Where best to put our money?

MissBojangles

Hi there :-)

We have just taken out a £200k mortgage (18 yrs) and plan to pay it off double-quick. I am 48 and hubby 54. We are higher tax rate payers and are able to put at least an extra £1000 a month (double repayment of mortgage) into whatever vehicle is most efficient. We have a very good mortgage rate (base rate) as a staff benefit, although I pay BIK (still works out amazing).

My questions are:

• Do we pay double mortgage payments or put the money into something else with a view to paying off as a lump sum? (if we did a savings plan, I can see we'd maybe get 1 or 2% more than the interest we are paying on mortgage)
• Should we be considering AVCs, as from what I have read, we can both put unlimited amounts in, get 40% tax relief and take pot tax fee as a lump sum to pay off our mortgage at 55+ (as long as the total amount is not over 25% of our total pension funds). Surely this equates to 40% interest??

Am I being thick here? I'd be grateful for your opinions and some guidance as to whether I am thinking along the right track...


Thank you!

atush

I think overpaying a low rate mtg is not the best thing to do, even if paying basic rate tax. So as HRtaxpyers, it is a no brainer- pension (that is if you have an emergency fund of 3-6 months spending and other savings to cover the short/medium term spenidn you know you will need like car replacement)

The question is PP, SIPP or AVCs. Each have pluses (Avcs if there is salary sacrifice) and minuses so choose the best one for you.

MissBojangles

Thank you

I have a non contributory final salary pension scheme that pays out when I am 60. If I work until then it is approx £17k or I can take a lump sum and reduce it to around £11k. I am wondering whether I whack as much as I can into AVCs with a view to taking them out as a lump sum tax free, paying off my mortgage with that and keeping my pension intact?

atush

How old will you be when the mtg finishes?

I would use AVCs if salary sacrifice or anotehr pension if not. I would nto take ANY LS from your FS pension, but instead build up an outside pension (avc if you can use this for your TFLS, PP or sipp if you cant).

A case for S&S isas could me made as you will be a taxpayer when you get your pension- what is your OH's pension like?

jamesd

Given your ages forget overpaying on the mortgage and put pensions first. Your pension contributions are capped by the annual allowance which is currently £40,000. This includes the annual increase in value of DB schemes you're an active member of so you'll need to watch that.

You can carry forward unused allowances from the past three years to go over 40% provided you were in a pension scheme, active or inactive, during those years.

As well as the annual allowance you're capped at no more than your earned income in pension contributions. The lower of the two applies and you can't use carry-forward of the annual allowance to pay in more than your earned income.

AVCs are defined as being specific to defined benefit pensions. You can use them or personal pensions, the other main form of what are generically called "money purchase pensions".

The 40% doesn't amount to 40% interest. Say you pay in £8,000 net. £2,000 will be added by the pension scheme to give basic rate income tax and HMRC will refund another £2,000 to give the higher rate relief, or will adjust the tax code if you tell them in advance. So you end up with £10,000 in the pension at net cost to you of £6,000. 10000 / 6000 * 100 -100 = 66.7% gain from the tax relief. If you were able to take out all of the money tax free, in practice most people pay 20% income tax on all but the 25% tax free lump sum. Though that can be avoided with planning.

You can end up paying the mortgage capital off just from the tax relief being taken out as the 25% tax free lump sum and will still have some money in the pension that is tax relief after that. It's a great deal - pension and a free home thrown in by the kind people at HMRC.

jamesd

If you exhaust your higher rate income or annual allowance and want good tax relief an interesting option is VCTs. Lots of types but I rather like the asset-backed ones. Some of those are available paying 10%-11.1% tax free after allowing for the 30% income tax rebate you get on purchase, which is capped at your income tax actually paid and has to be repaid if you sell within five years.

There's also the usual non-pension option of S&S ISA. And P2P. Lots of good and interesting choices.

At the moment I tend to favour asset-backed P2P and VCT over ISA because the bull market in shares is getting a bit long in the tooth at the moment and I see asset-backed alternatives with equity-like returns but low correlation with equities as a very interesting way to reduce risk. This doesn't mean that the S&S ISA option is bad, it's not, it's good. Just preference at current market conditions.