Future planning at 31

dai_bach

Hi Everyone,

Hoping to get a few opinions on my future plans please..

Bit of background:
Age: 31
Gross: £50k
Current pension pot value: £24k
My contribution – 7%
Employers contribution – 3%
Mortgage outstanding: £180k (currently pay £1k per month)
No specific targets for retirement age

So up until now my saving habits/targets have been very short term in nature… getting on the housing ladder was a big one and earlier this year paying for our wedding. In terms of things likely to happen in the near future we are likely to be moving to a larger house in the next 2 years, which will bump up our mortgage outstanding and monthly payments.. I guess worst case scenario would be £1,500 per month repayments.

I have now decided to try and plan out longer term, particularly pension.

Had a bit of a wake up call today playing around with some pension calculators. Using £25k as a desired income I would need a pot worth over £1m at retirement.. which equated to over £800 in monthly contributions from now. This is a big gap from my current £415 a month.

My partner and I have quite a detailed budget by month which I am using as the basis for my calculations. The aim at the moment is to save up approximately 4 months worth of essential spending for an emergency pot. Then the plan was then to make overpayments of ~£700 per month into the mortgage (until we move). Having a bit of a read around the last few days it seems it would be sensible to try and up my pension contributions instead to take advantage of the 40% relief, while it still exists. The other thing to note here is the higher mortgage payments on the new house would take up most of this planned overpayment at current levels.

So, I guess my question is, would you put more into pension contributions instead of overpaying the mortgage? Any other feedback welcome.

Apologies if that was a bit of a ramble, just trying to get all my thoughts down.

Thanks!

Terron

A £1million pot should produxe an income of £35k per year assuming 3.5% drawdown. Was the calculation you were doing for an annuity? You probably do need to increase your pension contributions anyway

I agree with building an emergency pot first, but I maight add a bit for moving costs.

Paying down the mortgage is like saving. You plan to take the money back out when you buy the new house. So the question is do you save more in interest by paying it down than you could get from investing it. With mortgage rates so low currently I would guess the answer is no, but there is more risk with investing. so which would be best woulf depend on your attitude to risk.


If you decide to invest putting it in your pensions would pay off long term, but keeping it available enough to increase your deposit on your new house and maybe reduce the interest rate would be worth considering.

Triumph13

A couple of thoughts for you.

1. Will paying down the mortgage get you a lower interest rate on the new house by virtue of having a better loan to value ratio?
2. Have you taken account of state pension in your calculations? If £25k is your target income in retirement then 2 lots of state pension at £8.5k each will cover a big chunk of that.

crv1963

Hi dai_bach


I'm a lot older than you but I'd suggest do nothing until you've had a good read of some of the threads here and elsewhere so you make an informed decision.


Upping pension contributions to take advantage of tax relief while it exists as it is - there are always rumours/ fears that this is an easy target for the chancellor at every budget - a good idea.


Look at your mortgage interest rate, will a better LTV get you a lower rate of interest? Is that worth it against the pension contribution being lower? Inflation reduces your mortgage payment in real terms over time while your pension contributions grow quietly in the background.


Personally I'd go pension over mortgage overpayment, but I'm not looking to move in 2 years time. Also you may want children at some point? They are expensive, so I'd look to put a bit away for a rainy day fund at the same time as increasing pension contributions.


Don't forget you and your wife are a team, so look to build her pension fund too. Or you may end up like us where there is a large imbalance between pension pot sizes so in later life be playing catch up for her.


It is possible to balance, spending, saving and investing- enjoy life, save for emergencies and invest in pensions while making some overpayments to mortgage if that helps your piece of mind. For instance we've rounded our mortgage payment up from £593 pm to £600 (small beer but every little helps) while concentrating on debt reduction on the highest interest rate debt, and increasing pensions contributions.


You don't know what life is going to throw at you so doing a bit of everything at a slower pace may be better than throwing everything at one objective. Do what you can afford on all fronts, balance is good.


Compounding is your best friend on pensions, inflation on your mortgage, sound planning/ long term objectives your roadmap, the various products LISA, ISA, Pensions, Savings Pots your tools.

JoeEngland

Terron wrote: »

A £1million pot should produxe an income of £35k per year assuming 3.5% drawdown. Was the calculation you were doing for an annuity? You probably do need to increase your pension contributions anyway

I agree with building an emergency pot first, but I maight add a bit for moving costs.

Paying down the mortgage is like saving. You plan to take the money back out when you buy the new house. So the question is do you save more in interest by paying it down than you could get from investing it. With mortgage rates so low currently I would guess the answer is no, but there is more risk with investing. so which would be best woulf depend on your attitude to risk.


If you decide to invest putting it in your pensions would pay off long term, but keeping it available enough to increase your deposit on your new house and maybe reduce the interest rate would be worth considering.

One advantage of paying the mortgage down quicker is that you're less exposed financially in the future if you lose your job.

Albermarle

As already mentioned . a Million Pounds to get a £25 K pa income seems at the extreme end . There was an article in The Guardian that indicated something similar a few months ago, but it turned out that it was for the most expensive annuity you could possibly buy with all kinds of inflation and spousal guarantees which were a bit over the top.There are a lot of assumptions and approximations involved but I would think for £25 K pa , the good news for the OP is that he needs to be aiming more in the £650K region and then state pension would be on top of that , although by that time the state pension starting age will probably be 75 !

atush

Ok so I make it that 7% contributions for you at 50K is 3500 per year. So if you paid another 1500 (around 125/month) this would take you out of HRT.

So you could (after saving your emergency pot) put any excess you can save against the mtg- or into a current account paying more than your mtg rate.

As is usual with personal finance, you dont have to take and all or nothing approach- you can fight on several fronts at once.

dai_bach

Terron wrote: »

A £1million pot should produxe an income of £35k per year assuming 3.5% drawdown. Was the calculation you were doing for an annuity? You probably do need to increase your pension contributions anyway

I agree with building an emergency pot first, but I maight add a bit for moving costs.

Paying down the mortgage is like saving. You plan to take the money back out when you buy the new house. So the question is do you save more in interest by paying it down than you could get from investing it. With mortgage rates so low currently I would guess the answer is no, but there is more risk with investing. so which would be best woulf depend on your attitude to risk.


If you decide to invest putting it in your pensions would pay off long term, but keeping it available enough to increase your deposit on your new house and maybe reduce the interest rate would be worth considering.

Thanks for the response.

The "calculator" was on the nutmeg website (one of the first that came up on a search), yes it was for an annuity. Good to know that was on the high side.

In the short term overpaying/putting aside for the next house could put us under the 85% LTV band so I think we should be aiming for that, thanks for pointing that out. Our current mortgage rate is 3.85%.

dai_bach

Triumph13 wrote: »

A couple of thoughts for you.

1. Will paying down the mortgage get you a lower interest rate on the new house by virtue of having a better loan to value ratio?
2. Have you taken account of state pension in your calculations? If £25k is your target income in retirement then 2 lots of state pension at £8.5k each will cover a big chunk of that.

Hi Triumph - thanks for pointing this out, as noted in my above reply, it might get us under the 85% band so it's something I think we should be aiming for.

In my pessimistic mind I have worked on the assumption that the state pension won't be around when I get there so working out worst case scenario I suppose.

dai_bach

crv1963 wrote: »

Hi dai_bach


I'm a lot older than you but I'd suggest do nothing until you've had a good read of some of the threads here and elsewhere so you make an informed decision.


Upping pension contributions to take advantage of tax relief while it exists as it is - there are always rumours/ fears that this is an easy target for the chancellor at every budget - a good idea.


Look at your mortgage interest rate, will a better LTV get you a lower rate of interest? Is that worth it against the pension contribution being lower? Inflation reduces your mortgage payment in real terms over time while your pension contributions grow quietly in the background.


Personally I'd go pension over mortgage overpayment, but I'm not looking to move in 2 years time. Also you may want children at some point? They are expensive, so I'd look to put a bit away for a rainy day fund at the same time as increasing pension contributions.


Don't forget you and your wife are a team, so look to build her pension fund too. Or you may end up like us where there is a large imbalance between pension pot sizes so in later life be playing catch up for her.


It is possible to balance, spending, saving and investing- enjoy life, save for emergencies and invest in pensions while making some overpayments to mortgage if that helps your piece of mind. For instance we've rounded our mortgage payment up from £593 pm to £600 (small beer but every little helps) while concentrating on debt reduction on the highest interest rate debt, and increasing pensions contributions.


You don't know what life is going to throw at you so doing a bit of everything at a slower pace may be better than throwing everything at one objective. Do what you can afford on all fronts, balance is good.


Compounding is your best friend on pensions, inflation on your mortgage, sound planning/ long term objectives your roadmap, the various products LISA, ISA, Pensions, Savings Pots your tools.

I will have a good read!

My wife works for the NHS so has a DB scheme of some sort, I really need to get hold of some details of her scheme though as I currently have no idea what she is forecast. How would it work if she left the NHS in the future? I have only had DC scheme's so it's been easy to transfer them to next employer... I know that's not the same with DB schemes.

It certainly is a balancing act... I just wanted to make sure I wasn't missing any easy/big wins, which is why I want to take advantage of the 40% allowance and compounding as early as I can!

dai_bach

atush wrote: »

Ok so I make it that 7% contributions for you at 50K is 3500 per year. So if you paid another 1500 (around 125/month) this would take you out of HRT.

So you could (after saving your emergency pot) put any excess you can save against the mtg- or into a current account paying more than your mtg rate.

As is usual with personal finance, you dont have to take and all or nothing approach- you can fight on several fronts at once.

Hi Atush, I didn't mention in the OP but my pension contributions come out after tax (I have been pushing to get salary sacrifice in place, but it hasn't happened yet). When you say take me out of HRT were you assuming I was on salary sacrifice?