General long term planning, balancing pension, ISA, kids, bonus

HCIMbtw

Evening All,

I'm a pretty frugal diligent saver. What I am typing out is total first world problems, appreciate their are people struggling with finance using this site and it isn't meant as a brag in any way, just looking for some input from knowledgeable forumites, those who have older kids perhaps, to help me navigate my own decisions and planning.

I want to have financial freedom in my 50's potentially to retire early and to be able to help my kids (or wider family) out. Current state of things is, 36, £143k split between 3 pension pots, I believe one with about half of this has a protected age of access at 56 or 57. I'm currently putting in about 30k a year into my pension.

Conversely i've got about £26k in my ISA and I make no regular contributions, manged to put in 6k last year, but probably nothing this year coming year (I have nursery fees for second kid and a wife on statutory pay)

I've got 190k mortgage outstanding, at a decent rate though this will likely up in a couple of years time.. im not to worried about paying off mortgage though, its very cheap serviceable debt.

For a good few years I sal sac'd down to 50k salary, but with kids i've found i needed a bit more of the money so I don't do this anymore. 

ISA V pension - I really struggle to justify ISA contributions because of being a higher rate tax payer and the benefit of wrapping it in my pension. Current projections (4-6% annual) with contributions at a sustained level would put my pension between 1.2 to 1.5 in 20 years. sounds great now but likely won't be by then, and i'd still be a few years off being able to access it. I'll likely end up earning more, contributing more, and that's hard to plan for.. but I am worried my balance is big time off and I should be getting more regularly into my ISA that has more flexibility?

Kids, education, housing - I can't see myself actually pulling the trigger on retiring until like 56, because if my kids go to uni i will probably have to bank roll them. I'd also like to be in the position to help them out with a start in owning property that I think will almost certainly be out of reach for the next generation without a leg up. With bank rolling uni for two kids and having my own bit of bridge until i can crystalise pension, how can I work out how much I will need to have in my ISA? i'm also conscious if I want to provide some property security for them, so they could in future own somewhere to live.. it would almost be better to start looking at buying a place for them now rather than chomping of 20 years inflation down the road. 

Lastly, and probably the most pressing question for me is i'm getting a bonus this year, which for the first time is pretty massive, maybe close to 20k. If I put it in my pension, thats a huge chunk to add, like 15% of my pot. But i'm worried i'm just not building my ISA enough for my longer term plans, so really debating between taking it now and putting 11k ish into the ISA which adds >40%. Any thoughts on how to navigate at 36 for my longer term objectives, pension or isa? particularly people who have older kids and have handled some of the financing.

ORC

I'm in a not too dissimilar position to you, just a few years further down the road, and I have also struggled with these issues. I don't know whether I've got it right, but I've tried to hedge my bets given the unpredictability of life. In short:
(I) I've found it hard to resist the tax efficient nature of the pension, so I've probably over-contributed so far on the basis that I can ease off later if I want (or if the rules change to limit the amount of relief).
(II) I've made sure we have a decent emergency fund but beyond that not started yet to create the bridge from early retirement to pension access. I can access my pension at 55 so I'm not sure yet sure much of a bridge I'll need (if any) but can sort that nearer the time.
(III) I've continually overpaid the mortgage, which means we should be able to pay it off fully this year. This is not necessarily financially optimal but I think of it as downside protection.
(IV) I've got JISAs for the kids that will have plenty in them to see them through university (if they go). Although it would be nice to help them on to the property ladder, I'll be able to access my pension at that point in any case (as would my wife). 

The only thing that stood out from your post was that I wouldn't consider buying another property with the kids future in mind. My reasons for that are (i) it's a massive faff, (ii) tax inefficient, (iii) ever increasing regulation, and (iv) I'm not convinced the returns would beat investing in a very simple global tracker. It sounds like your kids are pretty young, so you've got a long time to plan for this.

chile_paul2

Sounds like you are in a similar position to where I was at your age 6 years ago. Just a couple of suggestions for you to consider:

- I continue to make pension savings to maximise on employer contributions as my employer has a generous contribution rate (I contribute 5%, my employer contributes 10%). This free money is too good to turn down!! If it was less, I'd be tempted to start reducing my contributions.

- Whilst I used to make additional contributions over and above this level I stopped as I realised I would very quickly exceed the life time allowance (which has now gone but who knows whether it will come back). I also realised that all I was really doing was deferring the payment of the tax - I almost certainly would need to pay tax when I withdrew after pension age

- Worth pointing out that none of us know what will happen to tax rules by the time we hit the age at which we can withdraw from our pensions - in what will be at least 22 years for you? So whilst you might expect to be paying tax at a lower rate after retirement that is not guaranteed. Of course that includes the normal minimum pension age you will be able to access your pension. I think I read something in the papers last week suggesting that it might shift back to 70 for state pension...... at least you know that what is in your ISA is yours!

- I swiftly moved then to move all other savings into ISA's and now have enough funds in my ISA's to be able to pay off my mortgage (if I choose to do so). That gives a lot of security in the event of shocks like we've seen to interest rates this year. It gives you much more freedom to make the right choice for you at the point your current mortgage deal expires.

- It's definitely worth starting to think about how much income you would need / like at retirement. There is a really good pinned thread in the Retirement Planning board "THE NUMBER" which I'd recommend you reading. Once you get a grip of this you can start planning from there how much you need in your retirement pots - pension post retirement age and ISA's to bridge the gap from early retirement.

- I found that before I could work out my number, I needed to get a better grasp of what I was spending today - so started to analyse much more closely our current expenditure. That in turn helped me to identify spending that I could cut and redirect back into my ISA.

- It also helped me to realise quite how expensive my kids are! I'm not sure how many kids you have or what age they are, but they get expensive quickly! I have 2 daughters, 8 and 12, and we're just starting to hit the stage of wanting mobile phones (for the older) and shelling out on swimming lessons, karate, sports clubs, school trips, scout/guide camps etc etc. They have a better social life than the adults do

- I'd also recommend opening a Junior ISA for them and then encouraging grandparents and family to start putting some (not all) of the money that they would have given them for birthday and christmas into the JISA for them. Our girls still get piles of presents (more than they know what to do with) but also have a small nest egg building up that they are not aware of yet which will be a massive help to them through uni, starting off in a house etc etc. 

If you are not familiar with it, I'd also recommend exploring some of the posts on the Escape Artist's blog - it's really helped me on my journey!