of stopping all contributions, discuss with your employer the minimum employee contribution required to earn the employer matching contribution. You may only need to fund 3% or 4% of your salary to get the matching employer contribution. This would maintain the investment in your pension and allow you to retain the benefit of tax relief, while also freeing up income.

Once you’ve reduced your pension contribution, or indeed if you decide to stop your contributions altogether, do a comprehensive budget. There are online budgeting tools at ccpc.ie and mabs.ie that can help you put together a workable budget. This budget exercise should help you identify areas where you can save income on your current expenses so you can get back to a pension contribution of at least 5% of salary as soon as possible.

Holding on to critical illness coverage when switching mortgages

Q I am considering switching my mortgage to another bank. I have mortgage protection insurance on my current mortgage and, due to a health condition, critical illness protection is included. How can I make sure I don’t lose my mortgage protection insurance’s critical illness coverage when I switch? Could I face a higher premium on my mortgage protection insurance after changing my mortgage? I wouldn’t borrow more from the new lender when I switch, so the outstanding mortgage would be the same. Niall, County Dublin

A As a condition of your loan with your current lender, you were required to obtain mortgage protection. In effect, you are hedging the risk that your lender dies before paying off your mortgage.

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Under your policy, the amount of life coverage would have been at least equal to the amount of the loan. Similarly, the term of the policy would have at least coincided with the term of the loan.

In the event of your death during the term of your mortgage, the policy’s life coverage benefit will pay off the outstanding mortgage and ownership of the property will pass to your estate debt-free.

You have also added a critical illness cover to this policy.

While it’s unlikely to be a condition of the mortgage offer, if it’s affordable and within your budget, it’s always good planning to include a critical illness in your mortgage protection policy. If you switch mortgages, you pay your current lender the amount outstanding on your mortgage and therefore there are no further requirements for the mortgage protection policy to be assigned to your current lender.

As long as you don’t borrow more from your new lender and you don’t extend the term of the mortgage, your existing mortgage protection policy can be reassigned to the new lender and all the benefits you currently have will be kept. There will be no higher premiums or changes to benefits currently in effect on your existing policy.

Nation World News Desk
Nation World News Deskhttps://nationworldnews.com
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