Where to put my spare £250 pm...mortgage overpayments, pension contributions, ISA?

OuterNet

Hi I am trying to balance a few different financial circumstances and not sure where the best place to put my money would be. I've been reading all the different boards, but can't quite work it out. Any advice?

I am 30, live in London, currently earn 36K and have paid off all my debts, and have 3 months emergency fund. I am very cautious with money, and tend to go for low risk strategies.

I am buying my first flat, and will have a mortgage of 120K if it all goes through. After the mortgage and living expenses, I will have about £250 per month surplus. I could put this into overpayments on my mortgage, starting a stakeholder pension, or £125 per month into both. Which is a better choice?

I was planning to make as many overpayments on the mortgage with it, the mortgage is flexible so any money paid in now can be used for payment holidays or underpayments later on if needed. In a way this will be building up my emergency fund, as I won't have to pay the mortgage for the number of months payments i build up if i get stuck, right?

However, i've been working in a company for 8 years with no pension, and i am thinking that i need to set up a stakeholder pension. I could put my £250 into a stakeholder, although I am a basic rate taxpayer. I have read all the information about investments vs. pensions, but I'm on my own and a bit nervous in case some time in the next 40 working years I am sick or out of work...then whatever I have saved up I will have to spend, wheras if I have a pension it will be protected.

Finally, hopefully in 6 months time my salary will be increased to 40K. I only have the basic tax allowances. Will that make me a higher rate tax payer? Does that change things?

I'm so confused!

dunstonh

I could put this into overpayments on my mortgage, starting a stakeholder pension, or £125 per month into both. Which is a better choice?

All have merits although anything over £100pm really ought to be invested a bit better than the options available in a stakeholder.

I have read all the information about investments vs. pensions

Car and petrol. pensions are a tax wrapper. You put investments inside them. There are about 13 other tax wrappers in the UK for which investments can be held. You can put investments in ISAs, onshore bonds, offshore bonds, unwrapped, pension etc. You choose to invest first then decide the tax wrapper (or wrappers as a mix is normal).

Finally, hopefully in 6 months time my salary will be increased to 40K. I only have the basic tax allowances. Will that make me a higher rate tax payer? Does that change things?

depends on your tax code but you are going to be just under or just over. deposit based on non-tax free investments could take you over.

Whilst I have said you should invest first and choose tax wrapper second, there is a bit of an exception to this with ISAs. The £7k allowance is a use it or lose it allowance. If you have the ability to use it, then you should. It can be invaluable later in life as it doesnt exist for income, capital gains or age allowance reduction.

Techno

Have you asked your company if they would be willing to make a contribution to your pension? Some companies don't offer their own but will pay in something if you ask - would boost what you can save in any type of pension

dunstonh

All companies will have to offer a contribution into a pension or subscribe to the NPSS by 2012. Some are getting into action now. Some havent got a clue this is coming and need a prod.

jamesd

Start with your stocks and shares ISA allowance, reading Ok then - How do I choose a S&S ISA to get an idea of what a sector allocation is and how to get started.

For the current tax year the taxes work out at:
First 5225: personal allowance, no tax.
Next 2230: lower rate tax, 10%.
Next 32370: basic rate tax 22%.
Above that: higher rate 40%.

That's 39825 before you pay higher rate tax. The gross interest from savings outside ISAs counts and could be enough to put you over the higher rate threshold.

You could make pension contributions just sufficient to keep you at basic rate.

Don't worry greatly about not making pension contributions at this point. Investing is the most important bit. Later you can make pension contributions when a future employer matches them or when you're clearly paying higher rate tax. You can put your whole salary into a pension each year so it's easy to transfer ISA money to pensions later if that looks like a good option. It probably won't be if you're a higher rate tax payer: the ISA allowances are just too useful. But it is likely that you'll have jobs that get you matching contributions and that's a good opportunity to make pension contributions and get the extra money.

If long term illness worries you could look at insurance that will pay a percentage of your salary if you're unable to work: permanent health insurance (PHI). There's a tremendous variation in what is covered - like whether it's only your type of work or any work that means you get the benefit from the policy. Best to buy from an IFA after discussing the exact cover you want. The cost is lower if you take a longer time period before the benefits start. Payments will usually last for the remainder of what would have been your working life once you qualify for the benefit.

Redundancy insurance is also available.

margaretclare

I would suggest you use up your tax-free ISA allowance first and foremost.

£3000 cash ISA and £4000 equity ISA, that would be £583 a month. Just put a proportion of your available money into each.

I put £300 a month into my equity ISA and that's from pensions income! DH puts £200 into his cash ISA every 4 weeks (what's left in his current account when the next pension payment arrives).

HTH

Margaret

OuterNet

Thanks for the comments!

There is a rumour of a 3% pension contribution from work in the future,:T into a stakeholder scheme. I suppose it would be worth paying into the pension when my pay raise to 40K comes through, to get the tax relief but maybe focussing on the ISA allowances until then.

My mortgage rate is 5.99% by the way, and my cash ISA 5.25 gross. Does that mean the cash ISA isn't as good value as reducing my mortgage debt? I'm assuming here that stocks and shares ISA is a different thing altogether because of potentially higher growth rates?

OuterNet

dunstonh wrote: »

All have merits although anything over £100pm really ought to be invested a bit better than the options available in a stakeholder.



Car and petrol. pensions are a tax wrapper. You put investments inside them. There are about 13 other tax wrappers in the UK for which investments can be held. You can put investments in ISAs, onshore bonds, offshore bonds, unwrapped, pension etc. You choose to invest first then decide the tax wrapper (or wrappers as a mix is normal).



depends on your tax code but you are going to be just under or just over. deposit based on non-tax free investments could take you over.

Whilst I have said you should invest first and choose tax wrapper second, there is a bit of an exception to this with ISAs. The £7k allowance is a use it or lose it allowance. If you have the ability to use it, then you should. It can be invaluable later in life as it doesnt exist for income, capital gains or age allowance reduction.

Thanks, I appreciate the information, and the point about pensions being wrappers for investments. Given the choice between the same investments within a pension or an ISA (I'm not putting away enough to max out the ISA), is there any benefit to choosing the ISA as a method of saving for retirement. I am assuming that if I were a higher rate taxpayer now, and a lower rate one in retirement that having the 'tax break' on my pension contributions would make the ISA a more financially beneficial choice. Am I correct?

dunstonh

We have a good pensions vs ISA thread on this forum. It may be a few pages back now but it makes a good read when deciding between pensions and ISAs. Hopefully, this section will have a board guide soon (raised the other day and being looked into) and they will sticky that thread as its a damned site more important than the other stickies up there at present.

morg_monster

OuterNet wrote: »

Thanks for the comments!

There is a rumour of a 3% pension contribution from work in the future,:T into a stakeholder scheme. I suppose it would be worth paying into the pension when my pay raise to 40K comes through, to get the tax relief but maybe focussing on the ISA allowances until then.

My mortgage rate is 5.99% by the way, and my cash ISA 5.25 gross. Does that mean the cash ISA isn't as good value as reducing my mortgage debt? I'm assuming here that stocks and shares ISA is a different thing altogether because of potentially higher growth rates?

You can definitely get better than 5.25% on your cash ISA, even if you need to transfer it over, have a look at Martin's article to find one which suits you. You will definitely be able to beat 5.99% for a new cash ISA, and may well be able to for one which allows your past years' contributions to be transferred in.

dunstonh

When we talk about ISAs vs pensions we are referring to stocks and share ISAs and not cash ISAs. Cash ISAs are not best suited for the long term