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Planning for 40 and beyond.

edited 30 November -1 at 12:00AM in Savings & Investments
30 replies 2K views
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  • LXVLXV Forumite
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    Thanks Albermarle for your reply, I will take a look. I definitely have access to my Standard Life account now online. Will set about some research on the funds within Aviva and Standard life to see what I would change to. Sounding like a separate SIPP may not be best for me. Thanks
  • LXVLXV Forumite
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    Thanks for your comprehensive reply Maxi!

    I don't believe it is a salary sacrifice. It was badged as an Employee Equity Program and that I agreed to be taxed upfront on shares and free shares to prevent paying income tax after the 3 years.

    Would you still recommend I look more into it, as to be honest the 2% NI bonus I wasnt aware of at all. When you say lower cost of entry due to economies of scale, do you mean in terms of platform fees?

    You lost me a little bit on the calculations. Why did it go from £38,556 (without interest).. but then only 20k. I'm also a little lost of the mortgage side as to how you arrived at only costing 2k more. Not challenging it, more just interested as to how the maths works as it's over my head at the moment.

    Thanks, reply would be appreciated.
  • AlbermarleAlbermarle Forumite
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    I don't believe it is a salary sacrifice. It was badged as an Employee Equity Program and that I agreed to be taxed upfront on shares and free shares to prevent paying income tax after the 3 years.

    Maxi was talking about your pension when he mentioned salary sacrifice . It is a way that some companies ( not all) organise their payroll when sorting out contributions .
    If your company uses this method ( which is a kind of legal loophole ) they can avoid some employers NI and you avoid some as well. ( 2% in your case )
    It's unconnected to your employee equity programme.
  • rupertsruperts Forumite
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    If you are in a salary sacrifice scheme then it's going to be easier and likely more fruitful to max that out rather than a new SIPP, as with salary sacrifice you get to avoid NI. Only 2% bonus as a higher rate NI payer, however, 2% shouldn't be scoffed at, and can make a big difference over many years of compounding. It's also easier to manage one pot rather than two, and chances are you're likely to benefit from lower cost of entry in an employer scheme rather than a SIPP thanks to economies of scale. Worth checking but probably the case.

    In terms of what you can afford on your pension, the answer is (all else equal) at least £300. £300 after tax for you currently is a net of £175, which you're using to overpay the mortgage. Stop paying that overpayment, and sacrifice £300 into the pension instead, and you keep at least £294 of that a month. £119 a month you're better off for doing that, £1428 a year, £38,556 until you reach 58, assuming you make zero investment gains on all that. Assuming you take 25% out as a tax free lump sum and only pay standard rate tax in retirement, going down that route rather than overpayments leaves you roughly with £20k more in assets than you would otherwise have.

    Your debt burden is bigger though because you've not overpaid the mortgage, however - it's likely to only be around £2,000 bigger based on £170 p/m payments and interest rates around 3% for the duration. So use the £20k to pay off the £2,000 and then sun yourself on a beach with the remainder for a year if you so wish.

    Edit: Your company scheme should offer you various funds, including index trackers, that allow you to create your own portfolio which gives you an 80/20 split. Won't be quite the same as VLS but with a bit of care you can diversify yourself round the planet with large cap and small cap equity and a bond fund chucked in with about 4 or 5 different funds, and paid little AMC on them as well. Likely to be slightly more expensive than VLS but gives you greater control of the split and if you can dodge the NI if the company scheme is salary sacrifice then definitely preferable than VLS SIPP.

    What about overpaying the mortgage as opposed to salary sacrificing into pension in order to get down to lower LTV bands?
  • LXVLXV Forumite
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    Hi Ruperts,
    Thanks for the message. Our house valuation is around 380k and we fixed 12months ago for 5 years. So by the time the renewal comes we should be down to circa 231k (taking out overpayment completely going forward). I'd be comfortable that in 4 years we could either find 3k to get below 60% LTV & hope the property value may creep higher over on average over the next 4 years too. I'm lead to believe pretty much all the best products are available between 60-70% from our mortgage adviser?

    Thanks again though.
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  • edited 14 January at 10:00PM
    rupertsruperts Forumite
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    edited 14 January at 10:00PM
    LXV wrote: »
    Hi Ruperts,
    Thanks for the message. Our house valuation is around 380k and we fixed 12months ago for 5 years. So by the time the renewal comes we should be down to circa 231k (taking out overpayment completely going forward). I'd be comfortable that in 4 years we could either find 3k to get below 60% LTV & hope the property value may creep higher over on average over the next 4 years too. I'm lead to believe pretty much all the best products are available between 60-70% from our mortgage adviser?

    Thanks again though.

    No problem, to be honest I was sort of hijacking your thread just to query the point about whether pension contributions still beat mortgage overpayments where someone is in a higher LTV band and could get a lower rate sooner by overpaying, as that's relevant to myself. I'd work it out myself but I'm not at my computer so was hoping someone else would do the maths for me!
  • edited 15 January at 11:51AM
    MaxiRobriguezMaxiRobriguez Forumite
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    edited 15 January at 11:51AM
    LXV wrote: »
    You lost me a little bit on the calculations. Why did it go from £38,556 (without interest).. but then only 20k. I'm also a little lost of the mortgage side as to how you arrived at only costing 2k more. Not challenging it, more just interested as to how the maths works as it's over my head at the moment.

    Thanks, reply would be appreciated.

    £38,556 means you can take out £9,639 tax free, meaning you'll pay (what is almost guaranteed to be standard rate income) tax on £28,917, which leaves you with £19,663, discounting any nil rates which may or may not apply in 20 odd years and may or may not be taken up with state pension anyway.

    That's where I got the £20k from (rounded up from £19,663) but you were right to challenge it as I forgot to add back in the £9,639 you have tax free. So you're even better off than I initially suggested, and the £2k figure was based on an estimated 3% interest rate (which you're avoiding by overpaying) on the £170 over 25 years.

    Don't get too bogged down in the numbers which are going to change over the next two decades due to policy changes, just try and understand a debt isn't always a bad thing if it's covered and read up a bit more on how compound returns work. If you get that, you'll be grand.

    Caveat: Assumes interest rates average out about 3%. If interest rates spike to 10%+ then it will likely make more sense to pay off the mortgage as the financial difference between the two options shrink and your investments within the pension are likely to be on a downward trajectory.... But, for now, with low interest rate environment, fill your boots.
    ruperts wrote: »
    What about overpaying the mortgage as opposed to salary sacrificing into pension in order to get down to lower LTV bands?

    Overpaying mortgage might get get you into a lower band which currently is likely to be <1% better than you're currently on. It's pocket change compared to not giving up the 20%+ tax avoidance swindle you can get by pension contribution.

    In pure monetary terms then it's practically impossible to beat pension contributions. The considerations on whether to use pension as a vehicle is more about when you want access to the money and the understanding that the access age is linked to state pension age (-10 years) and could mean accessing at 65 in the near future rather than the current 55. With 25+ years until you retire then people investing in pensions have duration risk - ie, the longer it is until you can access, the more likely policy changes are to happen in that timeframe, and thus you have to account for a greater range of possibilities.

    Specifically with pension age increasing, some people who want to retire before their mid 60's will need to consider investments held in other wrappers in order to bridge the gap from their target retirement date to the time when they can access pension - it's at this point S+S ISA becomes a necessity.
  • AlanP_2AlanP_2 Forumite
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    LXV wrote: »

    I also earn over the child benefit allowance (over 60k). I am salary plus bonus but if expectations are my salary will remain over this (else I'd be grossly underperforming in my role!)


    Gaining access to Child Benefit could be another plus for the pension option if you can afford to go down below the qualifying cutoff.
  • LXVLXV Forumite
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    Hi Alan, would that need to be salary sacrifice or is it as simple as if for an example in a given year I earn say 75k, if I put in more than 15k into my pension (to be below 60k) then I would be eligible for some child benefit? This will be useful to know as whilst I "should" earn above 60k - if have a quiet year this could certainly end up being the case where with an increased pension my earning after pension could be 50-60k bracket.
    Thanks
  • atushatush Forumite
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    If you're a 40% tax payer and not sacrificing every bit of that to get you under the limit then I would have a re-think of your strategy.

    Remember you can take 25% tax free lump sum at what is likely to be 58, and then you can use the remainder over what may be the course of 40 odd years for you, plus potential inheritance for your children.

    Overpaying the mortgage makes little sense with interest rates as they are. You may as well carry the debt in order to sacrifice more into pension, then extend the mortgage into your later years and use the additional pension to pay it off. 37% bonus doing it this way currently, every year.

    This,

    make sure you arent paying any 40% tax if you dont have to. Your pension provision is low and you need to catch up
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