I feel like i am doing the wrong thing!?

dazanteney4

Hello All,

I've had a process in place for about 18 months when saving for our futures, but i can't help feel like i am doing the wrong thing! I look online and one person says do it like this and another advises to do the other!
I'm 25 and my partner is 23. We own a house with a mortgage which has 24 years left and the current rate is 2.7% (due to expire May 2017). We over pay our mortgage by £150 a month and we each save £25 per week for a retirement. This is paid into a 5% and 4% current account which we sometimes borrow against if we need larger items that would normally go on high interest rates like credit cards and loans. This has come in handy as we are paying for our wedding.
We both earn around £22k per year and our companies pay 3% into our work pensions. Both Stakeholder with Zurich, the management fee is 1.5%.

My question, am i doing the right thing!? Should i be using my pension to clear my mortgage early? Should i be paying the £25 pw into our pension fund!? Should i keep doing what i'm doing???

Can anyone help? I'm not great with things like sipps, tax breaks etc...

Thanks

Darren

lisyloo

Should i be using my pension to clear my mortgage early?

There are some tax benefits to using a pension. For example there is a 25% tax free lump sum, so having a pension is a very good idea. Plus it gets you into the discipline of saving.
There may also be additional benefits on savings National insurance if your employers lets you do "salary sacrifice". Ask them both whether they do this.
It means you get pension rather than salary and the benefit is a very valuable 12% national insurance saving.
So IMO - no you should not be using your pension money to clear the mortgage early.

Should i be paying the £25 pw into our pension fund!?

If it's genuinely for your retirement then yes.
Firstly because there are tax and possibly NI savings to be had and secondly it puts it out of your reach so is genuinely for your retirement.

Should i keep doing what i'm doing???

I'm concerned against you borrowing against your retirement savings.
What happens if you can't pay it back? e.g. you get sick or lose your job.

Your retirement savings should be ringfenced. A pension will do this - you cannot touch it unless literally you are dead or dying (and even then only under strict criteria).
If there are things that are luxuries (holidays and weddings) then plan them and save for them. Don't borrow for these items.
If there are things that are forseeable (car repairs, fixing the house) then budget and save for them.
If there are things that are unexpected then plan for them by having insurance or an emergency savings fund.

If you borrow from your retirement fund then you are risking not having one.

I think you need to do some budgetting.
That's not complex or sophisticated. It's simply allocating money to different things.

Ma77hew

Also:

According to the calculator here:

With a mortgage rate of 2.7% If your savings rate is 3.4% or higher you'd be better off saving, than paying down the mortgage, so both the 5% & 4% rates beat that.

dazanteney4

lisyloo wrote: »

I'm concerned against you borrowing against your retirement savings.
What happens if you can't pay it back? e.g. you get sick or lose your job.

Your retirement savings should be ringfenced. A pension will do this - you cannot touch it unless literally you are dead or dying (and even then only under strict criteria).
If there are things that are luxuries (holidays and weddings) then plan them and save for them. Don't borrow for these items.
If there are things that are forseeable (car repairs, fixing the house) then budget and save for them.
If there are things that are unexpected then plan for them by having insurance or an emergency savings fund.

If you borrow from your retirement fund then you are risking not having one.

I think you need to do some budgetting.
That's not complex or sophisticated. It's simply allocating money to different things.

Sorry i was not clear enough. We have a fund already that will support our main bills for 4 months in case something happens. That is currently sat in a ISA account.
We only borrow against our pension for larger purchases, IE a car, rather than a car loan of £6,000 etc we would pay this off out of the pension fund then payback along with any interest we would of lost. The idea was that rather than making the bank richer we would just be using our savings and making sure that we wouldn't lose anything from our funds.

Me as a person, i am very strict with savings etc... i have weekly, monthly and yearly budgets that i plan everything in advance. Even things like car road tax, car servicing, mots and holidays are all planned ahead and saved weekly/monthly.

dazanteney4

Ma77hew wrote: »

Also:

According to the calculator here:

With a mortgage rate of 2.7% If your savings rate is 3.4% or higher you'd be better off saving, than paying down the mortgage, so both the 5% & 4% rates beat that.

Even though the amount owed being so high?

Ma77hew

My understanding is if the interest rate is higher you are earning more than its costing.

IE if you pay off £100 now, over the next year you will have saved £2.70 in interest, but earned £4 on the 5% account, at the end of the year you can use the savings to pay towards the mortgage still if the interest rate on the savings is lower.

Also I think Lisyloo's point was this:
If you save £25 a week for 10 weeks and then the boiler breaks and you used the £250 to fix it, you then need to save £50 for 10 weeks to catch up.
If you can't save the £50 a week now, how will you save it after you've spent your retirement savings.
That then puts your retirement at risk, better to ring fence.

dazanteney4

Ma77hew wrote: »

My understanding is if the interest rate is higher you are earning more than its costing.

IE if you pay off £100 now, over the next year you will have saved £2.70 in interest, but earned £4 on the 5% account, at the end of the year you can use the savings to pay towards the mortgage still if the interest rate on the savings is lower.

Ok seems logical to keep them in savings as long as you don't dip into it?

Ma77hew wrote: »

Also I think Lisyloo's point was this:
If you save £25 a week for 10 weeks and then the boiler breaks and you used the £250 to fix it, you then need to save £50 for 10 weeks to catch up.
If you can't save the £50 a week now, how will you save it after you've spent your retirement savings.
That then puts your retirement at risk, better to ring fence.

Ok this is a fair point, but i'm talking about much larger items such as cars as being honest it's going to talk a long time to save for a nice car. I don't really want to drive around a 15 year old 206 for the next 6 years lol

atush

Instead of overpaying your mtg, i'd be putting the mtg overpayment into pension. As at 6% (I assume you are both paying int he same as employer) that is a little low.

Then you have approx 100 each per month to save. Maybe put half on the mtg, and half into a savings acct to use against further purchases.

that way, you are saving more into pension, still overpaying a bit, and still saving something against future purchases. Killing 3 birds with 1-2 stones.

Ma77hew

dazanteney4 wrote: »

Ok this is a fair point, but i'm talking about much larger items such as cars as being honest it's going to talk a long time to save for a nice car. I don't really want to drive around a 15 year old 206 for the next 6 years lol

It's the same principle though just talking bigger numbers and a longer period to pay back.

I'm sure someone far smarter will come along with better answers, but:

Personally when I plan my finances, I priorities my goals, so what I'm seeing from you is:
1. Pay off mortgage
2. Buy new car
3. Pay into pension.

I would look at it like this.

Your mortgage will be paid in 24 years, but I have a feeling your pension won't be were you want it by then.

I would work out how much I want as a pension and up my contribution so that I know I will get there by the retirement age I set. I would do this through payroll to get the tax benefit, so the £25 a week would actually cost you £75 a month rather than £100. I reckon you probably need to pay 1/2% more in.

With the difference between the £150 a month / £25 a week and the additional pension contributions, I would either:

Pay off my mortgage/save to pay it off, if I was planning on moving in the foreseeable future.

Save for a new car if I wanted one before moving house.

That way your doing all 3, paying of mortgage, saving for retirement, saving for now.

I'd keep everything separate.

atush

what I'm seeing from you is:
1. Pay off mortgage
2. Buy new car
3. Pay into pension.

I agree and I'd reverse it. Saving for a pension is probably more important than overpaying and buying a c ar for cash. But buying a car w/o finance is again probably better than overpaying. AS it is a higher interest debt.

lisyloo

I think you missed my point.
What happens if you can never work again?
How will you pay back the pension money you borrowed then?

I don't know what job you do but my husband recently had 9 months unemployment. He's a successful and highly paid person with skills.
I'm glad you've got 4 months worth, but there are things that can happen - split, divorce, unexpected pregnancy that can derail your plans.