Saving for Retirement - Help!

Tantalus86

Hi all. So first a little bit of my particular context - I'm married with no dependents, 34 years old, higher rate tax payer, home owner (with mortgage) and full time employed paying into a workplace pension via salary sacrifice (the only pension I have). I've also had a bunch of free time over the christmas period so finally took the plunge into looking at properly sorting my finances (been putting it off for a while as, quite frankly, the prospect of investing seems daunting). Figured it's easier to try and sort it now rather than later!

So due to a number of situations i'm expecting to have about £50k in cash within the next month that I want to invest wisely rather than keep in cash. This is in addition to my cash emergency fund. I've read dozens and dozens of articles online and this forum and still feel lost in certain areas - any help would be apprecitated!

My aim is to retire by the age of 60 (ideally 55 if possible). The options seem to be one of, or a mixture of:
1) Pay more into my workplace pension
2) Open a SIPP, personal pension or a.n.other pension type and take control of the investments in there. Pay into that.
3) Open a S&S LISA and put £4k a year into that.
4) S&S ISA 

1) I've already upped the amount I'm paying so that I no longer pay any higher rate income tax. If I were to pay an additional lump sum into this, would this give me a tax break as a higher rate tax payer or a basic rate? So if I paid in £10k would this cost me £8k or £6k?
2) This appears to provide a lot of flexibility. It seems most people with workplace pensions are able to take a lump sum out of their workplace pension and put it into a SIPP but not sure this option is available with the one I have with aviva. I'm also not near the point of knowing enough to go down this route - just wanted to gauge what people that do know a a bit more would do in my situation.
3) This seems to be an optional extra to a pension. Am I right in thinking that it's preferable to pay more into a pension out of your pre-tax income rather than put money into a LISA from post-tax income? As the money is then locked away until retirement in both scenarios (I know I could in theory take the money out of the LISA at any time with a penalty, but let's assume I don't), then what is the point in using a LISA? 
4) Seems to be a simple option. Open the S&S ISA, whack in £20k now, £20k in April, and as much as deemed necessary from next April to meet the target. I'd start with probably 80% equities. Upside being that the money would be available at any time, downside being the tax savings are better in a pension.

I've read a number of threads that seem to suggest these but there's never a consensus - implying there is no right answer, but I'd love a few opinions from people with more knowledge on what you would do in the situation? My current thinking is to open a S&S ISA and put as much as I can into that, buy a couple of index trackers, learn more and see where I am this time next year (and probably pay any remaining as a lump sum into my workplace pension).

Sorry for the long post!

Albermarle

1) Any further contributions will only attract basic rate tax relief . You can not claim back more higher rate tax than you have actually paid .
2) Firstly do not assume that moving money from a workplace pension to a SIPP is some kind of magic solution . Your workplace pension may be perfectly adequate for your needs, and may in fact be cheaper. Have you checked the charges , and more  importantly have you looked to see where your money is invested and what alternatives there are within the pension?
3)  There is a full explanation of the pros and cons in this article https://www.moneysavingexpert.com/savings/lifetime-isas/
4)  Upside being that the money would be available at any time, downside being the tax savings are better in a pension.
This is always the trade off between S&S ISA and a pension.

george4064

I would probably do a combination of 1, 3 and 4, this will ‘diversify’ your assets in different wrappers which will give you better protection *if* there are any significant changes to UK tax/pension rules in the future.

AlanP_2

One additional thought, as you are married look at your finances / retirement provision in the round not in isolation as there may be advantages for one of you to use one approach and tnbe other a different one based on tax bands / income etc.

MaxiRobriguez

For someone who has "yet to sort their finances" having an emergency pot and reducing your salary via pension sacrifice to move into basic rate taxpayer state is a great start. That immediately puts you ahead of most people in the country.

There are a few questions/points that stand out for me:
1) If you want to retire at 55 then your need another pot of money that isn't your pension, as you won't be able to access it until you are 58 (perhaps older if the govt change the rules). It's probably right that the majority of any additional money you can squirrel away on top of what you already are doing should go into the pension for the tax breaks, but you will also need to put aside some money into a S+S ISA to fund you for those three years between 55 and 58 if you do want to retire before pension access.
2) You haven't stated anything about future plans. Would you want to upscale house soon? Get married? Possibly have children? All these things come at additional cost and will need to be factored in alongside additional squirreling. 
3) Pensions have upper rate limits (lifetime limit) which if breached cause significant tax implication. As a higher rate tax-payer you're more likely to do that if not careful (by way of simply having more money than others to contribute)
4) What is your LTV/Mortgage. Could you stomach a rise in interest rate from 2% to 5% for example?

Other than that I think you're doing OK and you've considered what you need to consider. The actual decision for you is just fine tuning now rather than saving you from your own decisions.

cloud_dog

Tantalus86 said:

Hi all. So first a little bit of my particular context - I'm married with no dependents, 34 years old, higher rate tax payer, home owner (with mortgage) and full time employed paying into a workplace pension via salary sacrifice (the only pension I have). I've also had a bunch of free time over the christmas period so finally took the plunge into looking at properly sorting my finances (been putting it off for a while as, quite frankly, the prospect of investing seems daunting). Figured it's easier to try and sort it now rather than later!
...
My aim is to retire by the age of 60 (ideally 55 if possible). The options seem to be one of, or a mixture of:
1) Pay more into my workplace pension
2) Open a SIPP, personal pension or a.n.other pension type and take control of the investments in there. Pay into that.
3) Open a S&S LISA and put £4k a year into that.
4) S&S ISA 

1) I've already upped the amount I'm paying so that I no longer pay any higher rate income tax. If I were to pay an additional lump sum into this, would this give me a tax break as a higher rate tax payer or a basic rate? So if I paid in £10k would this cost me £8k or £6k?
2) This appears to provide a lot of flexibility. It seems most people with workplace pensions are able to take a lump sum out of their workplace pension and put it into a SIPP but not sure this option is available with the one I have with aviva. I'm also not near the point of knowing enough to go down this route - just wanted to gauge what people that do know a a bit more would do in my situation.
3) This seems to be an optional extra to a pension. Am I right in thinking that it's preferable to pay more into a pension out of your pre-tax income rather than put money into a LISA from post-tax income? As the money is then locked away until retirement in both scenarios (I know I could in theory take the money out of the LISA at any time with a penalty, but let's assume I don't), then what is the point in using a LISA? 
4) Seems to be a simple option. Open the S&S ISA, whack in £20k now, £20k in April, and as much as deemed necessary from next April to meet the target. I'd start with probably 80% equities. Upside being that the money would be available at any time, downside being the tax savings are better in a pension.

1) I've already upped the amount I'm paying so that I no longer pay any higher rate income tax. If I were to pay an additional lump sum into this, would this give me a tax break as a higher rate tax payer or a basic rate? So if I paid in £10k would this cost me £8k or £6k?

£10k would cost you £6.8k, due to SS (NI reduction) - 20% TR, 12% NI cons savings.

As you are planning to retire at 55 at the earliest, and you benefit from SS, I am struggling to see why you wouldn't just utilise your SS capacity to fulfil your requirements?  Obviously, the early access age is increasing to 57 in the next few years so you may need to bear this in mind and use a ISA for that component but everything else indicates that additional SS pension contributions is the way to go.  We are obviously ignoring any financial consideration of a partner you may have.

Tantalus86

Albermarle said:

1) Any further contributions will only attract basic rate tax relief . You can not claim back more higher rate tax than you have actually paid .
2) Firstly do not assume that moving money from a workplace pension to a SIPP is some kind of magic solution . Your workplace pension may be perfectly adequate for your needs, and may in fact be cheaper. Have you checked the charges , and more  importantly have you looked to see where your money is invested and what alternatives there are within the pension?
3)  There is a full explanation of the pros and cons in this article https://www.moneysavingexpert.com/savings/lifetime-isas/
4)  Upside being that the money would be available at any time, downside being the tax savings are better in a pension.
This is always the trade off between S&S ISA and a pension.

Thanks Albermarle. Regarding the current pension investment the fund charge is 0.35% which, comparing other funds that are available, seems reasonable. The region allocation again is 'ok', but there seems to be a larger % in Japan and a smaller % in emerging markets than I'd like. Performance has also been doing well over the past 5 years and consistently outperforming the benchmark - so don't see an urgent requirement to change it. Once i've garnered a bit more confidence in investments I'll review this next year and see if it's worth changing (there is a limited selection of funds though with my current provider).

george4064 said:

I would probably do a combination of 1, 3 and 4, this will ‘diversify’ your assets in different wrappers which will give you better protection *if* there are any significant changes to UK tax/pension rules in the future.

That was my gut feel as well

AlanP_2 said:

One additional thought, as you are married look at your finances / retirement provision in the round not in isolation as there may be advantages for one of you to use one approach and tnbe other a different one based on tax bands / income etc.

We're both earning a similar amount, so are both higher rate payers.

MaxiRobriguez said:

For someone who has "yet to sort their finances" having an emergency pot and reducing your salary via pension sacrifice to move into basic rate taxpayer state is a great start. That immediately puts you ahead of most people in the country.

There are a few questions/points that stand out for me:
1) If you want to retire at 55 then your need another pot of money that isn't your pension, as you won't be able to access it until you are 58 (perhaps older if the govt change the rules). It's probably right that the majority of any additional money you can squirrel away on top of what you already are doing should go into the pension for the tax breaks, but you will also need to put aside some money into a S+S ISA to fund you for those three years between 55 and 58 if you do want to retire before pension access.

That's a very good point. I think in honesty 55 is too optimistic, 60 is a more realistic target. But then again there are always unforeseen things in the future that could bring this forward so i'll definitely keep a pot outside of a pension (just need to work out how much!)

MaxiRobriguez said:

2) You haven't stated anything about future plans. Would you want to upscale house soon? Get married? Possibly have children? All these things come at additional cost and will need to be factored in alongside additional squirreling. 

I'm already married and we moved into a suitable house a few years ago which will do us just fine for the foreseeable. Yeah there is the possibility of kids, which of course would put some strain on finances, but we wouldn't need to think about moving house at all and we would then divert some funds for pension saving into a S&S ISA or something. 

MaxiRobriguez said:

3) Pensions have upper rate limits (lifetime limit) which if breached cause significant tax implication. As a higher rate tax-payer you're more likely to do that if not careful (by way of simply having more money than others to contribute)

I'll keep an eye out for this but unless I delay retirement until 65+ I think i'm unlikely to hit the lifetime limit. 

MaxiRobriguez said:

4) What is your LTV/Mortgage. Could you stomach a rise in interest rate from 2% to 5% for example?

LTV is about 50% and we're currently overpaying the mortgage by a couple hundred each month. If interest rates were to rise then we would be able to stop the overpayments and this would hopefully cover the increased cost of the mortgage. Our fix runs out this year and we should be able to get a 5 year fix for a lot lower rate than we're currently on (can't see interest rates rising any time soon!).
I know from a strictly wealth increasing point of view it would be better to invest the overpayments into stocks/shares but it's mightily satisfying seeing that estimated mortgage payoff (not sure on terminology there!) coming down. Reduced the term by 20 months so far .

cloud_dog said:

As you are planning to retire at 55 at the earliest, and you benefit from SS, I am struggling to see why you wouldn't just utilise your SS capacity to fulfil your requirements?  Obviously, the early access age is increasing to 57 in the next few years so you may need to bear this in mind and use a ISA for that component but everything else indicates that additional SS pension contributions is the way to go.  We are obviously ignoring any financial consideration of a partner you may have.

I think it's essentially down to the unknown factors that could crop up. I wouldn't want to just have an emergency fund of cash until I retire - there could be kids in the future that need some money for university or something.

Thanks for all your responses guys, I feel a lot more reassured knowing I'm not thinking of doing something stupid. I'll have a look at which funds I want to invest in and open up a S&S ISA. It's then just a bit of tweaking to work out how much to put in that and how much extra to put into workplace pension - then review in a year's time! 

(Quick question, obviously I can only put £20k into an ISA this tax year, but do people open up a S&S LISA and a S&S ISA with different platforms in the same tax year? I wouldn't want to put the full 20k into the LISA and then struggle to move it to another provider later on)

Albermarle

 I wouldn't want to put the full 20k into the LISA and then struggle to move it to another provider later on)

The maximum you can add to a LISA each year is £4Khttps://www.moneysavingexpert.com/savings/lifetime-isas/

There a few cash LISA providers but only a very limited number of Stocks and Shares LISA providers .

In theory you should be able to easily transfer all ISA's but I read in another thread it can be tricky transferring a LISA when you are over 40 .

Alexland

Albermarle said:

In theory you should be able to easily transfer all ISA's but I read in another thread it can be tricky transferring a LISA when you are over 40 .

Yes LISAs already had much less platform choice but we have now confirmed EQi are accepting inbound LISA transfers (if you use their paper form to apply) for over 40s who want to invest in S&S and given they are the cheapest for holding funds that's good.

We use different providers for our S&S ISA and LISA contributions as different platforms are cheaper for different types of wrapper, trade patterns, account valuations, etc.

Tantalus86

apologies, I had in my head that you could pay the £20k per year into a LISA but the 25% bonus was only on £4k. I stand corrected

Alexland

Even if you could contribute more than £4k per tax year why would you want to tie up the extra money until age 60 or suffer a withdrawal penalty for no extra bonus?