Q The cost-of-living crisis has me really struggling to make ends meet. I’m on a reasonably good wage but my commute into work is now costing me considerably more. I’m in danger of falling behind on my mortgage or car loan if things continue as they are. I’m currently paying 5pc of my salary into my work pension – with my boss paying a matching contribution. To free up a bit of income, I’ve decided to stop those pension contributions – is this a good idea? I’m in my early Forties. Sean, Co Kerry
A The main priority for you should be to maintain your current lifestyle while also meeting your financial obligations.
You have entered into financial agreements with financial institutions for a car loan to provide transport from a rural area and for a mortgage to provide housing. A default on these loans can have a significant impact on your future capabilities to borrow and can also make future borrowing more expensive. So, making any possibility of a default on those loans less likely is the correct course of action.
The danger with completely stopping your pension contributions is that you may become accustomed to having extra disposable income each month. Also, by stopping the contribution, you are losing the tax relief available on pension contributions, and you are also losing the employer contribution of 5pc of salary. This is significant and this money invested correctly over 20 or more years would be important towards maintaining your lifestyle when you stop working.
Rather than stopping all contributions, discuss with your employer the minimum employee contribution that is required to get the matching employer contribution. You might only have to fund 3pc or 4pc of your salary in order to get the matching employer contribution. This would maintain investment into your pension and allow you to hold onto the benefit of tax relief – while also freeing up income.
Once you have reduced your pension contribution – or indeed, if you decide to stop your contributions altogether, do a comprehensive budget. There are online budget tools on ccpc.ie and mabs.ie which can help you to put a workable budget together. This budgeting exercise should help you to identify areas where you may be able to save income on your current expenditure so that you can revert back to a pension contribution of at least 5pc of salary as soon as possible.
Holding onto serious illness cover when switching mortgage
Q I’m considering switching my mortgage to another bank. I have mortgage protection insurance on my current mortgage – and owing to a health condition, there’s serious illness protection built into it. How can I ensure I don’t lose the serious illness cover in my mortgage protection insurance when I switch? Could I face a higher premium on my mortgage protection insurance after switching my mortgage? I wouldn’t be borrowing any more from the new lender when I switch so the outstanding mortgage would be the same. Niall, Co Dublin
A As a condition of your loan with your existing lender, you were required to get mortgage protection. Effectively you are covering the risk to your lender of you dying before you repay your mortgage.
Under your policy, the amount of life cover would have been at least equal to the loan amount. Similarly, the term of the policy would have at least matched the term of the loan.
In the event of your death during the term of your mortgage, the life cover benefit on the policy will clear the mortgage outstanding – and ownership of the property would pass to your estate debt-free.
You have also built in serious illness cover to this policy.
While unlikely to be a condition of the mortgage offer, if affordable and within your budget, it is always good planning to have serious illness included in the mortgage protection policy. If you switch mortgages, you repay your current lender the amount outstanding on your mortgage and so there is no further requirement to have the mortgage protection policy assigned to your current lender.
As long as you don’t borrow more from your new lender and don’t extend the term of the mortgage, your existing mortgage protection policy can be reassigned to the new lender and all benefits you currently have will be maintained. There will be no higher premiums or change to the benefits currently in place on your existing policy.