planning for retirement - pension or mortgage and property?

stevetan

Hello,

I would love to have some peoples advice as to what to do for the long term. I'm 30, married with a 4 month old. We have recently just brought our first home.
I currently do not have a pension (other than 4 years NHS) in place and am a higher rate tax payer. My wife has a pension in place through work.
I am in a position that I have £500 per month to invest in long term future finances. I cant figure out what to do with it.
My thoughts are that we can overpay £500 per month on our mortgage without penalty, which means we will be mortgage free in 16 yrs rather than 35 years (46 compared to 65!). We will then be able to invest our current monthly mortgage and excess in either stocks and shares or bricks and mortar creating a rental income on a monthly basis.
The other option is a pension, which has the main advantage of being tax deductable. however we cant predict the financial future in 30 years time, and there will always be a property market.

I look forward to hearing peoples thoughts.

dunstonh

My thoughts are that we can overpay £500 per month on our mortgage without penalty, which means we will be mortgage free in 16 yrs rather than 35 years (46 compared to 65!).

However, if you put all your eggs into that basket, you would be in your later 40s with only 28 years to retirement. That would require significant investment for those 28 years to catch up.

The other option is a pension, which has the main advantage of being tax deductable. however we cant predict the financial future in 30 years time, and there will always be a property market.

There will always be an investment market. Pension pro in your case is that 40% tax relief is too good to turn down. £10,000 into a pension would cost you just £6000. Tax free growth and the ability to take out 25% on maturity. So, effective cost is 35% ignoring growth.

MEM62

Are you still with the NHS? If not.....

Are you employed? Does you employer have a pension scheme and is it salary sacrifice? If so, then as a higher rate tax payer, the best bet by far would be joining your company scheme.

stevetan

@dunstonh, Cheers. The reason for wanting to be mortgage free is that I can not see myself continuing in the profession I am in until I retire, and that gives me the chance to be less tied down.

@MEM62 No I'm now working in the private sector and am self employed.

dunstonh

@dunstonh, Cheers. The reason for wanting to be mortgage free is that I can not see myself continuing in the profession I am in until I retire, and that gives me the chance to be less tied down.

Which is fair enough. However, missing out on 40% tax relief is a big loss as well. Plus, investment returns are typically better over the long term than mortgage interest rates.

Ultimately, you have to do both. Repay the mortgage and prepare for a period of 25-35 years of having little income. You are effectively asking whether you should pay the gas or the electric. In reality, you do both.

You also need to be aware that self employed get lower state pensions currently than employed. The new state pension will end that but you will have a period under the old and the new. So, you have a bit of catching up to do.

atush

stevetan wrote: »

@dunstonh, Cheers. The reason for wanting to be mortgage free is that I can not see myself continuing in the profession I am in until I retire, and that gives me the chance to be less tied down.

@MEM62 No I'm now working in the private sector and am self employed.

You will always be tied down, by being a husband and father. So reducing your mtg at the expense of paying extra tax and having nothing to retire on would be foolish. I am not saying paying down your mtg is wrong, just not with 100% of your available cash.

So start a pension. how is your company set up? Are you an LLC? Do you have an acct? Do you pay yourself just salary or do you take dividends?

You can pay your self your pension thru your company, the company saves tax and NICS and you do too.

Otherwise set up a personal pension. Put in your 500 per month, will be boosted by BRtax, then you can deduct the rest thru self assessment as you aren't PAYE. Your accountant if you have one will help.

you may want to see an IFA for this, or you can do it DIY. See unbiased.co.uk to find an IFA in your area if you don't know one.

Once you get it started you can use other spare cash you can find by paying down your mtg.

Lokolo

As already suggested, why can you not do both?

If you have £500 a month spare, put some into pension and some into mortgage repayments. As atush has asked above, you should think about making contributions from your company (assuming you have one).

Another thing to make notice of is, make sure you have some cash savings for emergencies! Self employment can obviously have its ups and downs, so need to make sure you have cash available at any time.

AlwaysLearnin

Lokolo wrote: »

Another thing to make notice of is, make sure you have some cash savings for emergencies! Self employment can obviously have its ups and downs, so need to make sure you have cash available at any time.

...as can home ownership, parenthood etc.

Can't really add any more, as it's all good advice above.

stevetan

Thanks all for the advice, I have 6 months worth of mortgage and bill repayments saved up in isas already.
I think I will look at investing it in a pension maybe £250 into a SIPP and £250 into bonds? Obviously adding to these and overpaying mortgage as and when. And it will increase when my wife goes back to work, as I am covering all costs of her being off and on materinty.
This £500 is free money, ie not going towards yearly expenses such as holidays and cars. Its the money which we were saving towards deposit each month., so money I wont miss at all

atush

Sorry, Id ont get that. A sipp is a pension. And bonds can be in a pension. they aren't 2 separate things. And 50% bonds is pretty conservative IMHO esp if you are 30 and over 30 years to retirement? So perhaps you need an IFA after all, from the above statement.

Don't for get you'll get tax back on the 500 (the bit between basic and higher rate tax) so you could overpay with your tax savings. Basic rate tax will be added to your 500 when it goes into the pension automatically.

stevetan

Hi atush, thanks. yeah I know that they are both pensions I just meant that I would split 50/50. I may then increase the risk a bit and put more into the stocks/shares side of things.