Pension for my husband

jamesd

First thing that strikes me from that is that 89500 / 110000 * 100 = 81.36% LTV. That's a higher LTV than it takes to get the best value mortgage deals. Your interest rate is also higher than the best deals.

If the property value is still £110,000 then it would take about £1,500 to get to 80% LTV or about £7,000 to get to 75% LTV. If property prices have been increasing in your area it's possible that you're already at 75% LTV since that would only take an increase to £119,500.

So, one thing to do is check local price changes, check mortgage deals at 80% and 75% and see whether you might profit by changing deal.

I wouldn't actually pay more than you have to right now. That's because the LTV will depend on the mortgage lender's valuation, so you won't know what it will take from you to get to say 80% or 75% until you know the valuation. But it does seem likely to be quite a good idea to accumulate savings so you can get to the LTV it takes to get a cheaper mortgage deal. I tend to like life of mortgage trackers because you never have to pay another arrangement fee, but if you don't expect to move now's a fairly good time to be buying a five year fix product.

Having an interest only mortgage might make it harder to do because you will now need to prove that you have a repayment strategy in place. One possible repayment strategy is use of a pension lump sum, which is available from age 55. If only your husband's pension contributions were to be used he'd need to accumulate a pension pot of about £330,000 to clear a £82,500 mortgage, the 75% LTV level. That level is just the amount of money, not inflation adjusted, because the mortgage balance doesn't change. But for pension income planning you need to use inflation adjustment to get an income in today's terms, so I'll do calculations both ways.

It's easy enough to do rough planning using a regular savings calculator and the long term return of the main UK stock market over the last hundred plus years, which has been about 5.25% plus inflation, 8-9% including it. I'll use 5% and 8% to allow for charges.

Using the calculator I put in:

Monthly payment: 100 (not increasing with inflation)
Duration: 25 years
Interest rate: 8%
Final value = £95,102

To get to £330,000 takes £330000 / £95102 * 100 = £347 gross a month.

Now to see what that would do as pension income, I just change the interest rate to 5% to get a today's money equivalent:

Monthly payment: 347 (increase by inflation each year)
Interest rate: 5%
Final value, today's money = £206,641

A quarter will be used for the mortgage, so that leaves 206,641 * 0.75 = £154,980 for pension income. A rough rule of thumb is that you can get 5% of the pension pot value as income, same as dividing by 20, so that could produce a pension income at 55 of £7,749 a year, assuming use of income drawdown.

Now, I wrote that a quarter would be used for the mortgage but that's not really true, because this time I've assumed that the monthly payment will increase with inflation. If inflation was 2.5% a year it would take £1.85 in 25 years to buy what a Pound today would buy. Since the mortgage amount doesn't increase, you can divide the 25% by that 1.85 to get the percentage used: 13.5%.

So, if he was to pay in £347 a month and increase that with inflation he might reasonably hope to pay off the mortgage, have about an 80% safety margin on top and get enough to provide an income of £7,749 a year. If you wanted to just cut the cost and only do the mortgage part, the gross amount could be cut to about £200 a month, increasing with inflation.

Since this is pension contributions, the £347 or £200 is with the tax relief, and with basic rate tax relief that's a net monthly cost of £278 or £160.

For retirement income planning you should really play a bit with the regular savings calculator and see what sort of amount it takes to get the income level desired at whatever age he'd like to retire at. That is quite likely to take more in pension contributions than it takes to clear the mortgage. What you'll probably find is that just the tax relief on the pension contributions is enough to clear the mortgage, so you effectively get it paid off free alongside the building up of the retirement income he needs anyway.

That's one reason why I really like the combination of interest only and pension: the tax relief clears the mortgage very cheaply and the pension is needed anyway, so the money that would have been used on the capital repayments is used nicely efficiently. It's what I'm doing with my own interest only mortgage and pension.

Do note that these are rough calculations. Investment performance varies and it's essential to monitor and adjust over the years, whether it's for retirement income planning or interest only mortgage paying off. And it's good to include a generous safety margin in investment planning - I like at least 50% above what's needed and prefer 100%.

There's more to write about other options but this is one method that can be very efficient compared to just overpaying. I may write more about other things later.

mumf

Well... I do not do the complicated maths. I have always earned a mediocre wage, no company pension. I am now 47 years. I had a private pension(took it out when Maggie told us it was a good idea) but along with all the other "Privatized"Ponzi schemes, it was a rip off unless you were a shareholder. ( see fuel increases on today's news). So, I paid the mortgage off 3 years early. BRILLIANT! We are free. I have a lower paid job as a result of redundancy this year. Does not matter, as where I live belongs to me and my Wife.

If your Husband is only 30, go for the mortgage. It liberates you. Unfortunately in this life, you CANNOT guarantee a set income which you can plan your financial life with. I used to earn £20 an hour, now I earn £8. But the mortgage is paid.

And for the record, my Wife is a local Gvt. employee with gold plated pension. I save regularly in an ISA with what I can spare. You have to work with what you have.

mumf

Well... I do not do the complicated maths. I have always earned a mediocre wage, no company pension. I am now 47 years. I had a private pension(took it out when Maggie told us it was a good idea) but along with all the other "Privatized"Ponzi schemes, it was a rip off unless you were a shareholder. ( see fuel increases on today's news). So, I paid the mortgage off 3 years early. BRILLIANT! We are free. I have a lower paid job as a result of redundancy this year. Does not matter, as where I live belongs to me and my Wife.

If your Husband is only 30, go for the mortgage. It liberates you. Unfortunately in this life, you CANNOT guarantee a set income which you can plan your financial life with. I used to earn £20 an hour, now I earn £8. But the mortgage is paid.

And for the record, my Wife is a local Gvt. employee with gold plated pension. I save regularly in an ISA with what I can spare. You have to work with what you have.

mumf

Double post there , sorry

jamesd

mumf wrote: »

If your Husband is only 30, go for the mortgage. It liberates you.

But it doesn't liberate you. You're stuck still having to work. No mortgage, but forced to sell if you lose your job and can't keep up with the bills. Nice to have no mortgage but I want more than that: I want to be able to retire or support myself indefinitely if I don't or can't work.

In my case it took perhaps 7 years to go from nothing to having a good prospect of both clearing the mortgage and having enough money in pension and non-pension savings to support myself if bad contingencies happened. On an income that was mostly lower than the combined income of Ellie_B. Few people would be willing to do what I did, which was saving and investing more than 60% of net pay plus gross pension contributions, but it's possible on average and above average incomes, takes longer on lower ones.

What that's left me with is:

1. The financial security of knowing I can both pay the bills and clear or pay the mortgage if I'm not working.
2. Well on the way to being able to retire at 55 on median average pensioner income or above if I want to.
3. With insurance to protect against some other adverse cases as well:
a. Permanent health insurance paying 60% of pay - more than I've been living on - for the rest of my working life if something it covers happens.
b. Critical illness insurance.
c. Private medical insurance of various sorts.
d. Sufficient to more than ample life and property insurances.

Nothing can protect against all eventualities but I do prefer very well rounded solutions, not single piece approaches.

jamesd

Ellie_B, do you have any interest in possibly retiring before your work scheme's normal pension age? If so, you might consider investing in either a personal pension or within a stocks and shares ISA. Those can be used to provide an income to bridge the income gaps:

final income: state and work pensions
middle income: work pension (for some pensions)
early pension income: personal pension from age 55

S&S ISA can be used for capital drawing to try to get a level income level from early pension income availability at 55 through to the final level. Or perhaps earlier than 55 if you're keen enough on retiring early.

Ellie_B

And the more I read, the more baffled I get!

Thank you for all your advice. Will have to sit down properly to read it all through.

House prices in our area have unfortunately gone down. I would think that our house is probably worth somewhere between £100k and £110k.

So we're looking at over 80% LTV.

We are happy to keep paying a bit off our mortgage every couple of months, as we do still have disposable income that we can put into savings.

It's got to the point where the husband has quite a bit of money in his account, and I just keep pestering him about pensions and savings etc.

Will get him to read this thread with me too.

Thanks for all your advice x

Perelandra

Ellie_B wrote: »

And the more I read, the more baffled I get!

Thank you for all your advice. Will have to sit down properly to read it all through.

Aye, it's baffling.

I think jamesd is giving good information, though, so hopefully you and your husband will be able to understand it.

Ellie_B

Thank you

I will read all the info and see if I can make sense of it
I may be back to ask more questions... so apologies in advance!

kidmugsy

If your husband opened a pension now he wouldn't get one of the great benefits i.e. employer contributions. So I suggest he wait until his employer offers a scheme, and be sure to join it then. He's only 30; a pension is important but it's not yet urgent.

Meantime, as jamesd has said, you could reasonably focus on paying your mortgage down below 75% LTV, while keeping a decent emergency fund and considering Permanent Health Insurance and Critical Illness Insurance for him. (You should check, but it's likely that your public sector scheme gives you the equivalent of those insurances for yourself, so you needn't buy more.)

Once you've got a mortgage on 75% LTV terms, take stock. If you managed to get down to 75% before your husband got an employer's pension scheme, that would be very convenient timing.

Above all, don't rush. While you are managing to save, time is on your side.