Invest or pay off house

newbieinvestor75

Hi there

I’m looking for some guidance on my next steps financially. I’m on a fortunate position to have a well payed job and have accumulated a good level of savings. I’ve recently been educating myself on investing and pensions and I am trying to figure out where to best put my savings and future income.

Here are some facts:

• Age - 35
• Gross salary - £93,000
• Pension contributions - 10% - 5.25% personal and 4.75% employer match. Been investing in workplace pension since 23. Max level of matching on employer contributions at this level 
• Savings - £105,000 - £20k in a stocks and shares ISA
• Debt - £125,000 mortgage on a property with estimated value of £260,000. Make 10% overpayments each month
• Monthly amount transferred to savings - £2,285
• Emergency fund (included in savings) - £15k being 6 months expenses 
• Lifestyle goal - move to countryside in next 10 years and work part time. To do so I would like to achieve a level of passive income making my money work for me. This would still leave however a number of years until official retirement age.

My thoughts on my next actions are as follows:

• increase contributions into private pension to 15% to obtain tax relief at source
• Place £20k into ISA when 2021/22 allowance become available and place £20k in general investment account. To do this over 4 months to achieve some averaging and take advantage of a years compound growth as I feel I’ve missed out on investing so far in life!
• This would leave £45k in savings including £15k emergency fund
• Transfer £2,285 a month into general investment account for the rest of the tax year
• Going forward into next tax year transfer £2,285 a month into ISA until allowance is full and then excess into general investment account until next tax year

I keep going round in circles on the following:

• is this really the most tax efficient route of planning to use my disposable income. Should I add more to a pension?
• Should I be using excess cash to pay off mortgage early instead of investing. A lot of US financial bloggers appear to advocate paying off your mortgage before investing at all
• Any other tips!

Thanks

MEM62

newbieinvestor75 said:

• increase contributions into private pension to 15% to obtain tax relief at source

I would go way further than 15%.  Any savings or other financial provision you are making outside of your pension you are making with post-tax money. Everything that goes into your pension goes in pre-tax .  It is an absolute no-brainer to max out your pension contributions first.  My Income is only around two-thirds of yours and I salary sacrifice 30% of my salary into my pension.    

newbieinvestor75

Thanks MEM62. I guess I am trying to balance state retirement age vs semi retiring early so putting everything into my pension isn’t something I’m keen on given the time it will take to access if that makes sense 

Alexland

There is a good thread about the consultation to increase the minimum age you can access your personal or workplace pension. Its looking like existing pensions with unqualified access to start at 55 might get protected rights so you might get access in 20 years certainly very unlikely to be as late as state pension age.

https://forums.moneysavingexpert.com/discussion/6240982/increase-to-minimum-pension-age-from-55-to-57-new-hmt-consultation#latest

We are contributing around 50% of our earnings into pensions and then after tax trying to make the most of our ISA allowances. This includes filling S&S LISAs (for age 60+) each tax year and putting much of the remaining allowance into S&S ISAs where we use an investment trust that provides a smoothed dividend yield around double the mortgage interest rate with the possibility of capital growth. We have just switched our low LTV mortgage to interest only to increase our S&S ISA contributions and will eventually repay the mortgage from the pension 25% lump sum (there is already more than 4x there).

It's not that risky running an unnecessary mortgage as the S&S ISA investment trust already provides enough 'passive income' (not that we like that term around here as it tends to be used by scammers and BTL sales people) to cover all the mortgage interest and some of our basic living expenses but for now all dividends get reinvested.

Albermarle

newbieinvestor75 said:

Thanks MEM62. I guess I am trying to balance state retirement age vs semi retiring early so putting everything into my pension isn’t something I’m keen on given the time it will take to access if that makes sense 

As above the age at which you can start taking a private pension is around 10 years earlier than the state pension.
As a higher rate taxpayer each £100 you put in the pension costs you £60 .
Assuming you will be a basic rate taxpayer in retirement ( most 40% taxpayers in employment are not 40% taxpayers in retirement) you will pay £15 tax on the £100 . So £60 gets you £85 - a 41% uplift 

Thrugelmir

newbieinvestor75 said:

• Lifestyle goal - move to countryside in next 10 years and work part time. To do so I would like to achieve a level of passive income making my money work for me. This would still leave however a number of years until official retirement age.

Target to be mortgage free in 10 years should be one primary objective. 

Grenage

From a strict numbers game one would do better investing the money as the average return will be greater than the cost of the mortgage (especially at the moment).

MaxiRobriguez

£93k salary servicing a £125k mortgage. You could be making yourself much more tax efficient!

I'd be sacrificing the full £40k allowance into a pension. 10 years of that you'll get a pension pot of nearer half a million by the time you're 45 and then you can pay nothing further into it whilst you work part time if you want to do that, knowing that investment gains for the next 10 years before you can access get you closer towards lifetime limit.

That gives you an effective £53k salary, so push £20k annually into a S+S ISA. Ten years of that will give you £300k give or take at 45 and you can wind that down alongside part time work until your pension as per above is accessible.

In the meantime that gives you an effective post tax/post investment salary of around £25k. That should be enough to service a mortgage debt of £125k (banks sometimes lend at those ratios) which I guess is what, £700p/m? Add on bills, cars and whatnot and you're probably looking at expenditure of £18k annually which gives you £7k headroom for everything else. 

That doesn't touch your current savings at all....

Obviously that cuts your income quite significantly so may not suit if you have some expensive pastimes, but is an indication of what you could do to get yourself into a position whereby you could fully retire rather than work part time at 45 should you wish.

Voyager2002

Grenage said:

From a strict numbers game one would do better investing the money as the average return will be greater than the cost of the mortgage (especially at the moment).

True.

However, there may be benefits from owning one's home outright. As well as the psychological benefits (sense of security), the OP talks about moving to a rural area: it might then make sense to keep his London property for rental income, and being able to do so without the need to obtain permission from a mortgage lender could make life a good deal easier.

Grenage

Voyager2002 said:

Grenage said:

From a strict numbers game one would do better investing the money as the average return will be greater than the cost of the mortgage (especially at the moment).

True.

However, there may be benefits from owning one's home outright. As well as the psychological benefits (sense of security), the OP talks about moving to a rural area: it might then make sense to keep his London property for rental income, and being able to do so without the need to obtain permission from a mortgage lender could make life a good deal easier.

Yes I agree, the psychological aspect is not insignificant.

newbieinvestor75

MaxiRobriguez said:

£93k salary servicing a £125k mortgage. You could be making yourself much more tax efficient!

I'd be sacrificing the full £40k allowance into a pension. 10 years of that you'll get a pension pot of nearer half a million by the time you're 45 and then you can pay nothing further into it whilst you work part time if you want to do that, knowing that investment gains for the next 10 years before you can access get you closer towards lifetime limit.

That gives you an effective £53k salary, so push £20k annually into a S+S ISA. Ten years of that will give you £300k give or take at 45 and you can wind that down alongside part time work until your pension as per above is accessible.

In the meantime that gives you an effective post tax/post investment salary of around £25k. That should be enough to service a mortgage debt of £125k (banks sometimes lend at those ratios) which I guess is what, £700p/m? Add on bills, cars and whatnot and you're probably looking at expenditure of £18k annually which gives you £7k headroom for everything else. 

That doesn't touch your current savings at all....

Obviously that cuts your income quite significantly so may not suit if you have some expensive pastimes, but is an indication of what you could do to get yourself into a position whereby you could fully retire rather than work part time at 45 should you wish.

Thanks for the response. I guess this is really focusing on investing for retirement at 55 where as I am looking to balance retirement savings, with semi-retirement savings and living now but thanks for taking the time to write this.

I do wonder wether getting say £20-£25k in my pension works and then investing heavily in a stocks and shares ISA for withdrawal in my mid-late 40s?