Late twenties and fairly clueless. What should we be doing?

Captain_Hook

To be quite honest, I haven't really considered retirement saving until this point as my wife and I have been prioritising saving for the wedding, raising a house deposit etc. No real Bank of Mum and Dad here. We are hoping to exchange and complete in the next several weeks and so my mind has started to move towards more long-term financial planning.

Now, as a teacher, I have been contributing towards a defined benefit pension scheme since I started my first teaching job in 2012. The first two-and-a-half years were as part of a final salary (1/60, NPA 65) which has since become a career average scheme (1/57th of pensionable earnings each year, NPA 68). I currently pay 10.2% in each month. As it stands, my total pension amount represents 7.61% of the current Lifetime Allowance. I'm not sure whether that's something that I should be worried about. My wife is a doctor and has been paying into her NHS pension since she qualified in 2012. She doesn't have a clue as to the status of her scheme but believes that it's now based on her career average.

I'm not entirely sure what our plans are going to be vis-a-vis retirement. We both have another 39 years before our normal pension ages. That's a long time away and I'm not convinced that I will want (or be able) to be working at a high level to that age. I suppose some flexibility would be preferable so that we/I could retire earlier if possible. I understand that your benefits reduce (fairly dramatically) if you retire 'early' and so what I suppose I'm after are tips, anecdotal stories and whatever else that anyone wants to contributes on what we should be doing.

Should we be making additional voluntary contributions to our pension pots? Buying additional pension, faster accrual...? It's not unlikely that we will both hit the lifetime allowance at some point in our careers. Is this something we should be concerned about? Are Lifetime ISAs worth investigating? I understand that they mature/pay out at 60. Should we be looking at other forms of investment? Keep in mind that we are not particularly interested in finance and are relatively risk-averse.

Some extra details. In the immediate term, we will be looking to complete our property purchase, 'do it up' to increase its worth, regularly overpay the mortgage, and build up an easy-access emergency fund (ca. 6 months income). We are both at points in our careers where we can take another step forward within the coming year - with the salary increases that will entail. House-wise, we expect to be there for around fix years (which ties in with the 5 year fixed mortgage rate that we have applied for) before remortgaging, looking to extend, or seeking to move to a more high-value property.

Sorry for the essay. Basically, what plans would you be making if you were in a similar position...

MallyGirl

Captain_Hook wrote:

I understand that your benefits reduce (fairly dramatically) if you retire 'early' and so what I suppose I'm after are tips, anecdotal stories and whatever else that anyone wants to contributes on what we should be doing.

You could build up S&S in an ISA to fund the interim between early retirement and the DB pensions to avoid the reduction, or do similar with a SIPP

enthusiasticsaver

DH retired aged 58 last year and I have just retired and will be 58 next month. Our intention was always to retire early so we overpaid into pensions, took out AVCs and sips/stocks and shares isas and overpaid our mortgage.

The best thing to do is work out how much you will need to live off in retirement and monitor value of pensions annually to make sure you are on target.

crv1963

enthusiasticsaver wrote: »

DH retired aged 58 last year and I have just retired and will be 58 next month. Our intention was always to retire early so we overpaid into pensions, took out AVCs and sips/stocks and shares isas and overpaid our mortgage.

The best thing to do is work out how much you will need to live off in retirement and monitor value of pensions annually to make sure you are on target.

A few quick thoughts-


1) Good to be planning so young!
2) Depending on area of medicine and career progression as a medic your OH may well likely hit the LTA, so SIPP not helpful but as a teacher it may benefit you.
3) Spread the savings across tax efficient schemes, possibly accessible at different times. So for you SIPP, both of you ISA and LISA.
3) Set a year maybe 10 years before SP as a target to retire, work backwards so for you SP and NPA 2057, aim to retire 2047, how to fund the 10 years before pensions start- how much pa spending (assume mortgage paid off) and then work out what you need to save.
4) Overpay mortgage but not to the point of pushing selves into poverty, interest rates are low but they will rise in the next 39 years and you'll get a better interest rate with a lower LTV.
5) Are you planning children? If so budget and save hard!
6) Look at the little savings too I recently worked out that I have spent £16k over 8 years in Costa coffees! Now and then with friends good, every day at work bad!

NHS

Hi, I am have started working in the NHS since 7/2016 but planning to go back to Hong Kong due to family issues (and very likely to stay there for good). I currently still in the NHS pension scheme and was looking to transfer the pension money to a Qualifying Recognised Overseas Pension Scheme (QROPS) in Hong Kong when i leave in 7/2018. But just last month, all the Hong Kong pension schemes are not longer listed as QROPS on the HMRC website and therefore I would not be able to transfer the money to any of the HK pension schemes? May I ask what is the best way to maximise the amount of money I can get out of the NHS pension please. Thanks so much

kidmugsy

@NHS: you'd be wiser to start your own thread, using a title that will attract the attention of people who know about your topic.

louloubelle79

In case this helps (wife pension) Im a nurse in the NHS and recently gone along this route with AVC in my scheme and a MPAVC with Prudential.

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension

If you are a member of the NHS Pension Scheme you can also use a NHS Stakeholder Pension to top up your main NHS Pension Scheme benefits. You can do this instead of, or as well as, other top up arrangements.

I also opened a LISA with Nutmeg

atush

Congrats on the wedding and getting onto the property ladder.

So for your wife, the LTA may become a problem. But she may (or may not) take lenghthy career breaks for children. For her i'd look at a S&S isa (assuming you guys have a cash emergency slush fund).

For you a Sipp or personal pension would be a good idea, esp if you want to retire early

TBC15

Sorry you lost me at saving for a wedding.

Captain_Hook

Thanks for (most of) the contributions so far!

For added context, I am a higher rate tax payer (and aim to continue to be!) although my wife currently is not since she works PT (0.6 FTE). However, she’ll be qualified and looking to find employment as a GP from March/April.

I believe that we are both able to make extra contributions to our DB pensions (Teacher Pension Scheme and NHS) - presumably not matched by employers. In my case, I can buy additional pension, apply for faster accrual or set up an AVC arrangement. However, since we would not be able to take these in full until we’re 68, these might not afford us flexibility (or may even edge one or both of us into LTA zone).

Perhaps, in the short- and medium-term, we’re best off focusing on upping the equity in our home (investing in home improvements and making overpayments) whilst setting up ISAs (cash LISA(s) and S&S ISA(s)). We can afford to live on my salary alone, albeit frugally, so we’ll be looking to make the best use of her income.

ValiantSon

I'd take faster accrual at 45ths. It will significantly improve your pension, and it will also help reduce your income tax. I don't know exactly what you earn, but given that you're paying 10.2% I have a rough idea. You may find that the faster accrual actually brings you down below the 40% threshold and so makes you a basic rate tax payer once again. You can combine this a buy-out (which adds an additional contribution for the duration of your career). Buy-out will allow you to retire 3 years early without any actuarial reduction. You'd need to do the sums as it may or may not be worthwhile. In my opinion, faster accrual is a no-brainer for anyone who can afford the extra payments - it certainly gives a better return than you can expect from a pension scheme in the market place.

To give some context, let's say that your career average salary is £50,000. On your current contributions you would receive £877 of pension for every year that you worked. If you were paying faster accrual at 45ths (and had been since the new scheme began) you would receive £1,111 of pension for every year that you worked. This is in addition to your final salary pension, although yours is probably quite low, having less than 3/60ths in your old scheme. N.B. There is a limit on the maximum benefits available from flexibilities such as faster accrual, but it is still worth doing.

Your employer will not match your increased contribution, but bear in mind that they are already paying more than you! They are paying 16.48%. You also need to understand that your pension (and your wife's) doesn't work like those in the private sector. Your pension pot is only a notional value and is not being invested. Instead, the money you pay in is being used by the government as revenue to fund current spending. You will be paid your pension, when you retire, from the income the government has at that time. This doesn't mean that your pension is at risk, rather that you have one of the best schemes available and it is underwritten by the government of the United Kingdom. Unless you think the UK is going to be wiped off the face of the earth then your pension is safer than the vast majority of people's (and if the country is wiped off the face of the earth then it doesn't really mater anyway). Your employer's contribution, therefore, has absolutely no effect whatsoever on the pension that you receive.

I'd be surprised if you were to hit your lifetime allowance, but if you were to then a SIPP would be no use to you anyway. It may be a different matter for your wife. That isn't to say that you shouldn't consider a SIPP, but personally I'd look at a S&S ISA, perhaps with that split between a regular ISA and a LISA, given the generous 25% bonus on the LISA. Available S&S LISAs are few and far between, but compare Nutmeg, The Share Centre, AJ Bell Youinvest and Hargreaves Lansdown, who do all provide them. Obviously you can draw the money from your LISA at 60, and from your ISA whenever you want, to help fund the period between retirement and drawing your TPS.

Be aware that under the career average scheme rules (completely unreasonably) you have to draw both of your teacher's pensions at the same time, so if you start drawing your final salary scheme at 65 you will have to start drawing your career average scheme then, and so you will have to take an actuarial reduction on this.

I'd caution against thinking that you can add too much value to your existing home through doing work on it. There is a ceiling price for the area you live in and it is very easy to spend too much thinking - wrongly - that you will make even more on re-sale. Look at what similar properties in superb condition are selling for to give you an idea. It is far better to think of improvements that will make it the home that you want to live in, rather than having a constant eye on what you think a future buyer will pay a premium for. Do, however, ask yourselves whether what you plan to do is likely to cost more than you can expect to make back when you sell; if you still want to make the improvement because it is what you will both enjoy while you are there then you can still go ahead, but accept that it won't make you money.

Cash LISA rates are well below inflation, so I'm not sure why you would bother with them. Skipton are offering one of the best rates, I believe, at 0.75%, but inflation is currently at 3.1% and could well continue to rise through this quarter and possibly next (or beyond - who knows?). It would make more sense to use a S&S LISA and split your allowance between the two. Bear in mind that you can both open them, so between you have a £40,000 ISA allowance (putting £8,000 in LISAs and £16,000 in ISAs).