Pension in my 30s

pepperwand

I would really appreciate some advice on those more knowledge than I am.

I'm 33 and have £31K in my workplace pension. I currently work part time as I have two children under school age and earn £21K a year....not a lot. I've been concerned I'm not putting enough into my pension (I pay in 10% and employer pays in 10% which I know is generous but still not a huge amount on my basic salary.)

We've just bought our forever family home but had to extend our mortgage to do so. Currently owe £270K in mortgage on a house worth £425K (I'm in the South East). The amount of mortgage debt is scaring me so we're currently making overpayments to bring that down but I wonder if I should be adding more to my pension pot instead? Mr Pepper earns significantly more than I do so his pension is healthier than mine which obviously should help family finances in retirement when we finally get there.

I'd be really interested to hear how you allocate the balance of retirement savings/mortgage overpayments and what you would do in my situation?

TVAS

Why are you relying on your husband's pension? Fund your own as much as you can.

21k part time  is more than full time minimum wage. I am assuming you will have no more babies so you will return to full time work.

You need an income in retirement (obviously) and to reduce mortgage debt is a good thing and you want to be mortgage free by 50. This implies large mortgage overpayments at the expense of pensions giving you less time from 50 to retirement age for higher pension contributions.  

I would increase pension contributions and do ad hoc capital sum to reduce the mortgage and keep the repayments at the original rate so this further reduces the debt. If you can increase pension by another 5%?  There is no formula it depends on circumstances. Or you could make higher mortgage repayments until you return to full time work and then make higher pension contributions as you are likely to have an investment period of 25 years.
 
425k in the South East? Where? I cannot buy I house where I live Brighton for 425k!

Albermarle

Similar questions are asked every day on the forum , so a scroll through the threads could be useful. For example
Pay off mortgage or invest?? — MoneySavingExpert Forum
Usually the answer is down to personal circumstances and preference . The default position is pay some to mortgage , some to long term investments , like pensions and make sure you have sufficient cash savings for emergencies, loss of employment etc
.425k in the South East? Where? I cannot buy I house where I live Brighton for 425k!
Brighton is desirable so not cheap. Many parts of the South East are not that desirable and therefore more affordable .

pepperwand

It's not that I'm relying on my husband's pension, more of a statement of our family finances. I'm definitely concerned with my own hence looking on here. 

We're in the home counties, 50 minutes into central London by train and a nice enough area but definitely not as desirable as Brighton 

pepperwand

Oh should have said, yes I'll definitely be increasing my hours in the next few years. I do waver on whether I should increase them currently but then know I won't get this time back with my children when they're this small. By September 2023 they'll both be in primary school but that feels an age away, although I'm sure it'll fly.

Retireinten

If you can afford to work part time I would do so until they're at school and particularly if your husband's work doesn't allow him to share the childcare load.  From my experience, two parents working full time can make for a stressful household, especially if the bulk of the household and childcare responsibilities falls mainly to one person.

Your question is really all about balance and finding the right balance for your family. But here are a few things to think about:

When you retire you will each have a personal tax allowance (£12.5k currently).  Ideally you both want enough retirement income to utilise you tax allowances as your income  up to this amount is tax free.  You want your retirement income to be as tax efficient as possible. For example, if your husband has an annual pension of £25k and you have nothing then after tax, your household income will be £22.5k.  Whereas if you both had pensions of £12.5k each so £25k in total, your income after tax would still be £25k.

If your husband is a higher rate tax payer then he should pay as much into his pension to take him out of the 40% tax threshold, if he can afford it.  This also protects your child allowance

Mortgage over payments are made from taxed income, but pensions are paid before tax is deducted.  So assuming you can access your pension within your tax allowance at retirement you won't pay any tax in the way in or out. I pay into a works pension and also a private pension. That £600 I transfer every month from my taxed earnings immediately turns into £750 when it hits my pension account because of the tax relief. 

Reducing your mortgage payments may mean better mortgage deals in the future so worth bearing in mind. 

You cannot ignore the psychological benefits of a smaller mortgage. I am mortgage free, having 'found' this pensions forum just a couple of years before my mortgage free date. This forum certainly triggered an increase in my pension contributions but it was the psychological benefits that meant I continued on my mortgage fee journey.  This is a personal choice. 

Also find and read The Number thread on this forum if you have time. It's a good place to start for working out your retirement income needs. 

TVAS

retireinten is right it is how one feels if you have a large mortgage and young children. Do you have any protection for the mortgage if you or husband cannot work this could be privately or via work. Critical illness could be considered this would pay a lump sum in the event of a critical illness coved by the plan. 
As you say 2023 is not that far so you will be 35/36 another 30 years of work and potentially 14/15 years mortgage free.

pepperwand

Thank you, lots of really good food for thought there. We definitely need to sort out critical illness cover. We could afford to live on my husband's salary if I lost my job, particularly if we had no childcare costs. I earn about £400 a month after childcare fees (although our family finances are pooled so it's not really me paying all childcare). But it was important for me to keep working and continuing pension contributions was part of that decision.

pepperwand

@Retireinten I definitely hear what you're saying about the psychological benefit of paying off the mortgage. I need a good long think and discussion with Mr Pepper about family finances.

barnstar2077

pepperwand said:

@Retireinten I definitely hear what you're saying about the psychological benefit of paying off the mortgage. I need a good long think and discussion with Mr Pepper about family finances.

Paying the mortgage off feels great, but it may not be the best financial move.

Pensions are usually a safe bet because of the 25% uplift. but you can't access the money until you are 57 (possibly 59/60 by the time you get there.)

A stocks and shares ISA is also good because your money is tax free and can be accessed reasonably quickly, but you don't get the free money on the way in like you do with a pension.

Personally, I would invest in a cheap 100% equities global tracker in a stocks and shares ISA instead of overpaying the mortgage, as your likely return would be higher than the interest you would save from overpaying the mortgage.  You could then (hopefully) use this money to pay the mortgage off sooner.

It really depends on how safe your jobs are, your health, and your ability to accept a small amount of risk in return for a probable greater reward.

There is nothing wrong with splitting any extra money between all three options if you can't decide.  Each option has it's positives and negatives, which is why there is a thread every day asking a similar question.