Critique my finances please?

pat1976

tacpot12 said:

Hi Pat1976, what is your plan to repay the mortgage in 15 years? If you don't have a plan, then realistically you need to be putting £9K per year into your S&S ISAs as minimum to give you the money to pay off the mortgage. I know you have said that you are risk averse and can't face the risk of further investing, but this really is a bad decision.

You have mixed up the DB/DC pension labels in your post, but it is clear that you are not happy with the investment decisions taken so far with your DC pensions. Rather than shun the stockmarket and accept that this money is not invested well, why not try to improve your knowledge of how to invest? If you can improve your investment choices for your pension, there is no reason why you can't also invest wisely in the stockmarket to repay your mortgage. It is very beneficial to your future financial health if you can get confident with investing.

It it really is too worrying, switching to a repayment mortgage would be a good idea - your home will be paid for and your security will be assured once the mortgage is repaid. It would be stupid to repay the mortgage in full now, but not to repay it over the next 15 years if you are not prepared to invest in the stockmarket.

As you have a disabled child, I think you should take some professional advice so that you can put together a plan that will ensure that they can be looked after if anything happens to you. It may be beneficial to set up a trust for them, and you may need insurances that you don't have in place yet.

You haven't mentioned state pension entitlement; you should try to ensure that you are both on track to receive the full state pension.

You have plenty of income, but need to convert this to assets, ideally assets that appreciate in value like shares and houses, and not Cash which gets devalued over time due to inflation. 

Thanks for the reply, I've managed to mix up the pensions twice now but hopefully I've corrected them. I am now pretty well educated in investing, the DC pensions are from 20 years ago when I took whatever the company pushed, I've been getting valuations and will transfer to SIPP.

I have £119k in the stockmarket (including DC), that's best part of half the pot. I know that's lower than is often recommended but feels quite substantial to me at the moment. I will think harder about it, thank you for the challenge.

I am aiming to pay the mortgage from cash, it's currently offset, I can't see an advantage of moving to a repayment which would reduce my flexibility. I can see the advantage of moving it to somewhere safe with a higher rate, like premium bonds. My cash ISAs are at a reasonable rate being 3 and 5 year fixes from a few years back.

I do need to look into what to do for the future of my child, we're only recently realising the extent of our savings, we have been too busy earning and caring  to notice it building up!

pat1976

thegentleway said:

That’s a lot cash, what are you saving for? Is it earning more than 0.6% after tax? If not then you should overpay the mortgage.

I'd love to know the answer to this question! We both grew up poor and all saving have come from earnings rather than windfalls, so we are saving because that's what you do!

The cash offsets the mortgage and so is effectively 0.6% tax free, but I do think I'll risk moving it to Premium Bonds. The downside is limited and hopefully we will win some prizes.

thegentleway

pat1976 said:

thegentleway said:

That’s a lot cash, what are you saving for? Is it earning more than 0.6% after tax? If not then you should overpay the mortgage.

I'd love to know the answer to this question! We both grew up poor and all saving have come from earnings rather than windfalls, so we are saving because that's what you do!

The cash offsets the mortgage and so is effectively 0.6% tax free, but I do think I'll risk moving it to Premium Bonds. The downside is limited and hopefully we will win some prizes.

It’s a good problem to have Perhaps you could think about what’s most important to you and that should shed some light on what to do with it? Personally, I think it’s important to do good and there’s the opportunity to do great things with money, such as saving lives without noticeably reducing quality of life. In fact helping other tends to improve happiness! In the meantime, premium bonds are a safe place to keep cash and with average luck you will win 0.8% tax free.

Mr.Saver

pat1976 said:
Married couple, mid-40s, one high school child. Very secure and stable jobs, one full time the other part-time with a side gig.

Income (net) 
FT    £36k    (planning salary sacrifice to SIPP to take this one out of high tax band)
PT    £30k
Gig   £36k    (varies £2k to £5k per month, only likely to last a few more years)

If I'm understanding this correctly, the person with full time job earns £36k, and the other person earns £66k from two jobs combined, yet you plan to use salary sacrifice on the full time job, which only gives you 32% tax savings? It looks like the person who earns £66k should pay some into a pension and get the 40% tax relief instead.

pat1976 said:

 we're only saving about £40k a year which is disappointing given the high income.

If the £40k savings doesn't include interest and investment returns, you annual expenses is about £33k.

pat1976 said:

Assets
House Value   £350k with £140k mortgage, interest only, Base Rate +0.5% (currently 0.6% around £75 a month) for the remaining 15 years, no intention to move.

That's a pretty cheap mortgage. If I were you, I would keep it for as long as the interest rate is low, and start to overpay it from my investments about 5 years before the end of the 15 years.

pat1976 said:

Savings
Cash               £76k  (mainly offset against mortgage but thinking of moving most of this to PBs, £20k to shares ISA for this FY)
Cash ISAs      £65k
PBs                £21k
Shares ISAs   £78k (passive globally diversified funds)
Shares           £21k (passive globally diversified funds)

£162k in cash or cash equivalent, that's way too much. Do you have plans for large expenses in the next few years? If not, it's better to keep 6 months' living cost in cash, and stash the rest into a SIPP and/or S&S ISA.

Why do you have unwrapped shares and a cash ISA at the same time? Top easy access cash ISA only pays 0.6% at the moment, fixed rate aren't much better either. You are much better off transfer the cash ISA to the S&S ISA, and invest it instead. Very risk-averse? Have you looked at any of these funds below? Because their limited equity (stock) exposure, in an unfavourable market condition, they don't go down as deep as funds with higher equity exposure. But because they still invest some money in the stock market, they will likely produce a much better return than cash over the decades ahead of us.

• Vanguard LifeStrategy 20%
• BlackRock Consensus 35
• L&G Multi Index 3

pat1976 said:

Pensions
DC Pension Pot   £20k (over several pensions, probably terrible funds, planning to move to a SIPP)
DB Pensions       £9k @60, plus £9k @65, plus £7k @67 and £13k lump  (these are related to current employment and will go up whilst we remain working there)

By the time you are 67 years old, you will have about £25k annual income from DB pensions. Have you checked your NI record? Will you get the full state pension? Assuming yes, that's another £18k (£9k each person). That's £43k guaranteed annual income for a family of three. Judging by your current annual expenses of about £33k, this sounds enough for you.

I assume that you both are contributing to your DC pension at the minimal auto-enrolment level (8% of qualifying earnings), the DC pension, even with 20 more years of contributions from both of you, the DC pots are only going to give you a few thousands extra income per year. So don't have a high expectation here.

Do you plan to retire earlier than the state pension age? Or think you will need more than £43k per year? If so, you'll need to put  (a lot) more into your DC or SIPP pots now.

BTW, if your DC pensions are invested in their default funds, they probably aren't as terrible as you think. Because you said that you are very risk-averse, and don't have much experience with investments, I'm more worried that if you move them to a SIPP, you may choose a fund that isn't suitable for your situation.

You said your child is disabled and is unlikely to ever live independently. Have you got life insurance and permanent health insurance to cover both you and your partner? It's important to have a plan for the unexpected, and this is especially true when you have both a dependant and a mortgage.

Mr.Saver

Just read the replies from OP, and realized some of the cash are being used to offset the 0.6% interest mortgage. Really? You can't earn better than 0.6% after-tax elsewhere with that cash? A simple risk free option would be 1% one year fixed rate savings account (see the MSE savings account page), as one of you is a basic rate tax payer, the first £1000 interest is taxed at 0%, and the rest is at 20%. Even you pay 20% tax on the entire interest, you will still get 0.8%, higher than the 0.6% offset mortgage. Not to mention that you have 15 years left on the mortgage, investments will have enough time to rid out the up and downs, and have an extremely high chance beating the 1% cash savings.

Ray_Singh-Blue

Mr Saver, I like your analysis, but moving all the cash savings into investments comes with some risk.

Bond funds could drop quite a lot from current value. It's sometimes said that "a bad year in the bond market is like a bad day in the stock market", which makes bonds sound safe. However in the case of bonds, the worst year on record on saw an 11.1% drop.

If this occured in the same year as a stock market crash, even a safe fund like VLS80 could lose perhaps 20% of its value.

Of course, the OP with 60% cash and 40% stocks might also lose 20% that year. But their higher exposure to equities increases the upside potential of their portfolio.

(This is how I see it anyway)

pat1976

Ray_Singh-Blue said:

One way of looking at it:
£160K of cash, when considered with your £100K of shares, gives a 40:60 balanced portfolio of £260K which has likely handsomely out performed your mortgage over the last few years.

Another way of looking at it:
Ignoring pensions, you have a £450K net wealth, split roughly like this:
Property 70%
Stock 25%
Cash 35%
Bonds -30% (mortgage behaves like negative bond)

Another way of looking at it:
You have a £600K portfolio with 33% leverage.

Pretty healthy

This is a really useful way of looking at it, thank you. 

I've been thinking about replies and I do feel I can move more to stocks than the additional £20k planned, it would have to be next years ISA allowance so I have some time to think about the level.

pat1976

mark13 said:

Hi Pat, I wonder what the cash value of the DB pension would be  and the performance of your ISA funds and whether you are comfortable managing them yourself. On paper I think you are in a good position even with a mortgage. You've got good income, good cash backup and a few years to add to your ISA and pension pots. Paying of the mortgage does give some reassurance, in my case I I took a y5r fixed  rate mortgage which I am allowed to pay of 10% each year. So I can reduce my mortgage and keep some invested in ISA's for better returns.  Also why aren't you doing 40K to you and your wifes ISA ? 

I've gone back to clarify the pension position, the current pensions are DBs and will continue to increase, thanks.

pat1976

Mr.Saver said:

pat1976 said:
Married couple, mid-40s, one high school child. Very secure and stable jobs, one full time the other part-time with a side gig.

Income (net) 
FT    £36k    (planning salary sacrifice to SIPP to take this one out of high tax band)
PT    £30k
Gig   £36k    (varies £2k to £5k per month, only likely to last a few more years)

If I'm understanding this correctly, the person with full time job earns £36k, and the other person earns £66k from two jobs combined, yet you plan to use salary sacrifice on the full time job, which only gives you 32% tax savings? It looks like the person who earns £66k should pay some into a pension and get the 40% tax relief instead.

pat1976 said:

 we're only saving about £40k a year which is disappointing given the high income.

If the £40k savings doesn't include interest and investment returns, you annual expenses is about £33k.

pat1976 said:

Assets
House Value   £350k with £140k mortgage, interest only, Base Rate +0.5% (currently 0.6% around £75 a month) for the remaining 15 years, no intention to move.

That's a pretty cheap mortgage. If I were you, I would keep it for as long as the interest rate is low, and start to overpay it from my investments about 5 years before the end of the 15 years.

pat1976 said:

Savings
Cash               £76k  (mainly offset against mortgage but thinking of moving most of this to PBs, £20k to shares ISA for this FY)
Cash ISAs      £65k
PBs                £21k
Shares ISAs   £78k (passive globally diversified funds)
Shares           £21k (passive globally diversified funds)

£162k in cash or cash equivalent, that's way too much. Do you have plans for large expenses in the next few years? If not, it's better to keep 6 months' living cost in cash, and stash the rest into a SIPP and/or S&S ISA.

Why do you have unwrapped shares and a cash ISA at the same time? Top easy access cash ISA only pays 0.6% at the moment, fixed rate aren't much better either. You are much better off transfer the cash ISA to the S&S ISA, and invest it instead. Very risk-averse? Have you looked at any of these funds below? Because their limited equity (stock) exposure, in an unfavourable market condition, they don't go down as deep as funds with higher equity exposure. But because they still invest some money in the stock market, they will likely produce a much better return than cash over the decades ahead of us.

• Vanguard LifeStrategy 20%
• BlackRock Consensus 35
• L&G Multi Index 3

pat1976 said:

Pensions
DC Pension Pot   £20k (over several pensions, probably terrible funds, planning to move to a SIPP)
DB Pensions       £9k @60, plus £9k @65, plus £7k @67 and £13k lump  (these are related to current employment and will go up whilst we remain working there)

By the time you are 67 years old, you will have about £25k annual income from DB pensions. Have you checked your NI record? Will you get the full state pension? Assuming yes, that's another £18k (£9k each person). That's £43k guaranteed annual income for a family of three. Judging by your current annual expenses of about £33k, this sounds enough for you.

I assume that you both are contributing to your DC pension at the minimal auto-enrolment level (8% of qualifying earnings), the DC pension, even with 20 more years of contributions from both of you, the DC pots are only going to give you a few thousands extra income per year. So don't have a high expectation here.

Do you plan to retire earlier than the state pension age? Or think you will need more than £43k per year? If so, you'll need to put  (a lot) more into your DC or SIPP pots now.

BTW, if your DC pensions are invested in their default funds, they probably aren't as terrible as you think. Because you said that you are very risk-averse, and don't have much experience with investments, I'm more worried that if you move them to a SIPP, you may choose a fund that isn't suitable for your situation.

You said your child is disabled and is unlikely to ever live independently. Have you got life insurance and permanent health insurance to cover both you and your partner? It's important to have a plan for the unexpected, and this is especially true when you have both a dependant and a mortgage.

Thank you so much for taking the time to go through this. It's really helpful.

I can't figure out how to format this reply usefully like yours so I apologise in advance if this is a hard to follow.

On earnings, the gig is actually tax-free, so the PT is basic tax rate. Someone also asked why the gig would fade in a few years, it's been declining over the 4 years I've been doing it and my hourly rate is probably half what it used to be so at some point it won't feel worthwhile but could continue if we needed the money. 

It does seem like a lot in cash to me now, I've added in that the Cash ISAs are fixed until 2022 at 1.74% which is a very good rate for today. I could transfer them to stocks at a loss of a few months interest. Given that our entire isa allowance is already used each year by our savings this would be the only way to buy get additional stocks.

The unwrapped shares were bought near the beginning of the tax year after allowances had been used, there's not much I can do with them since I'm not short of cash to fill ISA allowances. 

I equate being risk averse with wanting to keep a greater proportion of my funds as cash, I do know enough about stocks to know where I want to invest.

On pensions I have gone back to the original post to clarify. We are currently in average salary schemes with a few old DB and DC schemes so provided we stay in work our pensions should be pretty healthy and sufficient. I hadn't really thought about the state pension, is it really expected to still be around in 30 years? We've both been in work since graduation but I'll see where it stands and get some advice.

We have life insurance which I've added to the original post, £350k one life, £500k two plus some survivors pension. I have no idea if this is enough and will look into it.
We do not have critical illness insurance, I did look into it once and it seemed rather expensive given the safety-nets in place e.g.  our employers would support us at 75% salary for at least a year for a temporary illness,  more long term we'd be fine on one income forever if costs were trimmed, the side gig is online and can continue whilst I am able to work on a laptop. I will look into that some more too.

So my new plan:
We have £20k of this years ISA allowance left so that will go to stocks
We will put £40k into next years allowance (£10k of this will be new savings earned by then)
I will think about transferring the cash ISAs to stocks when the rate expires.

Thank you

pat1976

I generally try to avoid saying what it is because of the reaction. It's online poker, which immediately makes people assume I'm a gambling addict who's been getting lucky 🙄
Genuinely completely tax free, but brexit had reduced the opportunities and there are increasingly more good people about these days.