Starting to save from age 33

averageish

Hello everyone,

My first post here, hoping that those more knowledgeable than I may offer some advice. I hope that is not too presumptive of me!

I am 33. It has suddenly dawned on me that perhaps I should start saving for my retirement. I've never been the quickest out of the blocks at the best of times and I know this is something I should have been doing from 18. We live and learn.

I'm fortunate enough to have what I consider to be a good income of around £80k gross, as the sole earner. We are now just about breaking even on the house, after a couple of years negative equity, with a remaining mortgage of £111k at SVR of 2.5% currently. House value is around £115k. It is our first home.

Salary rise has been rapid, in 2005 my salary was only £24k and I had £25k of debt from a bad property deal in 2001 which has really given me a headache.

All debts are now clear, save for the mortgage.

We do wish to move to a larger home in the next 5 years, which ideally would be in the £300-400k range.

At a push, I have £2k per month to save or invest right now, plus around £12k per year in dividend income after tax. I'm just not sure where to put it or how to plan for a house move, or time any of it.

I've considered paying down the mortgage, which I can do without penalty at up to 10% per year, but at the current interest rate, the mortgage seems to be very cheap money, so I find myself tempted to max out a stocks and shares ISA until the inevitable interest rate rise.

Whilst it sounds ambitious, I am aiming for a pension pot of £2m in the long term, to be taken at 65. I am hoping this would be enough to sustain us for up to 25 years although I realise my investments would have to perform extremely well to achieve this. I am not even sure if it is viable.

If the company does well, I should see a pay rise in the next 5 years which will take my total income to around £110k gross.

Heres hoping some of you have been in my position and do not mind sharing your experiences and strategy.

It would be really helpful.

Many thanks.

Archi_Bald

Quick response because it's late.

Good news you can put some money away for various purposes, and you seem to have a good grasp on all the important aspects. That bad property deal from earlier should serve as a reminder that things can go wrong, but wrong things can also be survived.

Common wisdom seems to be you should have a cash reserve of some 6-12 months salary for anything unexpected.

Not paying off [part of] your mortgage faster than necessary seems a good plan since you won't presently get more than 2.5% net anywhere really, and definitely not as a higher tax payer, as you look to be.

If you want to upsize in the next 5 years, be careful with any investments / share ISAs. You might be better off with cash savings because they will be readily accessible when you need money for a deposit, furniture, furnishing, appliances etc.

You mention pension, which is great. £2m sounds a good target for yourself but if you are looking for a pension sustaining two people, or a bit more comfort for yourself, £2m might not be all that much. Are you maximising your potential? Even if it takes out money of your monthly pay packet, pension contribution is one of the best investment you can make because of the employer contribution and tax relief. When you get to your 50s and can draw on a decent pension and don't need to work any longer, you will be very proud of and grateful to yourself for having been so smart in your younger days.

Put as much as you can into tax-free vehicles - though not at the expense of short /medium term returns. Compare your possible returns from cash ISA to those from current accounts. You are mentioning "we" - is your partner in a lower tax bracket? If so, and if there is unlimited trust, it might be worth making savings in the partner's name.

Finally,you haven't specified how much you spend, and whether you are happy that this is reasonable for your circumstances. Even if you are generally liquid, there might be areas you can make savings in. Fill in an SOA, if only for your own perusal (google for SOA, or may be some other kind soul will post a link)

Other than that, don't forget to enjoy life! You've only got one of these.

averageish

Thanks Archi, especially for responding so late.

Indeed the ISA was worrying me as if I remove the funds I lose the tax benefit. It is difficult to know what to do. My partner is not a tax payer so that allowance is available also, I had planned to make use of the allowance where possible.

The plan was to keep two savings accounts, one for emergencies and one for general spending as needed. Combined, after a year and a half they will have approx 6 months salary in them.

I'm not sure what SOA means but I am guessing a statement of accounts?

If so, we are pretty good with spending. Outgoings are only 1,700 a month in total. We tend to keep our belts fairly tight. Biggest expense being our mortgage which is very high for the size of property due to the circumstances at the time of purchase, also, the fact that it was at the top of the market did not help!

I am not sure how we can save more really without compromising our lifestyle, which is not excessive. We spend around £60/week on groceries and in total allow ourselves £600 a month for all groceries, entertainment and fuel for my partners car. Mine is paid for by my employer, including fuel.

You mentioned a pension. It is available to me, with a company contribution of I think 6% of my annual salary available now. I do not have to contribute to this if I do not want to.

I'm unsure of the benefits of a pension via the company. I'm afraid of getting tied in and/or having government legislation ruin my savings!

Given that we can currently save £22k into stocks and shares ISA's per year, is that going to beat a pension plan overall? Thats where i get confused! lol.

It all feels like a mountain to climb. But, I do realise I am far more fortunate than some people so hopefully have perspective on money.

Thank you for your help.

PS. I should mention that I am a major shareholder in my employer, which means I am careful about spending the company's money as well as my own!

opinions4u

Given that we can currently save £22k into stocks and shares ISA's per year, is that going to beat a pension plan overall? Thats where i get confused! lol.

You don't get tax relief on the money paid into an ISA. So while an ISA is more flexible from a withdrawal perspective a pension immediately turns every £60 invested into £100.

ISAs and pensions can be exactly the same underlying investments. They are just differing tax wrappers.

If the company does well, I should see a pay rise in the next 5 years which will take my total income to around £110k gross.

HMRC have a rather nasty rule.
http://www.hmrc.gov.uk/incometax/personal-allow.htm

If your 'adjusted net income' - read more below - is over £100,000, your Personal Allowance is reduced by half of the amount - £1 for every £2 - you have over that limit. If your income is large enough, your Personal Allowance will be reduced to nil

This monstrosity effectively taxes a chunk of income over £100k at 60%. So making pension contributions to reduce income below £100k is very cost effective.

It sounds to me like you should be paying for the professional services of both an accountant and IFA. Get the best for the business and for you.

[Deleted User]

averageish wrote: »

You mentioned a pension. It is available to me, with a company contribution of I think 6% of my annual salary available now. I do not have to contribute to this if I do not want to.

I'm unsure of the benefits of a pension via the company. I'm afraid of getting tied in and/or having government legislation ruin my savings!

The value of an employer pension far exceeds just the raw amount, because you're also given tax relief and can take salary sacrifice, this can add up to a significant amount of money... and it reduces your tax liability, which means if your salary goes up (as you mention) you can keep yourself below the £100,000 tax bracket.

6% of £80000 is £4600, add in your £4600 which gets 40% tax relief to make your contribution £6440 and then depending on if salary sacrifice is offered you can probably add another thousand or so on top. That means your £4600 per year turns into... over £12,000 per year! That's the equivalent of an almost 10% pay rise available to you right now.

Taking a pension offer like that is a no brainer, there are very few situations where it would make sense not to take that pension and unless you can put forward a compelling reason it's a mistake not to take it. You should make it a priority to find out more about your employers pension scheme and then you can make an informed decision, once you do know more the pension section here will help you understand -- if there are remaining concerns.

planteria

interesting thread.

a few thoughts:

you might want to move to a higher value home. and doing so could be a good 'investment'.

i would set your pension up as effectively as you possibly can. for you. and for the company.

then, assuming there are still available funds, i would continue to invest via S&S ISA.

i thought £2m was very ambitious. i know a lot of people in their 30s who are aiming for £1m. but AB has a point. i believe there is a huge difference between what people think they are going to need when they reach retirement and what they actually will need. i am older, but also still in my 30s, and when i crunch the number i have to do a lot of earning and investing during the years ahead.

plan well. and good luck.

planteria

are you a Director of the company? whether you are/not influences the way you can contribute to your pension plan.

xylophone

It sounds to me like you should be paying for the professional services of both an accountant and IFA. Get the best for the business and for you.

Indeed! http://www.unbiased.co.uk/ A starting point?

planteria

for helping to choose the best investments?

in terms of organising his finances, i suspect averageish can do a better than average job of that himself.

opinions4u

planteria wrote: »

for helping to choose the best investments?

in terms of organising his finances, i suspect averageish can do a better than average job of that himself.

If you're querying the advice suggestion, my main reason for suggesting it is to best mitigate taxation for both the business and the individual.

Given the complexities this creates, the OP's £100k + income and a lack of understanding of ISAs and pensions, I think paying for advice makes a lot of sense.

averageish

Thank you to all of you for your kind responses.

I have seen a financial advisor previously. However, I am extremely cynical when it comes to paid professional advisors. Some of them know less than me it seems!

It is always good to get a cross section of opinions from normal people like myself who have no financial motivation to push me in a specific direction.

I will definitely be looking at the pension route as opposed to ISA, at least initially. The tax breaks are hard to ignore.

My course of action is to seek advice from three different professionals in January. I'll be meeting with a pension planner, a bank investment advisor, and an independent from the site suggested here. At least that way, if the three of them suggest the same thing, and it also tally's with suggestions from here, I must be heading in the right direction.

Just to answer a query from above, the company has an accountant and accounts are audited. We are looking to move accountant, so I am reluctant to approach regarding pensions.

Thanks again everyone, it's kind of you to take the time out.

Just a quick word to planteria. I've looked again and the pension pot we need to aim for to be comfortable is £3m rather than £2m. Since under no circumstances will I take an annuity and assuming business either grows or stays the same, it looks possible. The figures seem scary, but £1m in 30 years time will not be all that much!

I'm of the belief that the state pension will cease to exist and for someone in my position, who is unlikely to ever retire fully, I might as well save as much as I can and self manage the fund once it matures.