Debt vs Savings vs Pension

Derboy

Hi all.

I suppose this may be a well-worn question but no matter how much research I do to try and work out the best solution, I never seem to come up with enough information to help me decide which way to go. So I thought that I might post my circumstances here in the hope of getting some opinions of those more experienced than myself.

Having just bought a new house I'm considering my future and retirement and thinking about how to prioritise savings/pension/mortgage and would be very grateful for any opinions on this. For those that are interested (thank you!) let me kick off with a bit of background

Personal
38 years old. Married with 2 kids (5 and 1). My wife is the same age.

Work
I run a small business and am a Ltd co. director. My wife has worked for the NHS for 14 years. Between us we bring in net monthly earnings of £6600.

Finance
We've no debt apart from cars and mortgage. Just bought a new house which is a significant increase in mortgage resulting in our mortgage of £647 per month at 14 years changing to £1050 per month and 25 years. We've been making overpayments to top our mortgage payments up to £1500 for the last 3 years and plan on continuing to do this.

Currently we pay £500 per month into a long term stocks and shares ISA as a retirement vehicle and for the last 7 years I've paid £200 into an employers pension (no pension before this). My wife is in an NHS pension plan also. We also pay £200 into another ISA that we use as a short term savings vehicle (holidays, emergencies etc etc).

Moving Forward
i'd like to be in a position to consider retirement at age circa 55-60

Although I've reset the mortgage term on the new house to 25 years, i plan to overpay as much as possible to pay it off early. I'm considering the best way to move forward and am thinking about freezing payments to the £500 per month ISA and plowing as much into the mortgage as possible. My thought process is that by doing so, I can afford to pay as much as an extra £1800 per month on top of the £1050 mortgage payment but I'm worried about putting all of my eggs in one basket. I'm thinking about mortgage interest rates eventually increasing and I'm worried about pension provision.

Is it better to concentrate on putting as much to the mortgage as possible to get it paid off quickly and then reconsider my pension and ISA positions much later or should I be more concerned about my pension provision or ISA savings now?

Basically, over and above my mortgage payment of £1050, I've got around £2000 per month available to spend on retirement planning and I'd like to know folks opinions on how I should spend it across savings, mortgage over payments and pension.

All viewpoints and advice very gratefully and humbly received! Many thanks. :beer:

fwor

Derboy wrote: »

We've no debt apart from cars and mortgage.

This was one thing that jumped out at me.

Borrowing to buy cars means devoting relatively large amounts of income to a rapidly depreciating asset. Depending on interest rates being paid (which you don't specify), I would be looking to get rid of loans for cars as a higher priority than paying off a mortgage (or paying into an ISA, for that matter).

I appreciate that perhaps one or more of those cars is being paid for in a tax-efficient way, but that's not the important factor - unless the tax efficiency really does make it a cheaper way to borrow money than your mortgage...

Derboy

Appreciate the input, fwor. Both cars are leased and attract tax advantages through my business so they're not actual loans but I mention them as they are the most significant monthly expenditure outside of our mortgage. Cars are a passion for me and I view them as an ongoing luxury expenditure rather than a loan that I would pay off.

What you say makes absolute sense to me in the context of a car loan in terms of expensive debt but I'm basically renting them instead.

fwor

Understood - I had a pretty good idea, from the way that they were referred to, that they would not even enter the equation. But I had to ask, as the cars featured as just one word in a fairly long financial summary.

Eco_Miser

Not your main question, but you shouldn't be using ISAs for short-term savings - current accounts pay up to 5% AER which is still 3% after 40% tax. Regular Savings accounts pay up to 6% AER, but have more restrictions.

You should probably be splitting that £2k three ways, but I'll leave it to others to debate the relative sizes of each part.

Derboy

Hi Ecomiser. That's a very good point. The smaller ISA is a cash ISA that we've used for years. Never really thought the returns on it but definitely worth swapping it for something else. Thanks.

jimjames

Personally I plough all my spare money into my S&S ISA. I think it's far more likely to grow at a higher rate than current mortgage and so far it's worked out brilliantly, ISA is 3x value of mortgage so I could pay off completely if I so wished but at just over 2% there's no point.

dunstonh

Debt vs Savings vs Pension

A bit like saying do you pay the gas, the electric or water. In reality, you should be doing all these things. Not one or the other.

You need to be repaying your debt. You need to build up some savings. You need to plan for your retirement.

it is more a case of the ratios of your spending that should go into these that is important and there isnt enough to go on in your post to help with that. However, dont go 100% with any one option.

Playing_with_Fire_2

I'd look to ISA/pension now and mortgage later.

Due to inflation, it will be more expensive to put £500 into the mortgage today than in ten or twenty years' time (compared to what £500 will buy you). Over that time I am confident (and other people think differently), that the average growth of investments will be higher than the interest you pay on the mortgage.

Unless it is an offset, I'd be wary of putting all savings into a mortgage where you can't easily access them if your cashflow dries up (will vary on the T+Cs of the mortgage).

For pension vs ISA, consider the tax advantages (depends on how you are paid from the business), and the likelihood that you will need to access the money before 57/or whenever the rule is at that time. In your position I would be aiming to reach 55 with five years' expenses (including mortgage payments) in an ISA (in case the pension access age moves again), plus enough in the pension for the remaining mortgage payments (3*12*1050) and whatever your target pension value is.

My gut feel is that you are well behind on pension contributions if you want to retire at 55 (it depends on the NHS pension and how long you've been putting the £500 into the S&S ISA).

If you or your wife are PAYE and paying 40% tax, I would be filling a pension now in expectation that the tax relief will go in April. After that I would balance contributions to the S&S ISA and pension to maximise the tax advantages and get to the target balance of ISA and pension at 55.

Derboy

dunstonh wrote: »

A bit like saying do you pay the gas, the electric or water. In reality, you should be doing all these things. Not one or the other.

You need to be repaying your debt. You need to build up some savings. You need to plan for your retirement.

it is more a case of the ratios of your spending that should go into these that is important and there isnt enough to go on in your post to help with that. However, dont go 100% with any one option.

Well that's actually my question, what sort of ratios should I be looking at in the current climate of interest rates? My pension provision at the moment is far too low but do I skew the ratio towards that now or to my mortgage and then over to the pension later?

I'm keen to get an idea of how other folks prioritise the three and their reasoning.

:xmassmile

jimjames

Derboy wrote: »

Well that's actually my question, what sort of ratios should I be looking at in the current climate of interest rates? My pension provision at the moment is far too low but do I skew the ratio towards that now or to my mortgage and then over to the pension later?

I'm keen to get an idea of how other folks prioritise the three and their reasoning.

:xmassmile

So with pension tax relief likely to be hit it may be better to use that sooner. But proportion for them would be 50:50:0 with 0 for mortgage overpayment.