What to do with our savings?

noworries182

Over the past years I’ve had a decent job and managed to buy a house with around £145,000 left on the mortgage and also squirrel away around £70,000 of savings.

Recently took a new job with less money (but less stress), myself and my wife roughly earn £60,0000 a year combined, So we are still able to save money each month but not like we did before. We are both 30 and have a baby daughter, hopefully we’ll have another child in the future.

Based on the above, I just wanted some advice on what you would suggest doing with these savings. Keep them as a fall back in case one of us is made redundant, spread it across various savings accounts, use it to pay off lump sums of our mortgage, invest it (if so where) or put it into a pension plan?

Thank you in advance for those who take the time reply.

DiggerUK

With £70k in cash earning next to nothing, and £145k of debt the answer is simple. Kill the mortgage asap.
You will have an immediate drop in your outgoings, a far more affordable mortgage, and a bigger piece of equity in the roof over your head.

With a combined £60k a year income, and both working, you do not need a large rainy day fund. So only keep a small amount in savings.

As to your retirement finances, you have enough time to sort that out. The biggest assett you need in retirement is a paid for roof over your head. Clear the mortgage, then work on retirement financing..._

Zorillo

I broadly agree with Digger, although if you don't want to 'clear' the mortgage you could overpay it instead, to reduce the term and provide a buffer if your incomes do fall again in the future (eg more children, redundancy).

If you have pension provision through work then you should increase your contributions to maximise what your employer will match. I pay slightly more than that into mine because my employer isn't massively generous (I pay 10%, they pay 6%).

If you already do either of these, or doing this still leaves you with a big pot, I'd invest the money for the long term in LISAs, ISAs and pensions.

If you have no current pension provision through work this would take priority.

Or if you'd sleep easier once your mortgage has gone, you could do worse than what Digger has suggested.

MK62

Possibly all of the things you suggested, plus maybe start something for your daughter.

I'm not sure where you currently have the money, but it's a lot to leave in an easy access account for instance.

I would probably look at some interest paying current accounts, which also give you access to regular saver accounts - many of these will pay 3-5%, though it is on relatively small sums - this very site has details on these.

Then I'd probably look at putting some in a 1 yr fixed rate bond - again this site has details of the better paying ones.

After that, you could look at a couple of stocks and shares ISAs, one each for yourself and your wife (I might wait a bit on that though with the markets currently so high - either that or perhaps better is to drip it in bit by bit over time into actual investments - probably funds or Investment Trusts if you are new to stock market investing)

You've already mentioned topping up pensions - though it depends on your current pension arrangements as to the best way of doing this.
It's a judgement call on whether paying into pensions (or indeed ISAs) is a better use of the money than paying off debt (such as your mortgage) - as it's a long timeframe you can only make a guess - at the moment it probably favours topping up your pensions, though this can change. Obviously paying into a pension locks your money away until 55, so that could be a consideration in your planning.
As mentioned by several in another thread on this subject, you need to run some modelling of various scenarios to get a better of idea of the possible outcomes.
Also mentioned in that thread, is that you can always do a bit of both.

Your attitude to risk is also an important factor - by keeping debt and investing spare money on the stock market, you are effectively borrowing to invest - there's nothing wrong with that per se, as long as you do it with your eyes wide open, and fully understand/accept the risks.

kidmugsy

Consider income protection insurance.

http://monevator.com/do-you-need-income-protection-insurance/

dawyldthing

I'm another to pay the mortgage off. Yeah you can make the money work got you but it's pitiful returns really. I paid mine off and it's a huge relief and now I work to live rather than live for work

FatherAbraham

noworries182 wrote: »

Over the past years I’ve had a decent job and managed to buy a house with around £145,000 left on the mortgage and also squirrel away around £70,000 of savings.

Recently took a new job with less money (but less stress), myself and my wife roughly earn £60,0000 a year combined, So we are still able to save money each month but not like we did before. We are both 30 and have a baby daughter, hopefully we’ll have another child in the future.

Based on the above, I just wanted some advice on what you would suggest doing with these savings. Keep them as a fall back in case one of us is made redundant, spread it across various savings accounts, use it to pay off lump sums of our mortgage, invest it (if so where) or put it into a pension plan?

Thank you in advance for those who take the time reply.

Don't pay your mortgage off: http://monevator.com/not-paying-off-my-mortgage/

Ensure that you can pay your mortgage if you lose your income.

Warmest regards,
FA

jamesd

noworries182 wrote: »

around £70,000 of savings ... myself and my wife roughly earn £60,0000 a year combined ... We are both 30 and have a baby daughter, hopefully we!!!8217;ll have another child in the future. ... Based on the above, I just wanted some advice on what you would suggest doing with these savings ... ?

I suggest that you learn about venture capital trusts and effectively stop paying income tax by deferring 70% of your income for five years.

VCTs offer 30% income tax relief in the tax year of purchase, paid by HMRC as a tax refund or via PAYE within the year, after purchase. Capped at the tax that would have been payable that year. You have to hold for five years or repay the 30%, except after death. After five years you can sell and get the 70% plus or minus investment performance. Most VCTs pay a few percent a year in tax exempt dividends.

Say you have £25,000 a year of basic rate income between you. That would incur income tax of £25,000 * 0.2 = £5,000. You can get VCT tax relief of £5,000 by buying £5,000 / 0.3 = £16,666. Buys are normally in multiples of £1,000 so say buy £16,000 worth. You get back £16,000 * 0.3 = £4,800 from HMRC leaving the remaining £11,200 tied up for five years as part of the £16,000 of VCTs that you own.

In practice you'll normally get anther 10-30% of the £16,000 paid out in dividends over the five years from the investment performance. Depends on the specific VCTs used and their performance.

At the high point you'd have gross £16,000 * 5 = £80,000 in VCTs at the five year mark, hopefully diversified across many. But net cost of £80,000 * 0.7 = £56,000 less dividends, so already doable with your current savings.

I've done a combined calculation for simplicity but the buys and relief have to be done by each of you as individuals.

Unlike pension tax relief you can get this 30% relief once every five years, so over the long term your potential relief is far higher than from a pension. You should still use pensions but I'd put VCTs first in priority except for amounts that get employer matching.

ChasingSunshine

Just some questions for you to think through
Is this 70k all of your savings or extra on top of emergency fund? Do you already have a pension plan with work? What interest are you paying on your mortgage, is it a fix, what is your LTV and how much is needed to get you down to the next band? How secure are your jobs (both you and your wife), could you manage on one income in case of redundancy or if one of you took unpaid leave after a second baby?

I would ensure you had some cash savings earning the highest interest you can - have a look at current accounts and you may need to shuffle some money around. How much to keep in cash varies depending on your circumstances but most people recommend 3+ months of expenses.
I would also look at pension contributions. Does either of you pay higher rate tax? Does your employer offer a match on pension contributions? At 30 retirement seems far away but your expenses are likely to rise as your child gets older so contribute what you can now plus you will get employer contribution and tax relief on what you can put in.
Depending on your mortgage you might want to overpay. How much will depend on the particular deal you are on. If on a fix overpayments are often limited to a % so don't put in more than this. Also look at what LTV you have and if you can get down to next band by overpaying or keeping some of the money aside for when you next remortgage. Interest rates decrease as LTV falls eg 90% mortgage is generally higher interest than 80%.
S&S ISA are a good option to avoid paying tax on investment gains in the future. There is lots of information on beginning investing so have a read around. Often global index funds are recommended but you may decide something else is suitable.

I would keep well away from venture capital trusts on the information you have given they are very unlikely to be suitable.

I would probably do a little bit of everything - have cash savings in highest interest accounts, enough in pension (both you and your wife) to get employer contribution / get out of higher rate tax band if appropriate. And then split between the mortgage and starting a S&S ISA.

jamesd

ChasingSunshine wrote: »

I would keep well away from venture capital trusts on the information you have given they are very unlikely to be suitable.

That seems odd given their circumstances that make them look like a good match (lots of savings, potential child need for the money before pension age, still saving, time to get multiple lots of 30%, unlikely to get more than basic rate pension relief and once only, mainly not short term investing), what about them causes you to have that view?

kidmugsy

jamesd wrote: »

I suggest that you learn about venture capital trusts and effectively stop paying income tax by deferring 70% of your income for five years. ... Most VCTs pay a few percent a year in tax exempt dividends.

jamesd, I know you're a consistent fan of VCTs. Where is the best place to learn more about them?

For instance would you please give links to some of your own posts on the subject?

Specifically: do the dividends remain tax-exempt in the hands of whoever inherits them after the death of the original investor? Even if the inheritor is a discretionary trust?