Stocks and Shares ISAs

MaxiRobriguez

Steve123456789 wrote: »

I know that given my mortgage Is only at 2%, that I should be putting any overpayment money straight into my ISA as the return will be greater than the mortgage interest, but there's something nice about being 32, not having a mortgage and having the potential to not work anywhere near as much.

It's only nice in terms of an emotional weight lifted. It won't change the ability to work less because it's just changing where the money is. Paying off your mortgage gives your more equity, paying into S+S gives you, surprisingly, more in the S+S ISA.

You could also look at offset mortgages, using the mortgage equity to pick up dips in markets via the S+S ISA and then sell into rallies to put back into the mortgage if you're so inclined.

Steve123456789

MaxiRobriguez wrote: »

It's only nice in terms of an emotional weight lifted. It won't change the ability to work less because it's just changing where the money is. Paying off your mortgage gives your more equity, paying into S+S gives you, surprisingly, more in the S+S ISA.

You could also look at offset mortgages, using the mortgage equity to pick up dips in markets via the S+S ISA and then sell into rallies to put back into the mortgage if you're so inclined.

It's nice in terms of actually being able to work part from early 30s time until "retirement age" instead of full time until retirement age. Or is there something I'm missing here?
Simply, mortgage is a massive proportion of our expenditure. No mortgage, earn less, have the same amount of money for everything else, right?


Never heard of an offset mortgage. I'll look it up.

MaxiRobriguez

Steve123456789 wrote: »

It's nice in terms of actually being able to work part from early 30s time until "retirement age" instead of full time until retirement age. Or is there something I'm missing here?
Simply, mortgage is a massive proportion of our expenditure. No mortgage, earn less, have the same amount of money for everything else, right?.

As an example lets say you're 25, want to (semi retire) at 30 and are putting £5k a year in overpayments to pay off £25k remaining on mortgage.

Alternatively you could simply keep that £25k mortgage remaining, remortgage it over a 30 year term, mortgage payments of £1000 a year, so put £4000 per year for the next five years into your +S ISA.

You then have £20,000 plus any investment gains to fund the £1000 a year mortgage. 5% annualised returns pays that off with no loss to the £20k capital.

Ie - by the end of the 35 years you have £20k you wouldn't of otherwise had.

Bear market scenarios would need to be factored in, both in the next 5 years (work another year to fund another year) and the years then after (sacrifice some gains on capital in order to carry a couple of years of cash - use that cash then as drawdown).

Steve123456789

MaxiRobriguez wrote: »

As an example lets say you're 25, want to (semi retire) at 30 and are putting £5k a year in overpayments to pay off £25k remaining on mortgage.

Alternatively you could simply keep that £25k mortgage remaining, remortgage it over a 30 year term, mortgage payments of £1000 a year, so put £4000 per year for the next five years into your +S ISA.

You then have £20,000 plus any investment gains to fund the £1000 a year mortgage. 5% annualised returns pays that off with no loss to the £20k capital.

Ie - by the end of the 35 years you have £20k you wouldn't of otherwise had.

Bear market scenarios would need to be factored in, both in the next 5 years (work another year to fund another year) and the years then after (sacrifice some gains on capital in order to carry a couple of years of cash - use that cash then as drawdown).

This makes sense. It seems hitting the mortgage as hard as we can is a poor financial decision.

SonOf

Reading on here some think they're really risky

Stocks and shares ISAs carry no risk. It is what you place in the ISA that carries the risk. There are around 30,000 different things you can place in an ISA. Some are very low risk. Some are very high risk and off the conventional risk scale. Most consumers would position themselves at the lower end of the risk scale and there are plenty of options available to them.

My question is, is this sensible? Is there something else we should be doing instead?

Financially, overpaying the mortgage is not often the best thing. Mortgage interest rates around 2% and investment returns for medium risk around 5-6% long term means that from a financial viewpoint only (ignoring everything else), overpaying is not likely to be the best option financially. A lot of people overpaying their mortgage are doing little or no retirement planning. That is daft and will be costly in the long term. They think they are doing well by overpaying but they are not. You even see higher rate taxpayers doing that which is crazy. S&S ISA would be a half way house and in some cases would be sensible. But you should be looking at all phases of your life.

Many people, myself included, overpay the mortgage, pay into an S&S ISA and pay more into their pension. A combination is usually the best rather than focusing on one thing.

Steve123456789

SonOf wrote: »

Stocks and shares ISAs carry no risk. It is what you place in the ISA that carries the risk. There are around 30,000 different things you can place in an ISA. Some are very low risk. Some are very high risk and off the conventional risk scale. Most consumers would position themselves at the lower end of the risk scale and there are plenty of options available to them.



Financially, overpaying the mortgage is not often the best thing. Mortgage interest rates around 2% and investment returns for medium risk around 5-6% long term means that from a financial viewpoint only (ignoring everything else), overpaying is not likely to be the best option financially. A lot of people overpaying their mortgage are doing little or no retirement planning. That is daft and will be costly in the long term. They think they are doing well by overpaying but they are not. You even see higher rate taxpayers doing that which is crazy. S&S ISA would be a half way house and in some cases would be sensible. But you should be looking at all phases of your life.

Many people, myself included, overpay the mortgage, pay into an S&S ISA and pay more into their pension. A combination is usually the best rather than focusing on one thing.

Sounds like I need to pay more into my pension then.


Would you say it's a bad idea to prioritise mortgage? I have £11k left this year to max out my overpayment, which is what I was planning on doing. This will be easy and I'll definitely have leftovers which I was planning on putting into my ISA.


Better idea to increase pension, pay max on mortgage and then the rest into my S&S ISA?


I know so little about pensions it's embarrassing. For example, I don't know what my current pension is even invested in. It's just the default. Does any money that goes into a pension go before tax is deducted?
All I know about my pension is that I pay 6% and employer pays 6%, and that it's taken before tax, straight out of my paycheck.

Albermarle

For example, I don't know what my current pension is even invested in. It's just the default

So you are the same as 95% of people being/staying in the default fund . Your employer and/or the pension provider should normally have supplied you with a user name and password for on line access.
You can then see what other funds are available ( usually between four and 300 depending on the provider )

Does any money that goes into a pension go before tax is deducted?

This depends on what system your employer is using . If your contribution comes out after tax , the pension provider claims back tax relief from HMRC on your behalf . If your contribution comes out before tax then you have automatically got the tax relief.
Have a look at this government website.
https://www.pensionsadvisoryservice.org.uk/

Steve123456789

Thanks for this.


Correct me if I'm wrong, but the only benefit of a pension over a stocks and shares ISA, is the fact that you pay into it before tax, and therefore pay less tax on the rest of your earnings. right??
But then when you receive money from your pension, you're paying tax on that anyway. Obviously you don't pay tax on the first £12,000 (currently) or whatever, but state pension takes up a fair whack of this chunk anyway.


I won't build up much state pension though if I don't work long. Ugh, there are too many variables and too many unknowns.


No one I know my age has even bothered thinking about this and here's me trying to plan my (hopefully very long) retirement down to a tee.

cloud_dog

Steve123456789 wrote: »

Sounds like I need to pay more into my pension then.


Would you say it's a bad idea to prioritise mortgage? I have £11k left this year to max out my overpayment, which is what I was planning on doing. This will be easy and I'll definitely have leftovers which I was planning on putting into my ISA.


Better idea to increase pension, pay max on mortgage and then the rest into my S&S ISA?


I know so little about pensions it's embarrassing. For example, I don't know what my current pension is even invested in. It's just the default. Does any money that goes into a pension go before tax is deducted?
All I know about my pension is that I pay 6% and employer pays 6%, and that it's taken before tax, straight out of my paycheck.

OP, there are a number of things you probably need to do.

Firstly, can you confirm if either of you are paid via Salary Sacrifice (sometimes referred to as salary exchange)?

Secondly, you need to compartmentalise that the money you are talking about is for the long-term, specifically for retirement. Assuming you do then you need to think in terms of breaking down your requirements in to the section of years for:

• Years before access to a pension (personal, workplace, stakeholder, SIPP etc)
• Years after access to pension funds
• Years before access to LISA funds
• Years before state pension
• Years after SP

I would suggest you also need to consider LISAs, as you obtain the same government increase to pension but via different methodologies, i.e. add 25% to your contributions, but LISA monies are tax-free on withdrawal.

Depending on your answer to No.1 it may be that LISAs might be more tax efficient for you but the downside is that you cannot access them until 60. There are other benefits of a pension over a LISA, for example IHT considerations but I'm choosing to ignore this for the time being.

So your investment scheme profile may consist of, and you may access them like:

S&S ISA - For years before accessing pension(s)
Pension - For years after 55 / 58; access will increase in line with SP
LISA - For years after 60 (combined with pension or similar)
SP - For years after 68 plus any pension/ISA/LISA

MaxiRobriguez

Steve123456789 wrote: »

Thanks for this.


Correct me if I'm wrong, but the only benefit of a pension over a stocks and shares ISA, is the fact that you pay into it before tax, and therefore pay less tax on the rest of your earnings. right??
But then when you receive money from your pension, you're paying tax on that anyway. Obviously you don't pay tax on the first £12,000 (currently) or whatever, but state pension takes up a fair whack of this chunk anyway.

The pension contribution means you get to avoid tax at the point of input, rather than at the point of withdrawal like a S+S ISA. This means an extra 20% for your investments to gain compound interest on for the long term. If you're a standard rate tax-payer the benefit works out to 6.25%, if you're a higher rate tax-payer the benefit is more, and that's without even considering the personal allowance. Remember too you can take out 25% tax free from your pension.

Steve123456789 wrote: »

No one I know my age has even bothered thinking about this and here's me trying to plan my (hopefully very long) retirement down to a tee.

Admittedly young people seem particularly bad at it but there are a few of us. I'm 32 and I'm using my company scheme to sacrifice about 40% of my pre-tax salary into the pension. I'm not currently putting any further money into my S+S ISA because I have the offset mortgage I mentioned to you previously and over time I'm planning to rebalance it so the majority of what is in my offset account ends up in S+S ISA, with the intention of carrying the mortgage into later life and using the proceeds of the pension/S+S ISA to fund it. If my work pension scheme gets to a point whereby it's enough (or it's coming close to the lifetime allowance) then I'll reevaluate and start on the S+S ISA contributions again. But, my plan is to work another 18 years or so...

You may be interested in reading up on FIRE (Financial Indepdence, Retire Early) which is a growing community and plenty of sites about. It has some nice ideas about growing wealth hard in the early years whilst you're earning and then making it last over half a century or more...