To overpay or to save, that is the question?

jamesd

You don't have to wait until age 60 for the way out. As soon as you're 55 you can take the 25% tax free lump sum on which you'll have made at least a 40% tax gain. You can continue to do that taking of tax free lump sum from time to time as you see fit.

If you take even a penny of the taxable 75% your allowance for money purchase/defined contributions is cut to £4,000 a year so that part is best left until later.

I'm well on track to having my own mortgage clearable with just tax and NI relief. The tax free lump sum level is already more than the mortgage.

Stocks and shares ISA is worse than a pension because you don't get the tax relief on the way in. This loses you the pure tax gain on the 25% tax free lump sum and the likely partial tax gain on the rest. Pension easily beats ISA for those anywhere close to or over 55 unless things like the lifetime allowance are a factor. Even easier when there's higher rate tax relief on the way in and only basic rate on income tax way out. ISA is a good place to go to invest after taking money out of a pension.

You do need to consider the potential lifetime allowance value of your work pension to be sure that your plans won't take you over the pension lifetime allowance.

Rather than just savings you might consider some P2P use.

Overall, though, putting any money at all towards mortgage overpayment is just throwing money away unless it delivers you enough psychological benefit to make the loss seem worth paying.

Suffolk_lass

jamesd wrote: »

You don't have to wait until age 60 for the way out. As soon as you're 55 you can take the 25% tax free lump sum on which you'll have made at least a 40% tax gain. You can continue to do that taking of tax free lump sum from time to time as you see fit.

If you take even a penny of the taxable 75% your allowance for money purchase/defined contributions is cut to £4,000 a year so that part is best left until later.

Just to be clear - if you were to take any part of your Classic pension before age 60 it will be actuarily reduced (by 5% for each year before the scheme retirement date of 60, at current rates) unless you are being made redundant; in which case your redundancy money would normally be used to redress the actuarial reduction. The only lump sum you could take at age 55 is CSAVC if you had any.

SL

jamesd

Suffolk lass, good to be clear though there's no way my post could have referred to Classic because Classic doesn't offer a 25% tax free lump sum (an amount set by the scheme instead) and doesn't have any MPAA effect if the income is taken.

It would not be a good move to take anything from the Classic scheme before normal retirement age for that scheme unless some redundancy deal other than spending redundancy money to top up the pension is being offered. Probably better uses for the redundancy money than that, though it depends on the reverse commutation rate offered and age.

Use of the CSAVC options to take money at 55 would probably also be a very bad move, since according to the scheme description it only offers the UFPLS option to take lump sums and that is 25% tax free and 75% taxed, causing the reduced 4k money purchase annual allowance to be invoked. A transfer of the money from CSAVC to any personal pension then taking just the 25% tax free lump sum and leaving the remainder in flexible drawdown with none of it taken would be the way to go to avoid that unless the plan was to make no more than 4k of pension contributions a year after doing it, perhaps if retiring then.

Suffolk_lass

jamesd wrote: »

Suffolk lass, good to be clear though there's no way my post could have referred to Classic because Classic doesn't offer a 25% tax free lump sum (an amount set by the scheme instead) and doesn't have any MPAA effect if the income is taken.

It would not be a good move to take anything from the Classic scheme before normal retirement age for that scheme unless some redundancy deal other than spending redundancy money to top up the pension is being offered. Probably better uses for the redundancy money than that, though it depends on the reverse commutation rate offered and age.

Use of the CSAVC options to take money at 55 would probably also be a very bad move, since according to the scheme description it only offers the UFPLS option to take lump sums and that is 25% tax free and 75% taxed, causing the reduced 4k money purchase annual allowance to be invoked. A transfer of the money from CSAVC to any personal pension then taking just the 25% tax free lump sum and leaving the remainder in flexible drawdown with none of it taken would be the way to go to avoid that unless the plan was to make no more than 4k of pension contributions a year after doing it, perhaps if retiring then.

Yes, jamesd, you are right except Frugaliza said (s)he is a civil servant who has a mixture of the old and new pension schemes - his (her) only option for a lump-sum was CSAVCs which (s)he has not started yet - so far as I can see, there is no DC scheme to draw down from age 55, hence my contribution. I might have missed something though.

In terms of frugalising other spends and lifestyle I recommend having a read through the first few posts of the monthly grocery challenge in the Old Style Boards - there are some really good tips for keeping costs down in monthly housekeeping - and tips for making cleaning products cheaply if you want to expand from the washing gloop . In fact there are lots of money reducing things in that whole area of the forums. I am ashamed that I was once spending £6-700 a month on living stuff - reduced to just over a third after a few years tracking and changing the way I shop (and what for). And I no longer keep enough loo rolls (on special offers!) for the whole Village...
SL

jamesd

No DC scheme yet. CSAVC is one option and so long as it's possible to transfer out while being an employee it might well be the best one, particularly if it's by salary sacrifice with some NI to save as well as income tax.

I'm trying to be a little more clever about my own shopping. No real need for me to buy a year's worth of lamb at Christmas when there are other seasonal lower price times like spring.

Frugaliza

Thanks Jamesd and Suffolk Lass for your contributions. I'm 50 and have a pension portfolio as follows
22 years into a Classic pension (payable at 60 - I think). Pays a lump sum
Alpha pension which I've just been transferred to and gives an income at 67 but no lump sum
CSAVCs - I paid into this for a few years but stopped about 15 years ago. This is the bit I was thinking of resuming payments into as a tax effiecient savings plan.

No point me drawing down any CSAVCs at 55 as I'lll still be working and paying tax at 40% so I should wait until I retire and earn less and only pay tax at 25%

I'd love to see that mortgage redemption figure gradually get smaller but it doesn't make sense I can really see that overpaying a mortgage with an interest rate of 1.69% is not the best option when at the very least you can save at 5% or better still increase pension/start a stocks and shares ISA. Am now feeling like an imposter on the mortgage wannabe thread!

I think I originally worked out that to clear my mortgage at 60 rather than 67 (thus giving me the chance to retire at 60 should I want to) I would have to overpay by £440/month. So instead of overpaying the mortgage I'll build a savings/investment pot to offset the mortgage. I'm thinking of doing as follows:

£240 into regular savings accounts earning 5%
£100 into a stocks and shares ISA - thinking of a global tracker fund.
£100 into my old CSAVC pension DC schem.

I'd love to know what you guys think of this plan and if you have any other ideas. I think the above spreads the risk and keeps a good proportion of it in my control so that I can get my mitts on it if I need to.

Meanwhile less high falutin' frugaling - I dashed to Ukia to take advantage of the '£5 Christmas tree offer' in the last newsletter. Felt very smug and self satisfied as I dragged it into my car. Until I got home that was - it has rather wide bare patches of trunk for long stretches. Gah! I may have to cut off some of the lower branches and glue them up top!

P.S Frugaliza is all woman! - I see from the posts this might not have been clear.

jamesd

Frugaliza wrote: »

No point me drawing down any CSAVCs at 55 as I'lll still be working and paying tax at 40% so I should wait until I retire and earn less and only pay tax at 25%

Two reasons to take just the 25% tax free lump sum:

1. within the limits you can recycle it into new pension contributions to get a new lot of tax relief. One of the easier limits is no limit on recycling it starting in the third tax year after the tax year in which you take the lump sum. So taking it early makes it more likely that you'll still be working at the time you can maximise the recycling.

2. lifetime allowance risk. You want to take benefits in some way as early as possible from a defined contribution scheme to reduce the effect of growth on lifetime allowance use. If there's a possibility of exceeding the lifetime allowance.

Frugaliza wrote: »

I'd love to see that mortgage redemption figure gradually get smaller but it doesn't make sense I can really see that overpaying a mortgage with an interest rate of 1.69% is not the best option when at the very least you can save at 5% or better still increase pension/start a stocks and shares ISA. Am now feeling like an imposter on the mortgage wannabe thread!

I could clear my own mortgage at any time using non-pension money. It just doesn't make sense for me to do it, so I don't.

Frugaliza wrote: »

I'd love to know what you guys think of this plan and if you have any other ideas.

Maybe learn a bit more about VCTs. That's something I deferred learning about for too long. When there's plenty of income around they provide an interesting way to eliminate the income tax with an investment if you can afford to defer the income for at least five years.

Suffolk_lass

Hmm, you might have two sides of a coin with jamesd and me. I think his risk appetite is greater than mine. I am a relative newcomer to investing and I bow to his greater knowledge but have been reading up on a few things this year. I have an emergency fund of accessible cash that is annoyingly never quite as big as I would like, and a slightly larger amount of savings going into a S&S ISA - this was a new one this year, using Charles Stanley Direct (not quite as easy to look stuff up on as Hargreaves Lansdowne but a bit cheaper - I have spread my new ISA investments across three funds at the moment - one American, one UK and one global and all are reinvesting the accumulated income. It has been really interesting watching the market fluctuations and watching the different reactions to events. I have also kept my mortgage going - with a base-rate tracker interest rate of just 0.74 it would be silly not to, for the time-being. Like you, I am looking to retire at 60 or so (maybe 61) which is less than ten years away so for me, I think VCT are a bit out there for this stage - I have barely got the hang of funds vs shares, passive vs active management!

I look with interest at some of the matched betting gains people are making but I think it is not interesting enough for me to persevere with to really make a go of it. I was reading edinburgher's diary (only freedom will do) and he does some interesting things if you want to read up on his approach - from what I can see, he is generous with his understanding and shares his experiences - e.g. some P2P lending but always backed by assets, if I remember correctly. He was one of your early respondents so you could find his diary via his posts if it is not active at the moment.

Good luck!
SL

Frugaliza

Thanks Suffolk Lass, you are like my financial sister! Very similar attitudes and situation I think.

I'm definitely going to check out Edinburghers diary and in the new year start £100 into a S&S ISA. My EXOH (ex other half - is that the right acronym?) and I have been saving the equivalent amount of child benefit into a Fidelity S&S ISA (UK tracker) since my DS and DD were born (they're 13 & 15 now). I got a very pleasant surprise when I looked at it the other day (hadn't looked for 5 years). This is their Uni fund (which they don't know about yet) and whilst it still doesn't cover tuition fees is about half way there. That's their money and so my mortgage neutral project needs to be in a totally different fund so as I don't get mixed up. I am thinking of a global tracker - sounds very grand.

Meanwhile on the more micro day to day budgeting front Frugliza has been busy as follows:

Signed up to the 2017 save £12k thread (aim is a more realistic £6k) I'm including my S&S ISA contributions, CSAVC contributions and my savings....

I've discovered Tilly Tidying! I love it - Every time I look at my various accounts I tidy them up so that each balance has a 5 or a 0 at the end - I Tilly tidy those pennies into a redundant bank account I've now renamed 'Tilly Tidy Up A/D' (H@lifax lets me rename my accounts which is fun). I think I read that in one of your posts Suffolk Lass and am yet to discover where Her Royal Tilly Tidyness is hanging out - I like her style!

I've just been reading about smart metres and LED lamps - I have totally missed that trick and that's now added to the ever growing Frugaliza to do list.

I have reframed in my mind the £5 IKEA Christmas tree that turned out to be disappointingly threadbare/needlebare. It is now in my mind tastefully sparse and Nordic - it is hygge in it's pleasing simplicity. All in the mind you see.

DD has cut me a deal - If I buy any shoes between now and April she and DS are allowed to eat sugary cereal everyday for a week. She has no idea how serious I am about this:A

Do I need to start a diary I'm wondering or will this do? Not sure I'm in the right area as I'm a hybrid saver/mortgage free wannabe...

edinburgher

My ears are burning

• P2P - Jamesd is your go to person for all the best advice, I have used several of his insights to test my own assumptions and decision making processes. Some of his ideas won't work for me (VCT etc.), but like all good internet sources, you adopt the best and leave the rest
• Happy to answer matched betting questions where they arise, but the dedicated forum is a much better source of up-to-date information. My story was that I got heavily involved in it and managed to make approximately £1,000/month for a year and a half. There were some mistakes along the way (including 3? £,£££ mistakes, 2 of which I couldn't salvage)! :eek:
• I'm big into energy saving, recycling and most things 'green', also happy to discuss these. We have solar PV panels, a super-efficient condensing boiler and every light in the house is LED bar the rarely used flourescents under the kitchen units. Now looking at ways of reducing our waste after mastering the arcane art of recycling