Maximising return

mp80

Hi

I am 35, earn 100k basic + c. 25k bonus (gross pa)

Partner earns 55k but is just on maternity leave after our 1st child, so income is just north of 6k PCM net at the moment with her maternity pay, normally it is around the 9k-9.5k mark

My work pay 500 GBP PCM into my pension, I make no contributions

Have about 35k cash in bank doing stuff all for emergencies, couple of houses (mortgaged), bit of CC debt at 0%, PCP deal on car, and that's about it

The 35k cash will easily cover 12 months living expenses, probably more at a stretch, so now I want to maximise the potential of cash coming in by doing the following

* over paying PCP car deal, highest interest bearing debt
* over paying mortgage

My question is, is it best to simply overpay the above as much as possible verus investing in other areas? I always remember the Lewis principle of 'paying off interest-bearing accounts is as good as saving', but I'd like to hopefully explore some of the higher risk / return investments - is it best to see an IFA on these or do people have other nuggets of advice?

Thx!

eskbanker

A lot depends on relative rates for mortgages and PCP but if you're making no contributions to a pension yet then this would seem an obvious place to put at least some of your monthly surplus.

mp80

PCP is at 6%, mortgage is around 3

I thought about whacking up the pension, but I'm wary of them to be honest. Pay all that money in without any option to cash out, and then it might be worth tuppence ha'penny at the end. That's why I did a deal to get my employer to contribute without it affecting my net. But if it's genuinely worthwhile, i'll consider it.

bowlhead99

You say you earn £100k and expect £25k bonus. For every pound you earn over £100k you will lose 50p of your annual income tax allowance as it tapers down from the £11,000 a year that most people get to the £0 that high earners get.

So, with every pound you earn between £100,000 and £122,000 as this annual allowance is taken away from you, you will pay income tax of 40p (40% tax on the pound earned) plus 20p (40% extra tax on the 50p which used to be tax free but is now being taxed at 40% because your allowance is been taken away from you).

So, the net effect of earning £100,001 instead of £100,000 is that you pay 60p tax and take 40p home (well, 38p after your 2p national insurance contribution).

So basically at the moment you are choosing to pay 60% tax on the money between £100,000 and £122,000 and then 40% tax on the money between £122,000 and £125,000. That is £14,400 of tax with only £10,600 to keep to yourself.

If you instead diverted money into a pension you could have a £25,000 investment instead of £10,600 cash in your bank. You can access it from somewhere between age 55 and 60 depending on how many times the rules change before you get there.

If a £25,000 investment made in 2016 turns into 'tuppence ha'penny' by 2040, that is only going to be because the person (i.e. you) selecting the investment funds inside the pension is an imbecile. If you are not an imbecile you will probably invest it in a generalist fund which holds global equities, property and some government and corporate bonds, rather than some get-rich-quick scheme to buy a colombian plantation or a row of car park spaces at an airport.

After your £25,000 in the pension has grown at 7% for a little over 20 years, it will be worth around £100k. A quarter of it can be drawn out tax free (pension commencement 'tax free lump sum') and the remaining £75k element which you can draw out over one year, several years, or over the entire rest of your life, will only be charged at your marginal income tax rate in the years you take it - which might be 20% as a low rate taxpayer or might even be nothing if you have given up work and not started drawing your other pensions or taking income from other non-ISA investments.

So, you can earn £25000 this year, pay no income tax on it because you invest it in a pension, and have the £25,000 grow over a couple of decades at an inflation-beating rate to give you £100,000 out to spend on whatever you like (maybe pay off your mortgage, a few year's living expenses, etc etc).

Or, you can just do what you have been doing, take it as £10,600 cash after tax this year, and put that cash into paying off your PCP to save £600 of interest a year or paying off your mortgage to save £300 of interest per year.

It's up to you really but I know what I would do, because it is what I do.

bigadaj

Pemsion has to be considered, your currently losing your personal allowance so would be getting 60% odd tax relief on some of the contributions and 40% or more with salary sacrifice for the rest.

That sort of uplift dwarfs anything like paying off car finance or mortgage debt, look into it with some urgency to make sure you resolve before the end of the tax year.

Given the government is giving you nearly a pound for every pound that you invest, and there will be thousands of investment options in a pension, you can try as risky investments as you like with you actually providing only half the money.

mp80

Thanks both;

Just to be clear, this deal has just come into effect in Dec 2015 - I know about the tapering and originally I was offered a higher salary, so I elected to have it reduced it to 100k and to defer the rest to a lump sum bonus to be payable month before the year end, so I could have options as what to do with it in the tax year. I've not had any payment yet so i've not lost out.

Sounds like a lump sum contribution to the pension may still be the better bet for that bonus, and whacking in any monthly surplus onto the car/mortgage?

racing_blue

Bowlhead has explained it perfectly.

If you earn £125K, you lose all your personal allowance, and pay tax on the whole lot. You pay £49,414 in tax and NI and get to keep £75,585 of your wages.

If you put the £25k into a pension, you claw back your personal allowance of £10,600 which means you only pay tax on £89,400. So you pay £34,674 in tax and NI. Then, HMRC pays an additional 20% into your pension - an extra £5k. At least that's how it worked last time I did it. So in total you get to keep £95,325 of your wages.

£75K now, or £65k now + £30K later

PCP... why oh why?!

mp80

What's wrong with PCP?

racing_blue

six percent

mp80

Well, I didn't want to wang out 40 g's on a car. I also remembered that life isn't just about a race to see how much you've got on your deathbed!

savings_my_hobby

bowlhead99 wrote: »

So basically at the moment you are choosing to pay 60% tax on the money between £100,000 and £122,000 and then 40% tax on the money between £122,000 and £125,000. That is £14,400 of tax with only £10,600 to keep to yourself.

Maybe he is a socialist?:p