Investment / pension options

Tesco_Tom

I currently make (just) enough pension contributions to avoid higher rate tax and receive the maximum amount of free money from my employer. I am considering investing an extra ~£200 per month and would like your opinions on the best route forward. My OH is self employed, earning ~£10k pa and has no pension provision.

Option 1 - Extra contributions to my pension
Option 2 - Start pension for OH
Option 3 - Cash / S&S ISA
Option 4 - Overpay Mortgage (9 years remianing - 4 year fixed @ 3.7%)
Option 5 - ????

We already have some rainy day money in place.

Thanks

bobthedambuilder

For tax efficiency, your best bet is more investment into a pension, either for yourself or OH because the government immediately adds 25% to your contributions in the form of tax relief. You can invest it in pretty well the same vehicles as a S&S ISA. I personally would be inclined to do it for your OH, so that when she eventually makes use of it, it goes against her tax-free allowance.

The downside is that the money is locked in until you start drawing the pension, so if you want the flexibility of other forms of saving/investment take your pick. You can always switch into mortgage overpayment if the rate goes up after the fixed period.

atush

If your rainy day money is 6 months spending or more, and all in cash I would start S&S ISAs instead of more pension at this point. Just so you will have some investments that are more flexibel than a pension.

If your salary raises more, then I would increase your pension again. And i would make sure your OH is making voluntary NI contributions.

Alongside the ISA, I would overpay the mtg as you won't do better than 3.7% in easy access cash deposits.

jamesd

You're already using your higher rate income for pension contributions so that's the best gain taken care of.

For basic rate income I suggest that you invest within a stocks and shares ISA just as you would within a pension. If your higher rate income later increases you could move some money from the ISA to the pension to get pension tax relief at 40% instead of 20%.

Investments long term are likely to deliver more than twice as much as the mortgage is costing you so mortgage overpaying isn't the most rewarding option, though many people like to do it. An alternative is to invest then use the investments to pay off the mortgage later. As a higher rate tax payer you can get particularly good tax relief on higher rate pension contributions then use the pension lump sum to effectively get tax relief on repaying the mortgage capital.

fizio

I would max out on the 40% pension tax relief and then go ISA. I am in similar boat and have 'safe/balanced' investments in my pension account and then slightly riskier stuff in the ISA (emerging markets/commodoties/etc)

gadgetmind

Your OH should get full state pension due to NI contributions, but it's well worth starting a pension for her as most/all of the income from it will be tax free as it should be within her personal allowance.

PennyPurple

haf63 wrote: »

I would max out on the 40% pension tax relief and then go ISA. I am in similar boat and have 'safe/balanced' investments in my pension account and then slightly riskier stuff in the ISA (emerging markets/commodoties/etc)

Out of interest, why this way around? I have my safer investments in my ISA and my riskier ones in my pension on the basis that if I want to retire early I'll use my ISA (safe) until I can draw on my pension.

Penny

gadgetmind

PennyPurple wrote: »

I have my safer investments in my ISA and my riskier ones in my pension

I have roughly the same asset mix in each to allow annual rebalancing.