Investing the cash that used to go into the mortgage?

TobyB_2

I've lurked a lot here in the last few years - learned quite a bit - but now looking for more specific advice.

I am potentially going to pay off the mortgage very early later this year (another thread started about that) due to a combination of good fortune, luck and a bit of hard work. Won't have huge amounts of savings (a few thousand in ICICI, plus a £3k ISA) if I do this, but won't be paying £1500/month out anymore. Thinking I ought to save/invest this sensibly for the short/medium/long term ... I'm in my early 40's, as is my partner who also works ... we would like some advice on what to do?

I have a health service final-salary pension scheme which I can't just add too. But I could save some of this "free'd-up" income into a private pension. Would something like £3-600/month, perhaps into Scottish Widows (reasonably well rated by many sources I've seen), be sensible ... as a 40% tax-payer I'd benefit in the long term from the tax-back element wouldn't I? Would investigating (understanding!) SIPPS be important?

That's "long-term" ... for the "immediate/short-term" I thought I ought to just put some (3-600/month?) by as cash in my internet-only high-interest savings account for whatever life throws at us ... and I assume I ought to fill up my annual cash-ISA allowance ... but if I build up a very significant saving (10-15k +?) should I be looking at putting lump sums away in fixed-term accounts, NSAI tax-free 3-5-year certificates, etc? If so ... what, where and why?

Then there's the "investment" route which most "personal finance"accounts suggest is better for the medium/long-term ... although the economic situation I read/hear about in the press doesn't seem to support this just now as I understand it. Should I be putting some money (3-600/month?) into some sort of fund ... tracker, managed, UK or overseas ... perhaps in a S&S-ISA form. Should I be exploring the Bestinvest/H-L/etc sites to set up a regular contribution to a single or portfolio of investment funds? This sort of thing is all a bit mysterious to me, and lots of conflicting advice (e.g. trackers v's managed funds) to be found makes it seem even more difficult.

LOTS of questions here I know - but perhaps lots of you have been here (some or all part) already ... advice much appreciated.

Techno

I believe that under the new rules you can transfer a cash isa into a stocks and shares one so if you save into a cash one for you and one for your wife and when you feel the market has hit the bottom (anyone got a crystal ball?) transfer to a s & s one or invest into cash isas and a high interest reg savings account (in your wife's name if she is a basic rate taxpayer) like halifax at 10% for £500 per month and transfer this when market settles - don't leave it too late though as you want to buy shares/funds when the market is on the way up

dunstonh

Would something like £3-600/month, perhaps into Scottish Widows (reasonably well rated by many sources I've seen),

Scottish Widows have 3 mainstream pension options. The stakeholder pension is rubbish. The personal pension is very good (although NU's new version probably pips it). The Retirement account is a good option for large values but not regular contributions starting at nil.

Would investigating (understanding!) SIPPS be important?

SIPPs are experienced investor products that allow a much larger range of investments to be held. If you are going to invest in funds then SIPPs are an expensive option. They are geared for direct investment and are great for that. Apart from the investment options there is little difference between a SIPP and a personal pension. SIPPs are the current fashion and far too many people are taking them out who shouldn't be. Whilst media coverage on them is positive, you have to remember that the media also promoted endowments and tech stocks (plus most other fashion investing options over the years).

as a 40% tax-payer I'd benefit in the long term from the tax-back element wouldn't I?

Don't know. You would get 40% relief on the contributions now but would you end up paying more tax in retirement? for example, would it mean you earn more than the age allowance reduction threshold or even take you back into higher rate? Would the lower relief your partner would get be better value?

Then there's the "investment" route which most "personal finance"accounts suggest is better for the medium/long-term ... although the economic situation I read/hear about in the press doesn't seem to support this just now as I understand it.

You should pay in. Either maximise using regular or phased singles. Investment options don't have to mean stockmarket but you do need to consider that the markets "could" be down as far as they are going to go (more or less) or could go down more but at this point they are around 25% cheaper than the high point. It could be a good time to invest for the long term. Certainly better than any time since 2006.

I understand it. Should I be putting some money (3-600/month?) into some sort of fund ... tracker, managed, UK or overseas ... perhaps in a S&S-ISA form.

No. You should diversify it and use a spread of funds that averages out to your risk profile. Single fund investing is old fashioned and will result in lower returns over the long run.

Should I be exploring the Bestinvest/H-L/etc sites to set up a regular contribution to a single or portfolio of investment funds? This sort of thing is all a bit mysterious to me, and lots of conflicting advice (e.g. trackers v's managed funds) to be found makes it seem even more difficult.

Those companies are DIY options where no advice is given. If you know what you are doing then they are good options. However, if you don't know what you are doing (and your post suggests you don't) then you could end up making costly errors.

My view of you post based on that limited information is that:
1 - there isn't enough info to go on to even come close to suggesting what you should do.
2 - your knowledge on pensions isn't strong and you are looking at it back to front and focusing on your 40% relief and not what you will be paid in retirement.
3 - you are focusing on just you and not including your partner. That can be a costly error.
4 - investing doesn't have to mean stockmarket but when it does, periods of decline can be a very good time to invest (especially on regular). For you, the decline is a good thing but you perceive it as bad.

Man_in_Black_4

Hi Toby

In terms of topping up your pension, remember that the tax-man gets back some of the relief when you come to access your pension benefits - other than the tax-free cash sum, the rest is taxable income. The system works best when you are a higher-rate tax-payer whilst earning the relief, but will be paying tax at a lower rate as you take your benefits.

You should explore the options with your final salary scheme carefully. If you're still working there, you may have the option of buying added years (guaranteed but expensive) or making 'additional voluntary contributions' which can be a little cheaper than private pensions.

If you're thinking of private pensions, then yes, Scottish Widows do a good 'stakeholder' plan - as do Legal & General. The advantage of these things is that you pay charges of 1% p.a. max (no upfront charges) and can access external investment managers to look after some or all of the funds (The Life Companies themselves aren't great at managing money for you).

If you're thinking about a SIPP, although those regular contribution levels are good, with your other beenfits secure in the health service scheme, it's unlikely that you'll get such a great deal charges-wise on a SIPP. The H-L one probably is viable - because they run their own platform unlike most other discount brokers, it will not have any £fixed startup or annual fees at that level, though the annual management charge% will be a little more expensive than the stakeholder

In terms of your shorter-term cash investments, be careful with anything that offers a 'fixed return' over the next few years - with inflation getting stoked up, the real value of a fixed return (if not the real value of your capital) stands a chance of getting eroded. One approach is to go for indexed-linked savings certificates with NS&I (where your cash will tend to hold value albeit offering only a small real return). Another, quite frankly, is to shop around the high-interest deposit accounts on the high-street and go to the hassle of moving your money year-to-year to stay with the attractive rates.

In terms of the medium term investments, you are right that it usually pays to invest in 'real assets' via unit trusts over this timescale. The figures haven't looked so good in recent years with lower inflation and the dramatic bear-market of 2000-3. But with inflation stoking up, there is a chance that these will be better for growth in the medium term.

You mention 'index trackers' and here's the crucial bit. If you are going to invest in unit trusts etc, you should spread your money around. The problem with an index tracker is that it does just that - your money rises and falls sharply as the UK stockmarket (and often just the FTSE 100) rises or falls suddenly. Instead, you should look to a basket of funds that invests any equity element across different locations (e.g. european, north amercian and far eastern equities) rather than *just* the UK. Also, you should include funds that invest in things other than equities e.g. bond yields are good currently and usually pays to have exposure to commercial property and/or commodities, even though in the short term, these might be a little over-valued.

Try and avoid expensive funds when doing this - like expensive 'fund of funds'. You should check the 'total expense ratio' and aim to seelct funds that cost no more than 1.5-1.6% p.a. *total* expenses.

I hope this helps.

MiB

PS. Interest to declare - I work in Funds industry.