Mid 30's and looking forward rather than backward (investment / pension planning)

Fitzkepp

Hi all, like many I've got more time on my hands than I did at the moment and the future is very much a focus. I've spent the last 10 years completely clearing all debt (bar mortgage) which peaked a couple of years after uni (three credit cards maxed, two overdrafts, student loan etc etc. Good times). It's fair to say earnings have been a hockey-stick and I'm now lucky enough, at 35, to own my own house, have a decent job, and be largely debt free. This March (annual bonus) was always earmarked at the moment the decks would be cleared, and to look forward rather than backwards - so here I am.
My financial position is roughly as follows:

• Mortgage - Repayment, 1.99% (Fixed until Jun 2021) , 50% LTV
• Pension - 10% Contribution (Person + Employer contribution)
• Debt - None (aside from mortgage), credit card used monthly for groceries and leisure and cleared entirely. 

Outgoings have all been streamlined over the years to clear debt and do up the house, so cost cutting scope is actually quite minimal now but that phase has ended and I'm looking at how to best utilise the (net) £1.8k a month spare funds after all bills and spending money etc. I know I have the option to over-pay the mortgage (but releasing this investment if required is difficult) and upping my pension contribution, but the idea I'm toying with is making a property investment. The idea I'm toying with is accruing a decent deposit and buying a flat locally, letting it out for a couple of years then utilising it as a working base for me when we eventually relocate (we're out-growing this house fast, with one 4yr old and another child on the way so moving house in a couple of years is a must, and we'd always planned to relocate back closer to family again when it happened) until such a time as I can secure a new role closer to home. At that point I could go back to letting it out, or sell it to liquidate the investment.

It's a bit of a convoluted plan I know, but I'm looking at a way to make a viable long-term investment work tactically in facilitating the relocation by easing pressure to get a new job in order to make it happen, but also being a viable long-term investment. 
You can probably tell I've put zero thought into the future other than keeping the pension contributions ticking over, all my focus has been on getting to today and be well positioned to exploit the fortunate situation I've worked to in terms of earnings. Is property (especially buy-to-let) a sensible consideration in my position, or have I missed a blindingly obvious alternative or pitfalls?
(Assumptions: economy doesn't tank, property in my prices are resilient - they were in 2008-2011)
Thoughts welcome!

Thrugelmir

If you are looking to move and upsize your home. Then overpaying the mortgage should be viewed as an investment. 10% into a pension scheme isn't high either. Worth upping this if your aim is to achieve an early comfortable retirement. Nor do you make any reference to your partners pension provision. Another avenue to explore. 

Alexland

Are you a higher rate taxpayer? If so making greater pension contributions could be both tax efficient and get your income down enough for child benefit.

cfw1994

Good advice above....& on the "how much to put in pension" - broad MSE rule of thumb is half your age in % terms to achieve a "comfortable retirement" - not that "how comfortable" is well defined!
So if you can squeak that up to a total of 15-20% at your age, your future self will probably thank you.   Pensions are the best simple tax-efficient investment you can make, I would suggest, especially if you are high rate taxpayer....
Personally, I would say now is a great time to invest more into that sort of thing - we may not know the bottom, but we do know it is cheaper to buy into funds now than it was 2 months ago.   Might go lower, might bumble along low for many months, but unless the apocalypse really lands, things will rise in the future.

Albermarle

As hinted at above , a key factor here is how much 40% tax you are paying ( if any )?
If you are earning well over £50K , then extra pension payments are usually the best bet by a long way.( depending on exact personal circumstances )

steampowered

There are lots of investment options which aren't buy-to-let. You should only invest in residential property if it is genuinely the best option in your circumstances.

Buy-to-let is not tax efficient for a number of reasons:
- You pay higher rate stamp duty when you buy the property.
- You pay income tax on the rent.
- You may pay capital gains tax when you sell.
- You are forfeiting the tax relief / tax advantages you could get by investing into a pension, or stocks & shares ISA, instead.

Most people are best off investing into a pension to get the tax relief, or if you don't want to lock your money away until retirement, into a stocks & shares ISA. Especially if you are a higher rate tax payer. 

The average long term return on stocks & shares investments is 7-8% per year, though obviously that will fluctuate from year to year, and you will have some years of negative returns. Invest into a balanced stock market fund (such as a Vanguard fund) rather than in individual shares to minimise your risk.

Your plan of paying for 2 properties so that you have a "working base" doesn't sound wise to me. I would have thought you'd be best off evaluating your circumstances at the time, rather than buying another property now.

Fitzkepp

Hi all, thanks for the great feedback and thoughts, and I hadn't really considered the impact of pension contributions vs higher rate tax (around £25k of earnings qualifies for higher rate), and that half-age for pension contribution is a rule of thumb I hadn't know until now! 
So I think by the looks of it the plan of action is to up the pension contribution and overpay mortgage, investigate funds and/or a stocks and shares ISA, and come up with another workable way of managing the relocation when the time comes (clearly that plan was over complicating things with little real benefit!)

Albermarle

Are you clear on how your current pension contributions are made and that you are getting the higher rate tax relief.?
If your contributions come out of your salary before tax ( via a net pay or salary sacrifice scheme) then you get the relief automatically. If the contributions come out after tax has been paid ( relief at source) then the pensions provider will add basic rate relief and you have to claim back the higher rate relief from HMRC.
Basically each Pound going in your pension only costs you 60p.
You should also look into what your pension is invested in and see if it is OK for you and change it if not

Fitzkepp

Albermarle said:

Are you clear on how your current pension contributions are made and that you are getting the higher rate tax relief.?
If your contributions come out of your salary before tax ( via a net pay or salary sacrifice scheme) then you get the relief automatically. If the contributions come out after tax has been paid ( relief at source) then the pensions provider will add basic rate relief and you have to claim back the higher rate relief from HMRC.
Basically each Pound going in your pension only costs you 60p.
You should also look into what your pension is invested in and see if it is OK for you and change it if not

Hi, my pension contributions are made before tax via a salary sacrifice scheme. In terms of pensions and what they're invested in, this is something I'm trying to wrap my head around as part of this process (having effectively trusted the investment plans were a good fit previously). Around 80% of my pension funds are with Standard Life, in their Passive Plus III Pn S4 plan which currently is basically worth the sum of contributions having taken a nosedive recently. The other 20% is in Legal & General's Multi Asset PMC Plan, this is because my company moved across to L&G last year. I opted out of the mass transfer at the time to allow myself the chance to look at my options, so one of the things I'm considering is bringing the Standard Life fund into the L&G one. I'm very, very new at pension plans and investment funds..