Pension for my husband

Ellie_B

Just to set the scene, my husband and I got married last year.
I work for the public sector, so I have a pension through them.
My husband works for a small company, who doesn't have a pension scheme.

We've never had much money, but we've been saving quite a bit regularly now, and have even managed to pay off some capital on our mortgage! :j


HOWEVER, the husband still doesn't have a pension. He's 30... and it's starting to worry me.

I've tried reading some information, but I honestly don't know where to start.

Does anyone have any recommendations, or anything they would advise that we definitely DON'T do?
It's all a bit grown up and scary and we don't know where to start!

Thanks in advance

Lokolo

Depending on the size of the company, they will be required to provide a pension and also contribute towards it.

How many employees approximately?

Ellie_B

Only about 10.

atush

Don't know the time scale, but they will have to provide one in a few years time.

In the meantime, he can have a personal pension. That will give him 100 invested for every 80 he puts in (the govt tops it up with tax relief).

You can go to an IFA (unbiased.co.uk) or do a DIY pension (look at Cavendishonline aoang others) and he could invest monthly into some collective funds and trackers.

As you are saving elsewhere, and have a home, a pension is the next logical place to go. It will never be as good as your pension, but it will be something, and it will be more flexible than yours.

Saving into S&S isas alongside, if you have 6 months spending saved in cash would be a good idea as well- esp for you if you want to leave work earlier than your scheme age.

xylophone

http://www.thepensionsregulator.gov.uk/employers/what-is-my-staging-date.aspx

With such a small payroll, the date could be as late as 2020?

He might wish to get on with a personal pension now.

http://www.cavendishonline.co.uk/pensions/personal-pensions/

jamesd

Ellie_B wrote: »

and have even managed to pay off some capital on our mortgage! :j

I'm sorry to read that.

The reason is, if you have a mortgage at 75% LTV or lower, it's inefficient compared to investing, so it makes you poorer long term to overpay on a mortgage.

If it's not at 75% LTV and you're paying a significantly higher interest rate than with 75% LTV then an excellent intial thing to do is overpay as fast as you can to get to 75% LTV and remortgage to a cheaper interest rate. If you're at 95% or 85% LTV it could be worth doing the remortgaging in two steps as you get down to gradually lower LTV and interest rates.

The reason that lowering LTV to 75% is a good deal is that the lower interest rate applies to the whole mortgage. So if you pay off 5% to get an interest rate drop of 0.5% your gain isn't 0.5% on just the 5% but 0.5% on ( 75 / 5 = 15 ) times. 0.5 times 15 is 7.5% and that's a good guaranteed investment return on your money. The bigger the interest rate drop and the higher the remaining LTV, the greater the gain. Once you get to 75% the gain is less likely to pay off compared to investing.

Ellie_B wrote: »

HOWEVER, the husband still doesn't have a pension. He's 30... and it's starting to worry me. ... I've tried reading some information, but I honestly don't know where to start.

First, six months, then a year and then maybe up to two years worth of spending in an emergency fund. The last half can be invested, though with fairly easy access, perhaps within a S&S ISA.

Your challenges aren't only pension, but also things like long term inability to work and a potential desire to retire early. You can't yet use a pension to fund inability to work, that takes things like investing within a S&S ISA. But later a pension can provide a good way to do it, as you get closer to age 55 and the ability to get access to money in a personal pension.

You're also at a time when there are really good long term gains to be had from being tight with spending for a few years. That's because each Pound not spent today is one that can be saving you interest or growing compounded for many years.

John1993_2

jamesd wrote: »

I'm sorry to read that.

The reason is, if you have a mortgage at 75% LTV or lower, it's inefficient compared to investing, so it makes you poorer long term to overpay on a mortgage.

It's rare that a definitive "one size fits all" answer is right for everyone, and the above definitely does not buck that trend...

Investing brings uncertainty, in general. You have no idea what vaule the poster to whom you are responding puts on certainty, so already you can't work out what return they'd need to gaiin to offset that.

You then don't know what tax bracket they are in, if their mortgage is fixed or floating, or what rate they are paying so, again, this takes you even further away from being able to state with any certainty which route is best for them.

I pay 45% tax on each additional pound of income. For me, that means that I need twice as high a return if taken in the form of income as I'm paying on my mortgage. That's not going to be easy to achieve without taking significant risk, so I'm pretty agnostic about overpaying or investing. Quite apart from my specific situation, there are all sorts of people for whom your statement is dead wrong, which is why you'll never, ever hear a professional in finance giving the sort of advice which you have above.

jamesd

It's certainly possible that overpaying is the best choice for this couple. I gave one of the possible cases. Risk tolerance is another, as is lack of availability of any tax wrappers like pension or ISA.

There are other cases where investing can be less efficient than overpaying on a mortgage. The most significant one would be where there is no significant risk tolerance, so investing just means saving, and where the mortgage interest rate is and will remain above savings rates. Here we know that pension investing is being considered, so that mostly eliminates the very low risk tolerance case.

What's really missing so far is Ellie_B saying what they make of the alternatives, whether they are interested in considering more efficient methods, what their risk tolerance is (high enough to use pension investing, so there is at least some). On those things, I'll trust Ellie_B to let us know, since this is a discussion, not a one shot presentation of all available options.

You're sort of right in one way, though. I set out to deliberately counter the apparent belief that overpaying on a mortgage is sure to be a good thing. I did that in a rather brief way and hopefully Ellie_B will say more about their circumstances so we can get a better idea of what might work well for them.

For your own situation, yes, it's true that every Pound of mortgage overpayment costs you almost two Pounds of gross pay, so you might consider ways to use gross pay rather than net pay to increase the efficiency of things. Which isn't quite what you wrote, but rather looking at it from the other direction, the potential efficiency of gross investing or high tax relief levels rather than using after tax income for mortgage overpaying. Just two sides of the same coin.

Lets see whether Ellie_B tells us more about their situation, then we can all see what we can come up with that might fit their circumstances and preferences well.

Ellie_B

To be honest, I'm even more baffled now. But maybe a bit more info would help?!!?

We bought our house for £110,000. We currently owe £89,500 on it. We currently have an interest only mortgage, but we overpay every couple of months to help bring it down. Our interest rate is about 3.74% I think.

We are both on the lower tax band, and earn around £53k a year between us.

Is there anything else I need to say?!

kidmugsy

Ellie_B wrote: »

We bought our house for £110,000. We currently owe £89,500 on it. We currently have an interest only mortgage, but we overpay every couple of months to help bring it down. Our interest rate is about 3.74% I think.

The price you paid for the house is only of historical interest. What you want to keep an eye on is the loan-to-value (LTV). So if you think a valuer would say that your house is now worth (say) £125k, your LTV is now (£89500/£125000) x 100% = 72%.
Or if the value remains at £110k but you pay the debt down to £80k, your LTV becomes (£80/£110) x 100% = 73%.

Those are both below the 75% mentioned by jamesd, implying that you'd expect to gain by changing your loan to one that acknowledges your new LTV. It might be that you would then gain more from investing surplus income than by overpaying in future. On the other hand, if you expect to try to move to a more expensive house in the next few years you might be reluctant to invest in, say, shares for only a few years. But saving in cash is poorly rewarded at the moment by low interest rates, so two other possibilities spring to mind. We'll assume that you keep overpaying until your LTV is below 75%. Then consider swapping to a mortgage that either (i) accepts overpayments, and will let you borrow them back in future if you should want to, or (ii) is an offset mortgage. These two options let you get a reward for your saving while still giving you some flexibility.

Every year or two you could take stock of your position and see if you want a change.

atush

Have you looked at switching to a competitive repayment mtg so you are paying off capital regularly? And so you can get a good deal and be able to invest more?

Not a big fan of interest only.