Are we on the right track?

vivster

I’d really appreciate strangers’ thoughts on our financial plans.

We’re a middle aged couple, no kids (me 44, husband 51). We own a house in southeast London, worth (conservatively) £500k. Outstanding mortgage is £170k. Both salaried full time workers with workplace pensions. No debt other than the mortgage - we’re on a 1.69% fix. I’m a higher rate taxpayer, he’s not.

We never thought much about our finances. Money came in, we spent it, we always stayed in the black (we don’t have extravagant tastes) and around we’d go again. Never saved or invested, other than through our pensions.

I’ve had a couple of big salary boosts in the last couple of years and we’re bringing in far more than we need to pay the bills and live. Before Covid, cash was already racking up in the current account and that only intensified once we started working from home. I had a bit of a lightbulb moment and realised we needed a plan for our money.

So...

£10,000 has gone into NS&I as an emergency fund. This would see us through 4 months, probably 5 with a bit of budgeting, if both incomes suddenly stopped (unlikely).

We started overpaying the mortgage by £1,000 a month (never overpaid at all before). We have a biggish contractual monthly repayment with 11.5 years left to run. I’ve got quite addicted to seeing the balance go down.

That still leaves us with about £1000 spare cash to play with and I currently distribute this between pots in the Starling account: home improvements, holidays (for when such things are possible again), the car and Christmas. Should probably start one for theatre/eating out in preparation for things opening up again.

Never done any investing, but I recently opened a S&S ISA and I plan to feed with £300 a month.

The mortgage deal is up in April and there are some pretty low rates on the market, so it looks like we could take the term down to 10 years and barely change the monthly repayment. If we continue to overpay by the same amount the mortgage could be gone in a little over 5 years. I’d then spend my 50s earning and saving for retirement, and ideally not working full time/contracting.

 But are there better strategies and have I got the balance between mortgage and saving right? Should we be thinking about upping our pension contributions? (I’m in a DC scheme, husband in a DB scheme).

I know next to nothing about investing (the S&S ISA is my first tentative toe in the water) and don’t have the knowledge or confidence to be an active investor.

Another factor is we’d quite like to relocate at some point, probably to the Pennines where we both have roots and family. We could obviously do that now and be mortgage free but there’s no rush and we’d like to increase our equity a bit more first. Sorry this is so long!

El_Torro

You have £10k in cash in NS&I. Is this in Premium Bonds? If so, fine. If it's in a different NS&I account you're probably better off moving it to Premium Bonds. Also is £10k enough of a cash reserve? For most people who are working a cash reserve of between 3 and 6 months worth of outgoings is a good idea. To pay for house repairs, redunandancy, etc...

I don't really see the rush to pay off your mortgage. You only have 11.5 years left on the mortgage anyway so I would just pay off the required amount. Sure, being mortgage free brings a great feeling, but growing your investments might be a better thing to do in the long term. 

You haven't said how big your pensions are, so we can't say whether you are paying enough in to them. However you are a higher rate tax payer, so contributing more to your pension might be the most tax efficient thing you can do. Your husband isn't a higher rate tax payer so the money from his income can go into your S&S ISA. A pension for a lower rate tax payer is still more efficient, but the difference isn't very big, and the benefit of an ISA is you can take the money out before you reach 55. 

As you grow your investments it would be a good idea to read up on how to invest. It's time well spent. Out of interest, how are you investing your S&S ISA now? Since your pensions are workplace pensions they're probably already invested in relatively safe (albeit perhaps too cautious) funds.

planteria

i would invest via an ISA, and look at making additional contributions to your pensions - if possible, or potentially set up additional pots if not. that said, the 'Dave Ramsey approach' that you should clear all of your debt as a priority before making additional allocations to investments does make sense too, and would feed your addiction to seeing your mortgage balance go down. either way, setting up your emergency fund was good planning. i would look for the very best rate you can get - or, as El_Torro suggests, look at Premium Bonds.

Albermarle

As you are a higher rate taxpayer you at least should contribute enough to your pension so you pay as little higher rate tax as possible . It is free money from the government .
I know next to nothing about investing (the S&S ISA is my first tentative toe in the water) 
In fact you are already a long term investor in your DC pension . Have you ever looked into what your money is invested in within your pension.? How this is invested is much more important than any little dabble into a S&S ISA.

vivster

Thank you all.

On the cash reserve, I think £10k is ok, plus I have another pot for things like a new washing machine. It’s in an NS&I income bond as that seemed the best thing at the time, but would I be better shifting to premium bonds.

On pensions, there won’t be much in my current pot as I’ve only been in my current job for two years. I put in 5% and my employer 10%, which is the maximum they offer. There’s £128k in Standard Life from my last job (obviously it fluctuates a bit). Should I transfer it to my current pension?

I’ve also got a bit in a public sector scheme. Latest statement says it will pay an annual pension of almost £3k when I’m 65, plus a small lump sum. I was planning to leave this well alone.

Don’t know much about my husband’s pension, but he’s got 20 years in HE so it’s a pretty decent scheme. He said he’d inquire about upping his contributions.

I’ve never actively looked into how my pension is invested, so it will be on the vanilla/medium option they start you on.

barnstar2077

The same question of which is better, pension, mortgage or S&S ISA is discussed on these forums a lot.  Generally it is thought that you should start by accumulating a minimum of six months emergency fund (This can just be enough to cover your bills with a small buffer, as you wouldn't be spending a lot if you were out of work for instance.)  Then put the lions share into your pensions and the remainder into an S&S ISA to add flexibility to your plans (In case you need to pay a lump sum off of the mortgage at a later date, or you want to retire earlier due to ill health etc.)  Note that the age you can access a private DC pension is due to rise to 57 for those that are not 55 by 2028.  Paying anything off of the mortgage really comes down to how much you value peace of mind over what makes financial sense, and also how secure your jobs are.  That last one is especially relevant these days.

El_Torro

vivster said:

Thank you all.

On the cash reserve, I think £10k is ok, plus I have another pot for things like a new washing machine. It’s in an NS&I income bond as that seemed the best thing at the time, but would I be better shifting to premium bonds.

On pensions, there won’t be much in my current pot as I’ve only been in my current job for two years. I put in 5% and my employer 10%, which is the maximum they offer. There’s £128k in Standard Life from my last job (obviously it fluctuates a bit). Should I transfer it to my current pension?

I’ve also got a bit in a public sector scheme. Latest statement says it will pay an annual pension of almost £3k when I’m 65, plus a small lump sum. I was planning to leave this well alone.

Don’t know much about my husband’s pension, but he’s got 20 years in HE so it’s a pretty decent scheme. He said he’d inquire about upping his contributions.

I’ve never actively looked into how my pension is invested, so it will be on the vanilla/medium option they start you on.

With NS&I Income Bonds you're earning 0.01% interest annually, so with £10k there you'll get £1 a year. £10k in Premium Bonds should, with average luck, net you £75 a year. So sure, we're not talking about life changing sums, but you should really move your £10k to Premium Bonds.

You can move your Standard Life pension to your current employer's scheme. The benefit is that you only have one pot then. Check the charges of both schemes, if your current scheme is less than Standard Life then there's a strong case to move it. Having more than 1 pot isn't the end of the world though, as long as you keep track of all your pots you can have as many as you want.

Your public sector Defined Benefit scheme, isn't very big. Still, you're right in thinking that you're probably best leaving it as it is. The £3k a year (increasing with inflation) will be a nice addition to your State Pension. It may be possible to convert it to a Defined Contribution scheme, though in the long run you'll probably get more benefit leaving it as it is.

vivster

The income bond wasn’t that low when I opened it! Will shift to PBs.

Will look into the charges on the pension pot and yes, just regarding the public sector pension as a nice little bonus.

jimjames

Just as food for thought and to back up some of the previous comments, instead of overpaying the mortgage over the last 10 years I've channelled money into S&S ISA instead. Yes the last 10 years have been a good time to be invested but it does mean your money is growing for longer by investing it rather than paying down the mortgage. So an extra 5 years for your invested money to grow could be significant. Essentially by delaying saving for your retirement until your 50s you have more limited time for that money to compound and compounding is the magic for making investments grow.

The money in my ISA could now pay off the mortgage several times over but there is no point paying it off when rates are so low.

NottinghamKnight

vivster said:

The income bond wasn’t that low when I opened it! Will shift to PBs.

Will look into the charges on the pension pot and yes, just regarding the public sector pension as a nice little bonus.

Your pension provision isn't great at your age, a lot of people will have a lot worse but if you are a higher rate taxpayer then the government would be putting nearly half your contributions into your pot so very efficient tax wise. 

JohnWinder

vivster said:

 have I got the balance between mortgage and saving right? Should we be thinking about upping our pension contributions? (I’m in a DC scheme, husband in a DB scheme).

I know next to nothing about investing (the S&S ISA is my first tentative toe in the water) and don’t have the knowledge or confidence to be an active investor.

This might flesh out the big picture by guiding you on how much to save/invest from now/whenever.

Try to estimate how much you'll need to take from you investments when you retire, eg you'll need £20k/year because your 'guaranteed' DB and state pensions will provide £15, and you can live on £35k/year. To make it easier, ignore inflation for all estimates, and use today's pounds.

Find an estimate of how much you can safely take from your investments at retirement, without running out of money before dying. It might be about 4%/year. Don't be discouraged by the likely inaccuracy of all estimates. Your investments thus need to be worth 25 times £20k at retirement.

Now estimate how much your investments can return each year (before inflation, might be 3% on average), how much they're currently worth, and how much you can add to the investments each year. Put these numbers into an online compound interest calculator for the number of years left to retirement, and see if it gets you to 25 times £20k.

Then do a sensitivity analysis: put in some figures which are at the 'optimistic' boundaries of your estimates (£15k instead of £20 because you're prepared to retire on beer not champagne; 4% return/yr etc) and re-do the compound interest calculation. Then do it for 'pessimistic' boundaries of your estimates. Repeat this each couple of years as your investments grow (shrink!) in order to make adjustments which will ensure you get to your goal of 25 times £20k.

Lastly, don't give up readily on getting the knowledge or confidence to be your own investment guide; it's not that hard, and likely worth it for you.