Conundrum

HappyJnP

Our first ever post. Do we invest spare cash ....Pension v mortgage . Wasn't sure which board to post it on, so it is posted on mortgages and endowments forum, but could have equally posted here. Can you pls pop over to mortgages and endowments and offer your advice. We need to make a decision soon and would appreciate your advice. Thank you

Marcon

HappyJnP wrote: »

Can you pls pop over to mortgages and endowments and offer your advice. We need to make a decision soon and would appreciate your advice.

Suggest you add the link to your other post to encourage people to 'pop'!

HappyJnP

oh dear.. Tried and failed on links:-

"The following errors occurred with your submission:
Sorry as a new user you are not allowed to post with links. This is done to stop spammers clogging up the site. Please edit your message below to continue."

I wonder when I am no longer 'new'

jamesd

The other post is Conundrum - what would you do?

If you want to apply 25k to the mortgage the sensible way is probably to use the 25k to make more pension contributions then take 25k of tax free lump sum after reaching 55.

Does either of you have an employer which uses salary sacrifice for pension contributions? What are your tax bands? Which one is at 350k already? What's the mortgage interest rate?

Since the salary sacrifice answer is yes for one of you that's likely to be the first choice for pension contributions.A gift of tax free lump sum money to the other at 55 is a possible evening out approach that doesn't cost the household the salary sacrifice gain.

MEM62

This question has been asked recently so I'll past my reply to the other thread.

MEM62 wrote: »

It's not rocket science.

You make your mortgage payments with money that you have already paid tax on and will save 1.9% on any additional capital that you repay. You pay into your pension tax-free and it is reasonable to expect that money to earn you inflation plus 5% in the long term.

You will be significantly better off by throwing the money at your pension rather than the mortgage - particularly if you are a 40% tax-payer. If there is any balance remaining on your mortgage at the point of retirement you can use some of the (substantially larger) 25% TFLS that you will have to pay it off.

If, at any point, interest rates and /or pension rules change and that balance changes then your can rethink & adjust your plan as appropriate.

HappyJnP

Thank you for your advice
I have the pension pot and growing It Quickly with salary sacrifice. Also borderline 40% payer. I think I was paying a bit of 40 % but increased contribution to avoid. DW has negligible pension and is 20% tax payer. So I think need to load pension to her, without me slipping back into 40% . I guess a 25 k kick strart into a new pension would be a good start. Does the extra 6250 get added automatically to the fund?
FYI 5 yr remortgage starts next month at 2.09% on 260k so about 1350 a month.

Dazed_and_confused

Will she earn at least £31,250 in the current tax year?

And don't forget that although the tax relief may ultimately be the same (you save income tax, she gets it added to her pension fund) you will lose the benefit of any National Insurance saving salary sacrifice can bring.

HappyJnP

No she earns about 10k less than that so I guess any kickstart is limited by that . I still think a mor balanced pension will help so that when we get to the otherside we can make better use of her allowance, otherwise if all in mine then we could end up paying more tax during drawdown.

jamesd

With both at basic rate for the extra the choice per thousand gross paid in is:

1. you, that 1000 in the pension and 120 now in your bank account because of the employee NI saving. On the way out 250 tax free plus 600 after basic rate tax. £970 total. More if your employer adds any of their NI saving.

2. her, 1000 in and £1000 out as long as it's within her personal allowance on the way out. £850 above that.

What this means is that it's better for you to do the extra because her normal contributions are going to be enough to use up her personal allowance.

I'm assuming that you don't become a higher rate tax payer in retirement. That's because at 5% drawing rate on even 750k taxable you'd get 37.5k and with 8.5k state pension on top you're still below higher rate at 46k. 750k is because you wouldn't want to go over the lifetime allowance.

Good mortgage rate for this.

HappyJnP

Thank you James
My pension it is then
So to put 25k cash into my co pension, should I increase my contribution through salary sacrifice to drip feed it in. E.g temp increase from current 20% to say 50% until it all goes in, or simply pay direct to Aviva as a lump into the fund, and they would auto add 25% to the fund?
No chance of reaching higher tax rate on pension for me, and LTA would not be consideration either.

Also during drawdown I hear that it is usually best to leave the 25% tax fee so uncrytalised. Can you do a halfway house on the tax free coming out, e.g 5% lump sum and then rolling 20% tax free on every 2 month drawdown ?

(Drawdown is free 6 times per year if stay in current plan, which I'm inclined to do as only 0.45% annual fee and 0% fund mngt fee). Someone famous once said something like compound interest is one of the most wonderful things in life , and so I think the opposite true with fees, so very keen to minimise, whilst of course ensuring well invested.