MFW & Retirement Planning on a Single Income

nellis10 · 21 February 2017 at 12:51PM

AnotherJoe wrote: »

Financially you'd be substantially better off other way round.

Reason is, your investments in your pension should be growing at 2-3x mortgage rate, so the earlier you get the in the longer they have to grow and their growth for outdoes the mortgage. Plus you get tax relief on payments into a pension which you dont get on a pension. Pay £100 into a pension costs you £60 if you are a high rate taxpayer which you indicate. Pay £100 into a mortgage costs you about £150 after tax.

It may seem less comfortable to do this, in which case, perhaps compromise and go 50/50, but as I think everyone knows but finds it hard to take on board and action, maybe because they have a big mortgage debut they can see and a pension 'debt' thats like a reverse mortgage and so its not right in front of you, the longer you invest in a pension the better and you'd be delaying it.

So, even if you can't stomach putting in all of that overpayment into pension, half would be better than nothing. Especially if you are a 40% tax payer, then pension beats mortgage by so much its no funny.

If you put £100 into a pension, that costs you £60, if it grows at 4% (modest) thats £104 pension for £60 after one year. (after tax at 20% when you take it out, about £25 profit from an investment of £60. Your £60 became £87.

Or, take the £100 that cost you maybe £150 to earn (because its taxed) to pay off your pension and that saves you £2.89 from £150. Your £150 saved you £2.89

If you are a high rate tax payer you are almost literally throwing money away if you dont pay it into a pension instead of a mortgage.

WOW!! Now you really have me thinking!!
I guess it's the burden of having a debt hanging over you that's the reason I wanted to pay it off sooner but compounding over even an extra 5 years makes a helluva lot more than 5 years less.

Hence I am like a deer in the headlights...so much information, so many options and I want to make the right choice!

First things first will definitely be to up my pension contributions even without the overpayments from 5% to 10%...I've used the salary calculator website and it's not such a big hit in my take home pay to double my pension contribution each month.

Then when I'm comfortable, I'll up it to 15% (hopefully at the start of next year) per Dave Ramsey (once I have the Emergency Fund sorted in a cash place - again no idea where to put that!)

At the same time, I would like to up my mortgage overpayments...17 years outs me at 63 to clear my mortgage if I don't overpay. That seems interminably long, hence the desire to do it in 7 by 53 - 10 years early.

But I'm glad I am at least in a position to start talking about overpayments, than being in big debt and worried about no pension. I'm very grateful for that.

edinburgher · 21 February 2017 at 2:52PM

Completely agree with Another Joe's observations. If anything, he's not trying hard enough to scare you!

While Dave Ramsey probably has good intentions, I find that his fans can get a little bit too attached to his rules of thumb/the baby steps. In addition, these focus on American problems to a large extent, meaning that some problems/goals are overstated for a UK audience (education costs) and that others are not given the weight they should (investing for retirement). I understand that his aversion to debt is one of his USPs and something that a lot of people seem to like, but not all debt is bad (as MSE Martin likes to remind us all when it comes to student loan chat).

A few thoughts/questions, because I think we're missing some of your story

You have a list of assets in #4, but don't mention a pension, but you do mention paying into one. Is that an intentional omission?
What tax band do you fall into (i.e. Basic/Higher/Additional Rate)?
Does your employer pay into your pension? Are you contributing enough to obtain the full match on offer?
Do you have a salary sacrifice pension? This could be another dimension to whether or not additional pension payments to your workplace pension are a good idea!
Do you have any plans for/reasons against selling some/all of the shares in your employer? You are already exposed to their fortunes enough by virtue of the fact that they pay your wages. Unless I had a strong incentive to retain these, I'd be considering selling to invest the money elsewhere
Your idea of growing your emergency fund isn't a bad one, but have you considered income protection in the short term? This would allow you to avoid any immediate term catastrophes (which would seem to be important as you're a single parent). The policy could always be cancelled/reduced as and when you were comfortable with your emergency fund?

nellis10 · 21 February 2017 at 3:15PM

edinburgher wrote: »

Completely agree with Another Joe's observations. If anything, he's not trying hard enough to scare you!

While Dave Ramsey probably has good intentions, I find that his fans can get a little bit too attached to his rules of thumb/the baby steps. In addition, these focus on American problems to a large extent, meaning that some problems/goals are overstated for a UK audience (education costs) and that others are not given the weight they should (investing for retirement). I understand that his aversion to debt is one of his USPs and something that a lot of people seem to like, but not all debt is bad (as MSE Martin likes to remind us all when it comes to student loan chat).

A few thoughts/questions, because I think we're missing some of your story
You have a list of assets in #4, but don't mention a pension, but you do mention paying into one. Is that an intentional omission?

What tax band do you fall into (i.e. Basic/Higher/Additional Rate)?

Does your employer pay into your pension? Are you contributing enough to obtain the full match on offer?

Do you have a salary sacrifice pension? This could be another dimension to whether or not additional pension payments to your workplace pension are a good idea!

Do you have any plans for/reasons against selling some/all of the shares in your employer? You are already exposed to their fortunes enough by virtue of the fact that they pay your wages. Unless I had a strong incentive to retain these, I'd be considering selling to invest the money elsewhere

Your idea of growing your emergency fund isn't a bad one, but have you considered income protection in the short term? This would allow you to avoid any immediate term catastrophes (which would seem to be important as you're a single parent). The policy could always be cancelled/reduced as and when you were comfortable with your emergency fund?

Thank you for your comprehensive answer, I've listed responses below

You have a list of assets in #4, but don't mention a pension, but you do mention paying into one. Is that an intentional omission?
Private Pension I pay £110.25/month currently worth £96K ish and I've now asked taxman for 20% relief on those contributions to date. Also currently pay 5% into current pension plan - value currently 9.5K and employee also contributes max 5%
What tax band do you fall into (i.e. Basic/Higher/Additional Rate)?
40% bank
Does your employer pay into your pension? Are you contributing enough to obtain the full match on offer?
Do you have a salary sacrifice pension? This could be another dimension to whether or not additional pension payments to your workplace pension are a good idea!
Current pension is salary sacrifice
Do you have any plans for/reasons against selling some/all of the shares in your employer? You are already exposed to their fortunes enough by virtue of the fact that they pay your wages.
Unless I had a strong incentive to retain these, I'd be considering selling to invest the money elsewhere
Difference in my option price vs current price isn't really worth it. I've an alert in place when difference is about $10/$15/share to be able to pay chunk off mortgage - ish!
Your idea of growing your emergency fund isn't a bad one, but have you considered income protection in the short term? This would allow you to avoid any immediate term catastrophes (which would seem to be important as you're a single parent). The policy could always be cancelled/reduced as and when you were comfortable with your emergency fund?
Not thought about income protection insurance...always think those things are like PPI, good in principle until you need it and then there's always an excuse not to pay you!

edinburgher · 21 February 2017 at 3:53PM

Have you ever calculated your 'number'? I.e. how much you expect to live on in retirement?

If I were you, I'd be cramming as much money as I reasonably could into your pension. It will reduce your tax and turbo charge your future prospects. You're allowed to pay up to 100% of your wages/max £40k/year) into pensions, although I believe that you can only use salary sacrifice down to minimum wage level.

Re. income protection, I appreciate the innate British scepticism around insurance, but most of the big comparison sites provide information on what % of claims are paid. I'm considering it myself, although it's a bit cheaper, possibly because I'm just outside of my mid-30s?

nellis10 · 21 February 2017 at 8:24PM

I've just looked at my FriendsLife pension - I have 2 years contribution in it.

It seems to be spread across 5 different investments only 2 of which have a growth in excess of 3% and the rest 1 & 2% only!!!

The 3%+ are My Future Growth and My Future Plus Growth.
I'm calling them tomorrow to try and get online access to see if I can change my % contribution and the funds that they are allocated to.

I am going to up the Growth and Growth plus, and I'm going to leave the My Future Plus Annuity (1% growth rate). The other 2 are My Future Consolidation and My future plus Consolidation (both 2% growth rate) which I will move out of 1 and leave the other.

Am I being silly?

edinburgher · 21 February 2017 at 8:50PM

Is this another pension that you haven't mentioned previously? The returns sound dire. FriendsLife no longer exists, it was bought by Aviva. Unless it has any valuable guarantees associated with it (which sounds unlikely), or has very low fees (I'd take a punt that this is also unlikely), it's probably well worth looking at transferring it into one of your active pensions.

I would get ye to the pensions board so that some of the 'resident' IFAs can take a peek...

nellis10 · 21 February 2017 at 9:31PM

edinburgher wrote: »

Is this another pension that you haven't mentioned previously? The returns sound dire. FriendsLife no longer exists, it was bought by Aviva. Unless it has any valuable guarantees associated with it (which sounds unlikely), or has very low fees (I'd take a punt that this is also unlikely), it's probably well worth looking at transferring it into one of your active pensions.

I would get ye to the pensions board so that some of the 'resident' IFAs can take a peek...

This one is my current employment one...I only have 2 pensions, current work one, and previous work one (with Aegon)

This is why I am panicking as people are telling me to up my pension contributions instead of paying off mortgage, but if it's a crap work pension I am stuck - should I invest in ISA instead (albeit net after income tax) and let the ISA compound over next 15 years?

Once you are in a work pension you can't change it can you?

edinburgher · 21 February 2017 at 9:56PM

Sorry, trying to read up while Mrs E deals with screaming toddler.

How did you pick your funds? Did you complete a questionnaire or similar to determine your risk tolerance? Or was it a default basket of suggested funds?
Do you know what proportion of your pension is in each fund?
Where are you getting your figures for returns? Because I Googled FL My Future Plus Growth and it suggested a more typical return for last year of 20% (which doesn't sound so outlandish considering it's roughly 70% in equities, 30% in gilts and bonds)

Further reading:

FL MyM My Future Plus Annuity Pn - This fund is designed for use within a lifestyle investment programme by members approaching retirement and considering taking their full tax free cash allowance and buying a fixed annuity with the remainder. It invests in one or more underlying funds to produce a portfolio with around three quarters in government and corporate bonds, other bonds and derivatives which aim to reduce the impact of changes in interest rates on the amount of pension income the fund can buy and around a quarter in money market securities. - for a 46 year old???
My Future Consolidation - roughly 60% equities/40% fixed interest and money market
My future plus Consolidation - roughly 50% fixed interest

nellis10 · 21 February 2017 at 10:17PM

edinburgher wrote: »

Sorry, trying to read up while Mrs E deals with screaming toddler.
How did you pick your funds? Did you complete a questionnaire or similar to determine your risk tolerance? Or was it a default basket of suggested funds?

Do you know what proportion of your pension is in each fund?

Where are you getting your figures for returns? Because I Googled FL My Future Plus Growth and it suggested a more typical return for last year of 20% (which doesn't sound so outlandish considering it's roughly 70% in equities, 30% in gilts and bonds)

I may have overly panicked!!!
I did a calc between my contributions to date, less a huge pay out of £672!!! less charges of £30 vs my current value...and sheepishly I now see that my fund value is 1.2 of my contributions to date.

I may have to delete my pensions question now!!

:o:o:o

I got the rates from my Pension statement...It says growth rates "assumed" - I guess I read it as growth rates realised. :embarasse:undecided:undecided

I think when I set it up I just took the defaults. I've never thought about pensions much and I now seem to be obsessed!!!

Thank you for taking the time to help me understand this better!

AnotherJoe · 22 February 2017 at 9:52AM

Regards "crap works pension" ( which it seems it isn't) you have to take the tax benefit into account if you are a high rate tax payer .
But, let's say it really is a "crap" pension, only growing at say 2% instead of maybe 5 or 6% in a better one or an ISA.

So, your £100 in pension that cost you £60 gives you a sum of £102 instead of £106. After tax at 20% (assuming you are not high rate in retirement) instead of getting £88 you might get £86. That cost you £60. £26 profit.

Whilst you were momentarily panicking you mentioned how about an ISA instead. But To get £100 in an ISA is costing you £150 of pre tax earnings, that grows to £106 let's say. You've still lost £44. So, crap pension still wins! (This is not say that ISAs are bad because usually all your earnings are after tax so it's unfair to make the comparison. But in this case it isn't because you are comparing the two directly)

There's also the case that the crap works pension is likely matching your contributions up to a point. So poor investment performance can be compensated by free money from employer, which again you won't get if you put money in an ISA

This is why I said, if you are a high tax rate payer, not putting money in your pension is like throwing it away. If basic rate, it's not as good because you are taxed either on way in or out at similar rates so it can sort if cancel out ( though there is employers contributions which in balance still usually wins)

Higher rate you save 40% on way in and lose less than 20% on way out.

More than 20% free money, don't turn it down !

MFW & Retirement Planning on a Single Income

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free