Mortgage free at 35. Now to start a pension.

2016Convert

Yes, being mortgage free has given me confidence ti invest int he business and be able to build that.

bowlhead99

Not_Me_Officer wrote: »

Where are all these people?
Whenever i read about pensions online it's like anyone talking about it is really pushing it towards higher rate tax payers and companies who pay in nice amounts.

Granted i don't know 100s & 100s of people but of those i do know not a single one is a higher rate tax payer. Some come close but none of them are.

Some have nice employers who pay in beyond what they're forced to by the government but the vast majority only pay in the minimum.

I don't know if anyone ran any statistics but i wonder out of all those paying into pensions up & down the land how many are higher rate and what percentage are basic rate, also who has an employer who pays in extra and who has an employer who pays in the minimum. I wonder how the percentages split.

You can get basic statistics on taxpayer numbers and rates from the twice-yearly publication via the gov.uk website : "UK Income Tax Liabilities Statistics :2014-15 survey of Personal Incomes, with projections to 2017-18'. It includes tables such as "2.2: number of individual income taxpayers by marginal rate, gender and age by country and region 1999/00 to 2017/18.

The projections from previous surveys rolled forward for current tax year are that of the 30 million taxpayers, ~85% of them do not get into higher rate while 13.7% are higher rate and 1.2% are additional rate. So if you knew a full cross section of society then more than one in seven of the people you know paying tax would be above basic rate. However 20% of the 30 million taxpayers are of pension age so you won't run into them at work. And obviously there are another 35+ million people somewhere who don't pay income tax at all because they don't work or simply don't have enough income (some will be kids and babies etc). More men than women (17m vs 13m) are taxpayers in the first place, before you get into what rate they're on.

So depending where you draw your list of friends from you might find very few people on high or highest rate tax (only 4.5m paying more than basic rate on a population of 65m).

On those projections for 2017/8, basic rate taxpayers as a group pay £57.4bn of tax on their earnings, the higher rate taxpayers pay £57.3bn on theirs, and the higher rate taxpayers pay £46bn on theirs. On interest income, the 85% of the people who are in the basic rate camp pay about 15% of the tax that gets paid on interest and under 10% of the tax that gets paid on dividends. Including earnings, interest and dividends the average amount of income tax paid by a basic rate taxpayer with earnings is about £2k each (under 10% of their total income) while the people in the higher rate band pay £15k each (about 22% of all their income) and the people in the top band pay £140k each (about 38%of all their income).

So, as you can imagine, the incentive to reduce your income tax through pension contribution, whether your employer helps or not, is pretty high if you have higher earnings (like our OP who will have something like a £17k tax bill on £70k of income if he doesn't make pension contributions). The marginal rate of tax saved by making contributions rather than paying the high income tax and using the net cash to pay off a mortgage, can be very compelling.

At lower rates of income tax per pound of income, the incentive to feed extra money into your pension is lower if there's no further employer contributions to be had and no salary sacrifice arrangement offered to save you some NI. Pension can still be useful, but there's less tax to save and things like LISA for someone OP's age can be handy if he didn't have high rate tax to save through the pension route.

I agree with the other posters that in OP's position I might consider some remortgage or even a low rate personal loan or credit card stooze to access funds to give me the cashflow to make big pension contributions to take me out of high rate tax. The "free money" from that route is seriously good and using a tax-free lump sum to clear remaining mortgage in two decades' time is extremely efficient.

An unmortgaged property can however be used as collateral to get business finance ; and personal mortgage proceeds could also be used for business purposes - so using either of those methods in some circumstances to grow the person's business can be even more profitable than using tax relieved cash to invest inside a pension, so I can understand why there are plenty of small business owners who haven't got started on their pension. Business capital is precious when you trying to grow and having the necessary cashflow can be the difference between success or giving up. So, i wouldn't call someone an idiot for prioritising business over pension but at some point the advantages of using one can be tremendous.

JohnnyJet

2016Convert wrote: »

Yes, being mortgage free has given me confidence ti invest int he business and be able to build that.

Then it was the right decision for you. A few years ago I was overpaying by a lot more than I do now purely for security reasons, now because the mortgage is much lower, I no longer feel the need. I'd rather build up my pension. I know it's not logical thinking in the current climate to pay the mortgage off first, but it gives peace of mind.

ams25

Feel for the OP who has achieved something great, whatever the other options were. Hopefully he can benefit from the tax relief still available from the past 3 years to supercharge his pension.

But I do agree with the comments though re pension funding and hope others reading (and in a similar position) learn that it should be mortgage AND pension planning, not OR.

I aggressively overpaid two mortgages which felt good but did plough funds into pension and ISAs too where I could.. Today have a small mortgage that I could pay off but choose not too. I think that 'Feeling' is almost as good as being mortgage free...But it means the funds have worked harder in the wider scheme of things, given tax relief and investment growth.

Thrugelmir

Malthusian wrote: »

over a 30-year time period you only need 2.6% growth to match what you would get if you opted out of the pension scheme and got 5% per annum. Over 20 years, 1.4%. .

I'm not retired yet. In my working lifetime. Amongst the companies I have worked for, 3 have gone under and another 3 have been bought. That's the nature of the real world for many people. No job for life. No certainty.

CBX1985

It isn't ideal to pay down your mortgage totally in this way, granted. But don't be too harsh on yourself. I too am a IFA and I pay a lot off my mortgage as it is effectively a safe savings account - every pound you pay down is one in which you will not pay interest on. Admittedly, I invest in my ISA, too.

A lot of people would not have paid down the mortgage and would not have invested in a pension/ISA either, so you are in a better position than most. You have acknowledged you need to save for your future from now on and that is the most important thing: what is done is done.

It is like the old joke popular in Ireland: When asked the way to Cork, a man in the pub replies "I wouldn't start here, if I were you". It's a bit late for that and criticising you for it is a little unhelpful.

dunstonh

It's a bit late for that and criticising you for it is a little unhelpful.

You need to remember that posts on this site are read by many people and responses are not just for the benefit of the OP but all those others reading. Indeed, a number of posters started new threads referencing the responses on this one seeing what they should consider doing.

So, don't think of it as criticism. It is pointing out what could have been done differently, mainly to help others.

CBX1985

dunstonh wrote: »

You need to remember that posts on this site are read by many people and responses are not just for the benefit of the OP but all those others reading. Indeed, a number of posters started new threads referencing the responses on this one seeing what they should consider doing.

So, don't think of it as criticism. It is pointing out what could have been done differently, mainly to help others.

Point fully taken. I just have a bit of an aversion to people being criticised for saving. But it is absolutely the right thing that people learn from the "mistakes" of others.

Having said that, the OP did say that having the mortgage paid off gave him the confidence to invest in his business. So if that is the case, perhaps it was the right thing for him at the time.

atush

Not sure it was fully taken, and I dont think any of us were mean about it.

Just pointed out a possible mistake of overpaying mtg to the neglect of a pension. Doubt anyone said anything about investing in his business whch is completely different.

enthusiasticsaver

Well done on paying off your mortgage at such a young age. I would agree that it would have been better had you not ignored the pension completely and people have only pointed this out for the benefit of others but that does not detract from your great achievement.

You are now in a good position to pay significant amounts into a SIPP so that is what I would be exploring particularly if you are a higher rate tax payer. Explore providers and funds.