Debt vs Savings vs Pension

Derboy

Playing_with_Fire wrote: »

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.

jimjames wrote: »

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.

Very sensible advice from you both. Thank you very much for this.

I'm surprised that the general consensus is not to bother with mortgage over-payments but the reasoning behind it makes perfect sense to me. Originally I started making ove-rpayments to build equity in my first house to allow me to trade up with a decent LTV% but then saw advice about getting the mortgage paid off early and thought that made sense.

Ideally I'd prefer to be mortgage free before age 55 and would have to make overpayments to be in that position. Would it make sense to calculate the overpayment required to achieve that and then split the rest 50/50 between pension and ISA or is the lack of pension provision so problematic that I should abandon mortgage overpayments entirely for the time being? I'd like to be mortgage free as early as possible but don't want to be retired and skint either.

dunstonh

I'm surprised that the general consensus is not to bother with mortgage over-payments

I dont agree with this "consensus". I am significantly overpaying my mortgage. However, I am also paying into pension and S&S ISA.

Derboy

dunstonh wrote: »

I dont agree with this "consensus". I am significantly overpaying my mortgage. However, I am also paying into pension and S&S ISA.

Which is what I'm currently doing but not putting enough away. I'd be really interested in hearing your thoughts on how you prioritise between the three?

atush

dunstonh wrote: »

I dont agree with this "consensus". I am significantly overpaying my mortgage. However, I am also paying into pension and S&S ISA.

I agree that overpayment of mtg only is unwise at todays rates, but i continue to over pay some too (but less than before). Just because we wanted the mtg gone by retirement (And the orig term was a few years after).

But as to pension, that is where I would concentrate (making sure you had both cash savings and still use S&S isas). AS you would get TR, and you could even set one up thru your company and lower th company tax bill too?

Derboy

atush wrote: »

I agree that overpayment of mtg only is unwise at todays rates, but i continue to over pay some too (but less than before). Just because we wanted the mtg gone by retirement (And the orig term was a few years after).

But as to pension, that is where I would concentrate (making sure you had both cash savings and still use S&S isas). AS you would get TR, and you could even set one up thru your company and lower th company tax bill too?

That's how I currently do it, but the spread has been more focussed on Mortgage and the the S&S ISA. Now that we've bought the house we want, I no longer need to focus on the Mortgage overpayment, but I'd like to still pay some to it. We're used to paying £1500 a month for our mortgage which would give and overpayment of £450 per month on the new one and still leave me with around £1500 to split between pension and ISA.

I'm wondering how sensible that sounds and what sort of ratio between I should go for. The ISA has around £20k in it, so I have access to that level of liquid cash if something bad were to happen. Taking the balance of the different views so far, it seems to make sense to me to pay £450 overpayment to the mortgage, around £1000 into the pension and keep the ISA going at £500 a month?

This would clear my mortgage at age 53 (obviously based on current rates which won't stay the same, but I would up the amount over time to stay on track). Give me around £110,000 in the ISA (assuming no massive gains or losses on my invested sums). What I'm not clear on is, how much I can expect to get out of my pension if I up it to £1000 per month till I retire?

Does this make sense or am I missing something?

dunstonh

Derboy wrote: »

Which is what I'm currently doing but not putting enough away. I'd be really interested in hearing your thoughts on how you prioritise between the three?

As I am regulated, I cannot slip into regulated areas on this site. Even if I could, there isnt enough to go on to say what you should do. Everything you have read so far is a bit generic and whilst some may suit a bias towards pension, others savings and others mortgage, the same bias may not apply to you. Its a mixture of knowledge, understanding, tax, occupations, product selection and investments selected, objectives and future needs and capacity for loss (both now and in the future) to name but a few.

Ultimately, all three options are good things to do as long as you dont overload one and leave the others behind. However, the fine tuning for how much into each needs more detail.

Derboy

dunstonh wrote: »

Ultimately, all three options are good things to do as long as you dont overload one and leave the others behind. However, the fine tuning for how much into each needs more detail.

Thanks DunstonH. Sounds like my next step is to go get some proper tailored advice.

jimjames

Derboy wrote: »

Thanks DunstonH. Sounds like my next step is to go get some proper tailored advice.

As a company director that would probably be a very good idea. Maximising the tax benefits from being self employed would make sense and that's not something easily obtained from strangers online.

I currently pay 25% into pension (employee & employer) and have some overpayments in mortgage already but when interest rate is just over 2% on mortgage it seemed to me that it was better to channel all available cash to S&S ISA in my situation.

atush

depending on your mtg rate, fixed period, level of savings/investments etc, I would probably say to cut down the overpayment a bit by 200-250 and swing that towards the pension. Along with the extra you can afford as 200 a month into your pension I am assuming is very small compared to your income.

This way you are still overpaying, but just a little less.

I can say this as I am not regulated lol.

AlanP_2

What we did was set a date when we wanted to clear mortgage by and then set the payment levels to achieve that.

All mapped out in Excel so that we can adjust when we need to, to fund additional pension payments whilst 40% tax relief still available.

Lower overpayments at the moment with a compensating increase from April 2016 (although this may get extended if relief still on offer).

Balance of spare income spread between Interest Paying Current Accounts & P2P and Pension.

No S&S ISA at present but on "to do" list - the pension tax relief is just so tempting (we are both 55+ so could access it if absolutely necessary which is a major consideration).