Tax efficient saving for the future

newbieinvestor75

Hi there

I’m looking for some guidance on my next steps financially. I’m in 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.

I fully recognise how lucky I am in these hard times so do feel uncomfortable posting this

Here are some facts:

• Age - 35
• No children (or planning on having any)
• Gross salary - £135,000
• Pension contributions - 12% work place pension with employer match. Been investing in workplace pension since 23. Max level of matching on employer contributions at this level 
• Private pension - investing £2-3,000 a month
• Savings - £15k in cash account for emergency fund 
• Debt - £145,000 mortgage on a property with estimated value of £300,000. 
• Investments . £150k split 60/40 ISA and SSIP
• Monthly amount transferred to savings - £1,667 into S&S ISA and £500 into general investment account 
• 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 max out £40k allowance each year
• Place £20k into S&S ISA a year (already doing this)

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 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

EthicsGradient

newbieinvestor75 said:

Hi there

I’m looking for some guidance on my next steps financially. I’m in 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.

I fully recognise how lucky I am in these hard times so do feel uncomfortable posting this

Here are some facts:

• Age - 35
• No children (or planning on having any)
• Gross salary - £135,000
• Pension contributions - 12% work place pension with employer match. Been investing in workplace pension since 23. Max level of matching on employer contributions at this level 
• Private pension - investing £2-3,000 a month
• Savings - £15k in cash account for emergency fund 
• Debt - £145,000 mortgage on a property with estimated value of £300,000. 
• Investments . £150k split 60/40 ISA and SSIP
• Monthly amount transferred to savings - £1,667 into S&S ISA and £500 into general investment account 
• 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 max out £40k allowance each year
• Place £20k into S&S ISA a year (already doing this)

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 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

If you pay 12% of £135k into your workplace pension, and your employer matches that, then that's £32,400 a year. and £2-3,000 a month into a private pension as well would already put you over the £40k allowance - it all counts towards it. So you won't be getting tax relief on all of it, and since it will be (mostly) taxed when you start drawing it, that is tax-inefficient. So you should decrease your private pension payments to stay within the limit.

There's also the lifetime allowance for the total value of the pensions to remember - that can currently go up to just over £1 million (what will happen to that figure in the future, who knows). But if you haven't been paying at this current level for many years, and are likely to stop (or drastically reduce) in another 10, you probably won't hit that limit.

Whether it's worth paying off the mortgage faster depends on the interest rate you currently pay, and what it might change to (eg if a fixed rate ends). Paying it off gives you a more certain outcome, but investments have, on average, outpaced the interest rate on mortgages. If you can live with the uncertainty (if it doesn't work out, it could mean working full-time for an extra year or two, perhaps) then invest the money.

With your general investment account, keep an eye on the capital gains, and use the yearly allowance (currently £12,300) to sell a bit each year, to avoid that building up and suddenly being taxable if you want to sell a lot of it (either to have as cash, or just to switch investments).

newbieinvestor75

EthicsGradient said:

newbieinvestor75 said:

Hi there

I’m looking for some guidance on my next steps financially. I’m in 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.

I fully recognise how lucky I am in these hard times so do feel uncomfortable posting this

Here are some facts:

• Age - 35
• No children (or planning on having any)
• Gross salary - £135,000
• Pension contributions - 12% work place pension with employer match. Been investing in workplace pension since 23. Max level of matching on employer contributions at this level 
• Private pension - investing £2-3,000 a month
• Savings - £15k in cash account for emergency fund 
• Debt - £145,000 mortgage on a property with estimated value of £300,000. 
• Investments . £150k split 60/40 ISA and SSIP
• Monthly amount transferred to savings - £1,667 into S&S ISA and £500 into general investment account 
• 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 max out £40k allowance each year
• Place £20k into S&S ISA a year (already doing this)

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 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

If you pay 12% of £135k into your workplace pension, and your employer matches that, then that's £32,400 a year. and £2-3,000 a month into a private pension as well would already put you over the £40k allowance - it all counts towards it. So you won't be getting tax relief on all of it, and since it will be (mostly) taxed when you start drawing it, that is tax-inefficient. So you should decrease your private pension payments to stay within the limit.

There's also the lifetime allowance for the total value of the pensions to remember - that can currently go up to just over £1 million (what will happen to that figure in the future, who knows). But if you haven't been paying at this current level for many years, and are likely to stop (or drastically reduce) in another 10, you probably won't hit that limit.

Whether it's worth paying off the mortgage faster depends on the interest rate you currently pay, and what it might change to (eg if a fixed rate ends). Paying it off gives you a more certain outcome, but investments have, on average, outpaced the interest rate on mortgages. If you can live with the uncertainty (if it doesn't work out, it could mean working full-time for an extra year or two, perhaps) then invest the money.

With you're general investment account, keep an eye on the capital gains, and use the yearly allowance (currently £12,300) to sell a bit each year, to avoid that building up and suddenly being taxable if you want to sell a lot of it (either to have as cash, or just to switch investments).

Thanks for your reply. Sorry I should have been clearer 12% is the total contribution into my work place pension with my employer match rather than 24% in total

Thanks so much for taking the time to reply 

EthicsGradient

Ah, OK - in that case you should be around the £40k limit at the moment (12% of £135k +£2k*12 = £40,200).

eskbanker

EthicsGradient said:

Ah, OK - in that case you should be around the £40k limit at the moment (12% of £135k +£2k*12 = £40,200).

The monthly contributions to a private plan (from taxed income) will presumably be grossed up so the annual total would be more like £46.2K already.

pjread

As others are saying, be careful not to exceed the AA - you can carry back, but only for 3yrs and it sounds like you're probably on the cusp or exceeding every year.

LTA is harder as depends a lot on returns and when you will 'pull the trigger' on retirement.  I'd not sweat too much about 'possibly' overrunning it a little, but you almost certainly don't want to be paying 55% on 6-figure values if you can avoid it.  It sounds like you can save well so personally at 135k I'd be looking to keep my adjusted net income to 100k if I could to avoid losing the personal allowance (the "60% tax trap" ) for now, then maybe slow down contributions when that becomes impractical. 

Once you're pretty sure you'll hit LTA by whenever you plan to/can draw on the pension, and are filling the ISA allowance annually (& maybe consider the LISA as you're under 40 - a 'free' £1k a year tax free isn't to be sniffed at), really your options are;

* Unsheltered/taxable investments - no harm but adds complexity/dampened returns versus same in a shelter

* Sheltered investments in a partners name if you have one - assuming you 100% trust and there's some headroom there

* more 'exotic' typically higher-risk investments - VCTs, EIS, etc - a bit opaque and sometimes illiquid, but another option for (legitimate) tax avoidance if you can stomach the risk level