ISA, pension or mortgage?

barnstar2077

Paying the money off of the mortgage is the least financially savvy option you could go for, but does provide peace of mind.  It could hurt you in the long term though.  Imagine you had £100k today.  If you pay that off of the mortgage it would be practically wiped out, but you are down £100k and you have saved less than 2% in interest payments.  If you put the same £100k into a pension over the next few years it becomes £125k because of tax relief and then should continue to grow until you need it.

You always need an emergency fund just in case.  Then put the lions share of ongoing savings into your pensions and an amount into an S&S ISA.  The idea behind an S&S ISA is to add flexibility to your plan, because it could be used to pay a lump sum off of the mortgage at a later date, or accessed earlier than your pension should you need / want to retire earlier than your pension allows.

It does depend on how secure your jobs are though, and I would recommend that you hash out a long term plan about what you want to do later in life and then decide how to use your money to best meet those objectives.

Type_45

Mrdiscoman said:

I currently have around £50k in savings, £45k of which is in an ISA with a 0.05% rate. My wife and I have joint mortgage with £108k left to pay over another 15 years with a 1.56% fixed rate for the next 4 years. 
Im in my late 40's and only have a small private pension pot, a works one I've paid into for 5 years and a previous one with around £15k invested. I've worked since I was 16 so all NI is up to date.
Should I use my savings or around 90% of it to either:
A; pay a lump off the mortgage?
B; pay a lump sum into a pension
C; invest elsewhere?

Why on earth would you keep your savings in a 0.05% interest rate account? 

Put them in VLS80. Or even VLS100. Or at the very least, VLS60.

Type_45

If you use your savings to pay off the mortgage, but then split up with your missus, you're going to lose half your savings. 

Unless your savings are jointly hers, of course, in which case you only own half of it anyway.

Albermarle

It does depend on how secure your jobs are though

This same question about isa vs pension vs mortgage gets asked on a very regular basis. Personally I think it boils down to the above question . If jobs seem secure then invest now and pay off mortgage later . If jobs seem insecure keep paying off the mortgage as quickly as possible as the priority.

daveharruk

barnstar2077 said:

daveharruk said:

Really B and C are the same thing. If you want to save for a rainy day, can you do that by overpaying your mortgage? Vanguard is fine for smaller amounts and if you want to use a buy and hold strategy, but it isn't really suitable for active investment, as there is no stop loss facility, so you would be at risk if/when markets fall significantly. I would suggest Trading 212 as not only do they have a stop loss facility and free trading, but they have a wider choice of shares and funds than Vanguard including things like Scottish Mortgage Trust which has a long history of outperforming the market as well as Nasdaq and S&P trackers and other current hot ETFs like iShares Global Clean Energy and precious metal ETFs. They will also be launching a SIPP soon, and they have a wider range of instruments to trade than their nearest competitor (FreeTrade).

No, this is not a good idea for the average person.  A globally diversified multi asset fund like the Lifestrategy funds are perfect for beginners, or for those that do not have the time to spend doing research on individual sectors, regions, or companies.  You don't need a stop loss facility because you are not trying to time the market, you are investing for the long term and any dips just means you are buying cheap for a time (as many of us did this year.)  Investing in the latest hot managed fund is a great idea until it isn't.  It has been proven that long term passive investing is the safest, most reliable way to invest.  Even Warren Buffet says so.  The average person should keep things simple, or at least start out that way.  They can always branch out a bit later on once they have a solid backbone to their finances (and even then it isn't necessary.)

I wasn't arguing against LifeStrategy - I've used it myself in the past, I am just against using it on the Vanguard platform. When you are talking about a "dip", you actually are talking about possibly 30% or more drawdowns with possibly many years before it recovers (this time purely buy and hold investors were lucky in that the recovery came relatively quickly, but it took many years after the last big crash). If you are looking to reduce large drawdowns, which is what really kills peoples' wealth, then buy and hold without a stop loss or regular management is a risky strategy. There is very little credible (i.e. independent) evidence that buy and hold is the best strategy to create long-term wealth - the most successful investors tend to be trend followers - although buy and hold does have the advantage that it is simple to use. There will continue to be arguments about passive vs active funds (both of which you can buy and sell without cost at any time the markets are open and with the advantage of a stop loss facility on Trading212 - which you definitely can't on Vanguard) - but in the end I take the view that if the fund manager has a long track record of outperforming the market (as it has with the 5* TrustNet rated Scottish Mortgage Trust), then it is worth considering as part of your portfolio. LifeStrategy's (3 or 4* TrustNet rated) recent returns have been skewed by the recent outperformance of the US market where it has up to nearly half of its allocation and so it would be unreasonable to expect those returns to continue.

DiggerUK

Mrdiscoman, being told that inflation will help you pay the mortgage is an old legend that has no merit. If, like the Bank Of England, you could produce your own money then it's plausible; but even then the BOE relies on a minimum of 2% inflation to dilute its borrowings over 28 years. If you can swallow that argument you're doomed.

Your mortgage deal ends in four years, nobody really has a clue what will be happening in four months. If you want another special rate in four years, will they be available? How much will the 'arrangement fee' amount to in four years? What will the interest rate be in four years? Will you have a well paying job in four years?.....etc., etc., etc..

Look here for some of the current best offers for a remortgage deal today. 

Not planning for a future downside is how many ended up in it last time. On top of that, the lower your LTV, the better choice you will probably have of a decent deal..._

grumiofoundation

DiggerUK said:

Mrdiscoman, being told that inflation will help you pay the mortgage is an old legend that has no merit. If, like the Bank Of England, you could produce your own money then it's plausible; but even then the BOE relies on a minimum of 2% inflation to dilute its borrowings over 28 years. If you can swallow that argument you're doomed.

Your mortgage deal ends in four years, nobody really has a clue what will be happening in four months. If you want another special rate in four years, will they be available? How much will the 'arrangement fee' amount to in four years? What will the interest rate be in four years? Will you have a well paying job in four years?.....etc., etc., etc..

Look here for some of the current best offers for a remortgage deal today. 

Not planning for a future downside is how many ended up in it last time. On top of that, the lower your LTV, the better choice you will probably have of a decent deal..._

Generally valid points. But none of them actually support overpaying the mortgage ASAP. 

If you are worried about what might happen in 4 months is locking your money away in order to save realistically a couple of hundred pounds a year over the next 4 years sensible? 

Since it doesn’t seem possible to pay off the mortgage in 4 years what’s the point in worrying about the cost of arrangement fees, interest rates in 4 years? As they will need to remortgage and pay these anyway. 

You also don’t ‘benefit’ from being in a lower LTV band until the point you remortgage so no need to rush to make the decision. 

There are many valid arguments for paying off mortgage so there isn’t really a need to include other reasons that’s aren’t really accurate. 

Mrdiscoman

Type_45 said:

Mrdiscoman said:

I currently have around £50k in savings, £45k of which is in an ISA with a 0.05% rate. My wife and I have joint mortgage with £108k left to pay over another 15 years with a 1.56% fixed rate for the next 4 years. 
Im in my late 40's and only have a small private pension pot, a works one I've paid into for 5 years and a previous one with around £15k invested. I've worked since I was 16 so all NI is up to date.
Should I use my savings or around 90% of it to either:
A; pay a lump off the mortgage?
B; pay a lump sum into a pension
C; invest elsewhere?

Why on earth would you keep your savings in a 0.05% interest rate account? 

Put them in VLS80. Or even VLS100. Or at the very least, VLS60.

That's why I'm asking for advice; because 0.05% is terrible.

Mrdiscoman

Type_45 said:

If you use your savings to pay off the mortgage, but then split up with your missus, you're going to lose half your savings. 

Unless your savings are jointly hers, of course, in which case you only own half of it anyway.

My thoughts exactly. That's why the mortgage option is my least appealing. You never know what's round the corner!