MFW & Retirement Planning on a Single Income

nellis10 · 22 February 2017 at 10:21AM

AnotherJoe wrote: »

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 !

Thank you. That does make sense. I'm going to up my contributions to 20% once I know what/if my payrise will be next month.

I'm also going to sell and come out of our company ESPP once it hits $20/share and after the next buy in round (March)

That will leave me with the 2500 options that are basically free money for now - I have 1250 available to exercise. So once it gets to $20 I might cash in the 1250 giving me about $9/share profit = $11K and use that to bung against the mortgage to take me down to the next LTV level.

What do you think? Of course the shares might tank, lol...but it's a good growing company and I think the shares will steady at about $20/$25 over the coming few years are more earnings call come in.

AnotherJoe · 22 February 2017 at 11:11AM

nellis10 wrote: »

Thank you. That does make sense. I'm going to up my contributions to 20% once I know what/if my payrise will be next month.

I'm also going to sell and come out of our company ESPP once it hits $20/share and after the next buy in round (March)

That will leave me with the 2500 options that are basically free money for now - I have 1250 available to exercise. So once it gets to $20 I might cash in the 1250 giving me about $9/share profit = $11K and use that to bung against the mortgage to take me down to the next LTV level.

What do you think? Of course the shares might tank, lol...but it's a good growing company and I think the shares will steady at about $20/$25 over the coming few years are more earnings call come in.

Seems to me, if you think that shares will double, it makes little sense to sell them now for what might be a marginal gain in mortgage rates if you will be on 2.29% in any case. Would need to know the exact savings but say it was 1% lower rate (very optimistic?). 1% of £60k is only £600 compared to, put £8k of it in your pension which would become £10k and HMRC would send you £2k as well! Admittedly that is a £600 saving every year but that would take a fair few years to pay back compared to your pension. (In this case it might be that you'd be putting the money into a separate pension not your employers)

Also house price inflation might get you to the next LTV level anyway without you needing to lift a finger let alone sell a share.

I'm selling some shares this month just under the cap gains limit, they will be going straight into my SIPP to bump up my contribution to the max. Also has the nice side benefit that after I've done my tax return, HMRC send me money

nellis10 · 22 February 2017 at 11:23AM

AnotherJoe wrote: »

Seems to me, if you think that shares will double, it makes little sense to sell them now for what might be a marginal gain in mortgage rates if you will be on 2.29% in any case. Would need to know the exact savings but say it was 1% lower rate (very optimistic?). 1% of £60k is only £600 compared to, put £8k of it in your pension which would become £10k and HMRC would send you £2k as well! Admittedly that is a £600 saving every year but that would take a fair few years to pay back compared to your pension. (In this case it might be that you'd be putting the money into a separate pension not your employers)

Also house price inflation might get you to the next LTV level anyway without you needing to lift a finger let alone sell a share.

I'm selling some shares this month just under the cap gains limit, they will be going straight into my SIPP to bump up my contribution to the max. Also has the nice side benefit that after I've done my tax return, HMRC send me money

House prices in NI, certainly in my area are stagnant. House bought for £80K in 2006 now worth £80K in 2017!! Maybe £85K if I am lucky. Mortgage is £67K so in the 85% LTV and not likely to get out until I reduce mortgage.

I'm like a deer in the headlights unsure of what to do next in case I make a boob. But it seems optimal to at least up my pension contribution as a first step, and then maybe up my overpayments to mortgage by a nominal £100 to assuage my need to get rid of mortgage.

My ESPP shares are bought at $11 and share price is about $15. I have about 100 shares in ESPP, and 2500 as options, again at $11.

Original alert for selling was for $30 but that's over optimistic lol
I'm now waiting for it to reach $20 and then will cash in for mortgage or emergency fund or new bathroom that I desperately need!! lol

edinburgher · 22 February 2017 at 12:12PM

Also house price inflation might get you to the next LTV level anyway without you needing to lift a finger let alone sell a share.

That's a good point. We bought in a very competitive market (great schools) and overpaid by about £15k vs. 'fair' value. We've made it back in 18 months.

nellis10 · 22 February 2017 at 12:41PM

edinburgher wrote: »

That's a good point. We bought in a very competitive market (great schools) and overpaid by about £15k vs. 'fair' value. We've made it back in 18 months.

Our prices still seem to be going backwards!

edinburgher · 22 February 2017 at 3:07PM

That's pants! Glasgow isn't particularly fashionable, but house prices seem reasonably resilient.

nellis10 · 22 February 2017 at 5:56PM

Just applied for a remortgage to reduce rate from 3.74% with current bank to 1.94% fixed for 2 years.

I always worry about applying for these big things. But it means I can keep the payments at £500/month and still be overpaying nicely.

nellis10 · 23 February 2017 at 1:56PM

OK...I now present myself with the next quandary!!

I'm getting a tax rebate due to the additional 20% relief that I'm going to receive from Le Taxman for the past 2 years and the next year.

That will reduce my taxable income. BUT I also salary sacrifice my pension which will also reduce my taxable income.

At this rate, I won't be able to up my pension contribution to 20% as that will pull me back down into the 20% bracket and might screw up the tax rebate that I am due for 2017/2018 contributions to my second post-tax pension.

In that case, as I am getting relief for 2017/2018 built into my tax code now, I think I will be better off either saving the money OR paying off the mortgage until April 2018, when I can reassess whether or not I am going to be in the 40% bracket after all my deductions take place.

I don't want to end up with another bill from the tax man from underpaid tax!!

Thoughts anyone?

edinburgher · 23 February 2017 at 3:55PM

Surely they don't pay tax relief on pensions in advance as your second sentence suggests? What if you change your mind?

I would ask for advice on the pensions/possibly tax forum, but if there's some reason to avoid using your pension for extra payments this year (I get the feeling there isn't, surely a government mistake can't force you to lose pension benefits?), ISA investments might be an idea?

Have you looked at the 'your number' thread on the Pensions board yet?

nellis10 · 23 February 2017 at 4:32PM

edinburgher wrote: »

Surely they don't pay tax relief on pensions in advance as your second sentence suggests? What if you change your mind?

I would ask for advice on the pensions/possibly tax forum, but if there's some reason to avoid using your pension for extra payments this year (I get the feeling there isn't, surely a government mistake can't force you to lose pension benefits?), ISA investments might be an idea?

Have you looked at the 'your number' thread on the Pensions board yet?

The lady I spoke to seemed to suggest I would be. She worked it out, including the fact that I go up from £110.25 to £115.76 in October as I go up 5% each year in my contributions.

Once I get the letter from HMRC I will call them and discuss it further.
I've paid my underpayment this month by check, so at the very least I will be going back to my normal tax code (less medical insurance) plus the tax relief from past 2 years contributions.

MFW & Retirement Planning on a Single Income

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