savings vs. mortgage overpayment

boglehead

atush wrote: »

Sorry, not getting this. You are afraid of what is to come? But things that change, you will be able to plan avoid before?

Ie, the PA. Yeah , they lowered it.

But it wasn't retrospective- anyone who had too much (each time) was allowed to keep it under protection rules. So please dont use that limp wristed excuse.

60 into a pension to get 100 is pretty great too- even in the worst of recent market falls you didn't lose more than 40% in a day.

What exactly, with your 60 quid will make it turn to 100 tomorrow? And the compounded investment returns that are amped up by this?

Yes Labour might make a raid, but it won't be retrospective. Don't cut off your own nose to desite yoru face, take advantage of 40% tax releif. Even if your pension is so huge you pay HRT, you'll stay pay less in the end as you get 25% tax free Lump sum.

Labour might take away or tax Isas? might reduce further contribs to Basic rate only? They might do a whole lot of vote losing things. But if you have tucked away your 40% TR pension contribs you'll be safe.

Private and company pensions have been favorite targets in days past, when labour voters didn't have them. with Auto enrollment they will, and with future tinkering, will it lower incomes enough to make benefits necessary again?

Don't see it happening once everyone more or less have a pension above and beyond the SP.

Loads of good points... this forum is great!

Atush,one more question... to get into the details, there are 2 things that also make me nervous about putting to kuch money in the pension.

A) From calcs i ran a little while ago, i would hit 750k in my pension in slightly less than 10years, and given that i wouldn't retire for another 10, the capital appreciation alone after that without further contribution (4% a year assumed) would put me above the 1.25m allowance, hence making me liable for significant income tax even before i start touching this pension pot. Hence might not make the most sense - even if i get a 45% tax break today.

my family doesn,t have a track record of living too old... and although i am no expert in tax affairs, i know that at least 50% of whats left in that pot goes to her majesty, while there are smart ways to minimize inheritence tax on money left in taxable accounts.

My approach has always been dont put too much eggs in the same basket, and right now, i am seeing 75% of my networth in real estate, and i can max out my own and my partner pension by the time we retire by just contributing what our employer matches. Hence my intial thought about maxing out both ours isa, and putting the rest in a taxable account.

But as i said, you raised v good points, and i am not sure about my initial approach anymore.

boglehead

boglehead wrote: »

dont put too much eggs in the same.

Note to self... 1) stop typing long posts from a smart phone without proofreading prior to hitting the send button, and 2) polish grammar before daughter gets to the age of needing help for her homework!

Thrugelmir

guymo wrote: »

For those who are advising ramping up pension contributions, have you realised that there is a very strong possibility that OP and his wife will both pay higher rate tax in retirement? Under these circumstances the tax relief on pension contributions is worthless. Employer match is still a bargain of course.

[edit: not quite worthless because of tax free lump sum but not the great deal it is for higher rate tax payers who likely have a lower marginal rate in retirement]

Use a SIPP with flexible drawdown.

getmore4less

Another thing to think about is multi generation.

The extended family is usually 3-4 generations so needs around 3-4 places to live

Do your parents/grandparents live in mortgage free homes your own kids will need a home are some point.

You are earning enough to set up your extended family with paid for housing on a continuous basis so no more worry about HPI just the regional variations.

Shelter is a necessity so although you current net wealth is heavily in property a significant portion of that is not really "investing".


Are the extended families net wealth up to their own nil rate band are they all using their S&S ISA allowances. You could also consider spreading your wealth to engage in some IHT planning.

pip895

Not sure if it has been mentioned but you may as well start an JISA for the little one.

In your position I would be putting the rest against the mortgage. Two reasons - Other options look expensive at the moment + you are already heavily exposed to the London property market (paying of your mortgage wont change this btw).

Secondly - Mortgage interest rates will go up, government may not want to see interest rates above 3% but it could easily happen - if inflation takes off they will have no choice.


If you are determined to invest rather than offload mortgage then go for capital growth stock to max out your CGT allowance each year, rather than income stocks. Also avoid accumulation units as they are a pain when filling out your tax return (as I can attest from bitter experience:o )
VCT's might also be an option particularly if you are already using your CGT allowance.

atush

boglehead wrote: »

Loads of good points... this forum is great!

Atush,one more question... to get into the details, there are 2 things that also make me nervous about putting to kuch money in the pension.

A) From calcs i ran a little while ago, i would hit 750k in my pension in slightly less than 10years, and given that i wouldn't retire for another 10, the capital appreciation alone after that without further contribution (4% a year assumed) would put me above the 1.25m allowance, hence making me liable for significant income tax even before i start touching this pension pot. Hence might not make the most sense - even if i get a 45% tax break today.

my family doesn,t have a track record of living too old... and although i am no expert in tax affairs, i know that at least 50% of whats left in that pot goes to her majesty, while there are smart ways to minimize inheritence tax on money left in taxable accounts.

My approach has always been dont put too much eggs in the same basket, and right now, i am seeing 75% of my networth in real estate, and i can max out my own and my partner pension by the time we retire by just contributing what our employer matches. Hence my intial thought about maxing out both ours isa, and putting the rest in a taxable account.

But as i said, you raised v good points, and i am not sure about my initial approach anymore.

A) worry about that in ten years? You can also register your pension for protection before it reaches the dizzy heights of 1.2mil

The facts are, that 100% of your pension is paid out free of tax if you die before taking it. Then, if you use Drawdow over Annuity, 100% of it can be inherited by your Spouse tax free if it is left as a pension for your spouse. Tax charges only come in if the pot is taken out of the pension as a LS by your spouse, or by other recipients.

B part 2, take care of ascribing your parents and grandparents health issues/early death as read for you. Your Personal LE may not track theirs if you have a better lifestyle (my parents both smoked like chimenies) so if their health was affected by liefstyle facotors like smoking, drinking, poor exercise/diet you do't have to have the same fate.

If they had faulty genes like Brac 1/2 it is a different story, so look into it further BEFORE you make life decisions based on it.

So what did they die of exactly? What choices did they make as regards risk factors? For instance, Cancer can be lifestlye driven (such as lung cancer in heavy smokers) or genetic like breast and ovarian cancer with Brac genes.

boglehead

getmore4less wrote: »

Another thing to think about is multi generation.

The extended family is usually 3-4 generations so needs around 3-4 places to live

Do your parents/grandparents live in mortgage free homes your own kids will need a home are some point.

You are earning enough to set up your extended family with paid for housing on a continuous basis so no more worry about HPI just the regional variations.

Shelter is a necessity so although you current net wealth is heavily in property a significant portion of that is not really "investing".


Are the extended families net wealth up to their own nil rate band are they all using their S&S ISA allowances. You could also consider spreading your wealth to engage in some IHT planning.

We are quite fortunate to have both families owning their own homes, and a few properties (2nd residence and BTL properties) - all mortgage free.
However, just to be conservative, I am not including any inheritance in our retirement calculation. This will come on top as a "sweetener". Some type of safety net.

Given how "young" our parents are (mid-60's) - I actually expect their assets to jump one generation and get passed on to our own children.

boglehead

pip895 wrote: »

Not sure if it has been mentioned but you may as well start an JISA for the little one.

In your position I would be putting the rest against the mortgage. Two reasons - Other options look expensive at the moment + you are already heavily exposed to the London property market (paying of your mortgage wont change this btw).

Secondly - Mortgage interest rates will go up, government may not want to see interest rates above 3% but it could easily happen - if inflation takes off they will have no choice.

Wouldn't additional mortgage payment increase my exposure to the property market? as I would be more than 75% invested in real estate, as opposed to diversifying?

However, I would still be exposed to interest rate rise - but,even if I was over-paying by £1.5k a month or £18k a year, it would only knock off £50/£100 on my monthly mortgage payment... not that attractive for the risk involved

pip895 wrote: »

If you are determined to invest rather than offload mortgage then go for capital growth stock to max out your CGT allowance each year, rather than income stocks. Also avoid accumulation units as they are a pain when filling out your tax return (as I can attest from bitter experience:o )
VCT's might also be an option particularly if you are already using your CGT allowance.

Yes - I am currently investing in a low cost vanguard all-world stock market ETF's (VWRL) - which is an income ETF - makes things a lot easier indeed, while I still re-invest the dividends as part of my monthly contributions.

boglehead

atush wrote: »

A) worry about that in ten years? You can also register your pension for protection before it reaches the dizzy heights of 1.2mil

True - I didn't think of that.

atush wrote: »

The facts are, that 100% of your pension is paid out free of tax if you die before taking it. Then, if you use Drawdow over Annuity, 100% of it can be inherited by your Spouse tax free if it is left as a pension for your spouse. Tax charges only come in if the pot is taken out of the pension as a LS by your spouse, or by other recipients.

Fantastic ! I did not know that the drawdown had this advantage over annuity (which would not contemplate - drawdown would be the way to go, in order to exhaust my pension pot as quickly as possible, and keeping the ISA untouched given their tax treatment)

atush wrote: »

So what did they die of exactly? What choices did they make as regards risk factors? For instance, Cancer can be lifestlye driven (such as lung cancer in heavy smokers) or genetic like breast and ovarian cancer with Brac genes.

Lung cancer for one of my grandpas (but heavy smoker), colon cancer for the other one. On my wife side, they actually live quite long, so she is likely to hit the jackpot when she reach 80y/o :rotfl:

pip895

boglehead wrote: »

Wouldn't additional mortgage payment increase my exposure to the property market? as I would be more than 75% invested in real estate, as opposed to diversifying?

Your exposure to the property market doesn't change as you pay off your mortgage - your mortgage company doesn't unfortunately share the risk (at least not to any useful extent).:rotfl:
You have a large mortgage - you could look at it, as if you were borrowing to invest in shares - not always a bad idea, but with valuations as they are, I'm not sure now is the time to do it! Paying off your mortgage is definitely the lowest risk approach.:)