Retirement plan SIPP/ISA Query

jp912

Hi,

I am putting a plan together which will get me to semi – retirement by my late 40s (ambitious I know). I am currently 29, with £73k left on my mortgage currently at 3.09% with 38 years left. I have no other debts and own my own car so no lease/PCP payments.

For work I am a director of an online clothing business which I have run for the past 6 years and take around 30k a year split between a salary and dividends. My other half is a teacher and doesn’t depend on me financially. We are not married (yet). I have no kids (yet). We do plan to buy a home in the future and possible let mine out? Yields are very generous in the north/east.

My dream is to make it to my late 40s then semi retire. I love my work but would equally like to cut my working time down (wouldent we all) as some weeks I can be working 50-60 hours which puts strain on my social life. This change would see my wage drop to around 12k per annum.

I currently have £10k of savings in Marcus 1.35% and can afford to put away £1k per month. I want to open a SIPP and a S&S ISA. Now my predicament is, I am unsure how much to allocate to each and which funds to put these in. My investing experience is limited, but I have read a lot of past threads on here and have a basic idea. So below I plan to.

SIPP - £150 per month in VLS100
S&S ISA - Deposit £4k then £850 per month in VLS80
Keeping £6k in Marcus as an emegency fund. (maybe more?)

As I will not be able to take the SIPP for 30+ years, I am comfortable with the higher risk. The ISA I am unsure whether to go with the 80 or 100 as that will be in there for 15-20 years.

I am open to other funds than Vangaurd's. But so far I have not heard anything bad from them, unless somone can tell me otherwise? Please let me know how this plan looks, I am open to critism and alternative suggestions.

Thank you in advance.
P.S - This forum is amazing, I have learnt so much from you guys.

BoGoF

Your mortgage interest rate isn't great - any reason why?

jp912

Hi, thank you for your reply.

I am aware of this, it is fixed with Lloyds for the next 4 years. At the time of setting up the mortgage it was difficult to receive any borrowing at all due to being self employed, also my credit score was not amazing (this is now a lot better). Lloyds payed for conveyancing and there was no set up fees. At the time this seemed the best deal. Probably a mistake in hindsight but a lesson learnt for the future.

george4064

What is your LTV currently?

Might be worth overpaying on the mortgage considering the (relatively) high interest but especially so if it will push you into a better LTV category.

BoGoF

As above, consider overpaying the mortgage - usually 10% overpayment allowed on a fixed term deal.

There is not much point saving at 1.35% but paying interest at 3.09%.

Albermarle

I think you need to use one of the on line calculators about building up retirement pots and what income can be expected .
My gut reaction is with income of only £30K and saving £1k a month , you will not be able to even semi retire as early as you would like. Obviously it helps that your partners income is separate but if kids come along you will be lucky to save anything for 20 years !

jp912

My LTV is around 52% I put in a deposit of 45k. The purchase price was £131k (I believe I could now sell for £140k). I have overpaid £11k since purchase in September 2018. I have recently gone off the idea of overpaying as I am confident I can achieve higher returns than 3.09% from a S&S ISA.

BoGoF

jp912 wrote: »

My LTV is around 52% I put in a deposit of 45k. The purchase price was £131k (I believe I could now sell for £140k). I have overpaid £11k since purchase in September 2018. I have recently gone off the idea of overpaying as I am confident I can achieve higher returns than 3.09% from a S&S ISA.

You probably could achieve higher returns than your mortgage rate but to get a 'real' return you need to achieve that plus inflation.

Don't put all your eggs in one basket. There is nothing stopping you partly overpaying and partly investing.

On a better mortgage rate the advice would probably be to invest but on your LTV that rate is not good at all....but you have explained the reasons for that.

wjr4

A quick note to say - make sure you pay pension contributions from your company as an employer payment to save corporation tax. Do you have income protection?

bowlhead99

BoGoF wrote: »

You probably could achieve higher returns than your mortgage rate but to get a 'real' return you need to achieve that plus inflation.

This is generally a red herring, as inflation will erode your liability to pay the mortgage in real terms at the same rate that it erodes the real-terms value of your investments.

So really the question of whether your investment generates a return greater or lesser than the interest that would be added to the mortgage on the same money if you didn't pay off that part of the mortgage, can be done independently of inflation rates. It doesn't really need you to bring in the complexities of adjusting the rates for inflation.

Don't put all your eggs in one basket. There is nothing stopping you partly overpaying and partly investing.

Agreed

- putting money in instant access cash giving a better return than the mortgage rate is nice idea because it gives maximum flexibility, but an after-tax rate equal to the mortgage interest saving is not achievable so there is a cost on doing that...

- putting money to pay off more of the mortgage saves interest at a decent rate (for zero risk) but then the money is tied up in the property potentially requiring a remortgage to get it back for other uses; and in the not too distant future the rate on the whole mortgage may come down so you may not have really wanted to overpay so aggressively; the LTV is not worryingly high...

- putting money into investments can outperform the interest costs of the mortgage got could leave you in a situation where you want the money to pay off more mortgage (depending on personal circumstances and interest rates achievable after the end of the current fixed deal) but can only access the investment monies by taking an annoying or significant % financial loss...

So, cash savings, mortgage overpaying and investing the currently 'spare' monies all have their drawbacks.

It is not all-or-nothing, and a blend of the options is often better than going all out with one solution.

jp912

wjr4 wrote: »

A quick note to say - make sure you pay pension contributions from your company as an employer payment to save corporation tax. Do you have income protection?

Yes, this is one of the main reasons the SIPP interested me. I don't have any income protection as such. My business insurance pays me a wage for 24 months in the case of a flood/ fire ect that would give me time to rebuild my business, but I do need to check this properly now that you have reminded me. I also have life and critical illness cover. How would the income protection work?