Advice on financial priorities for the next 5 years – retirement planning & mortgage

LegacyMum

Subject: Advice on financial priorities for the next 5 years – retirement planning & mortgage

Hi all,

I’d really appreciate any thoughts or advice from this wise forum – thank you in advance for your time and generosity in sharing your insights.

I'm 57, single woman, and co-parent to a 14-year-old. I work full-time and earn £94k. I’d love to retire or at least go part-time in about 5 years.

I live in London and own a property worth around £950k, with an interest-only mortgage of £280k (6 years remaining, current rate 1.44% fixed until Feb 2027). Ideally, I’d like to stay in the house until my son is 18 – he may or may not go to university then.

I realise I may need to downsize eventually to clear the mortgage, but I’m wondering if there are any realistic alternatives (e.g. later-life/lifetime mortgages) that might allow me to stay longer.

My pension pot is around £400k, with a new workplace pension (currently at £16k) getting £940/month from me and the same from my employer. I also have £65k in savings split across a cash ISA, shares ISA and bonds.

My main question is:
Where should I focus financially over the next 5 years to improve my retirement position and give me the best chance of staying in my home for a while longer?

Should I prioritise pension contributions (to make use of tax advantages)? Or keep more flexibility with ISAs/savings? Any tips on maximising my current position?

Thanks again for reading – I’m so grateful for any guidance!

Warm wishes,

Angelica123

I am curious to know rationale for choosing interest only rather than repayment. On your salary, you might have been able to have paid off entire mortgage and been able to stay in house indefinitely. You could definitely explore a lifetime mortgage - just bear in my mind that that will significantly reduce the inheritance you leave for your son. Either way you are best to go to a mortgage broker. 

I think you need to sit down and work backwards. What is the lifestyle you expect to lead in your retirement and how much would you need to enable that. Currently you would be looking at a significant reduction in lifestyle. 

Albermarle

Should I prioritise pension contributions (to make use of tax advantages)? 

It seems a shame not be getting more 40% tax relief by contributing more. Higher rate tax relief is very generous, especially if when you retire you will be a basic rate taxpayer. Also due to your age you are not restricted on when you could start withdrawing from the pension, so you still have flexibility.
Keeping some cash savings is always a good thing, but in your position investing via a pension would be better than investing outside a pension.
Hopefully you are aware of how your pension is invested? Many people seem to neglect this point.

boingy

If you want to stay in that house you should be targeting the mortgage. No point paying anything off whilst it is still on that low rate but you'll likely be shocked at the hike in rates when your fixed rate ends. You could easily be paying three times the amount of monthly interest for the remaining period of the mortgage. 

You haven't said how much spare money you have each month but one option might be to throw more money at the pension in the short term with a view to taking a tax free lump sum and putting it towards the mortgage. Of course that reduces your eventual pension but would be a tax efficient way to put a big dent in the mortgage.

This is a personal view but I think equity release and lifetime mortgages are best considered as a last resort. 

Brie

Savings into a cash ISA to help pay off a chunk of mortgage when it needs to be renewed.  

Check your state pension forecast to ensure you'll get the full whack.  If there are missing years you can top up see that that will cost.

Any share save/purchase schemes at work?  It's a nice easy way to save without seeing the money in your bank account.  Plus your employer might be subbing some of this too.  I liked that I could put £600 a year into a share purchase scheme that my employer matched - basically getting shares at half price.  

Then  the max available into your pensions to do the tax advantage thing.  Either a personal pension somewhere or into AVCs with the work pension.  Or both.  Depends on how hands on you want to be with it.  

Not a fan of equity release in any case and certainly wouldn't recommend it for someone with a child.  But as a last resort it might be ok.  I don't know how much it might complicate a house sale at some point.  Frankly I'd be looking at downsizing first.  Myself I'm keeping this idea in my back pocket but I don't have anyone to inherit things so the circumstances are different.  

Albermarle

boingy said:

If you want to stay in that house you should be targeting the mortgage. No point paying anything off whilst it is still on that low rate but you'll likely be shocked at the hike in rates when your fixed rate ends. You could easily be paying three times the amount of monthly interest for the remaining period of the mortgage. 

You haven't said how much spare money you have each month but one option might be to throw more money at the pension in the short term with a view to taking a tax free lump sum and putting it towards the mortgage. Of course that reduces your eventual pension but would be a tax efficient way to put a big dent in the mortgage.

This is a personal view but I think equity release and lifetime mortgages are best considered as a last resort. 

The above in bold, is certainly an option, and more attractive due to the OP being a high earner and getting 40% tax relief on pension contributions.

TheTelltaleChart

The big missing info is how much you're actually spending now (excluding pension contributions and mortgage payments). Plus, are there any reasons to expect that figure to go up or down at any future events (e.g. age of child, (semi-)retirement)?

If you're currently spending all your income (after tax, pension contributions and mortgage payments), then if/when your income drops, you may have to look at downsizing and/or spending less.

But if you're spending much less, then there may be no need to downsize at all. You could consider massively increasing your pension contributions. E.g. if you put in £3,650 per month instead of £940, that would all get 40% tax relief (and perhaps also restore Child Benefit, if that's currently lost due to your income? — though I don't know whose income is relevant in a co-parenting scenario). Including employer contributions of £940 per month, that would give total annual contributions of c. £55k (within the £60k annual allowance). After 5 years, that's another £275k in pensions; with the existing £400k, a total of £675k, of which 25% (£169k) could be taken tax-free to pay off the majority of the mortgage. And that doesn't allow for any investment growth within the pension, so realistically it should be a bit better than that.

On lifetime mortgages: there is a distinction between equity release, in which you effectively sell your home at a large discount in return for being able to stay there for the rest of your life (and of course, the younger you are, the larger the discount) and more conventional mortgages which some lenders offer to people after retirement age on the basis that their regular income in retirement is high enough to support the mortgage payments. For the latter, paying more into a pension is also going to put you in a better position.

LegacyMum

Thanks so much  TheTelltaleChart. This is incredibly helpful. I think I can afford to live on £3,680 a month take home - which would allow me to put £3k per month into my pension, less than your suggestion below but will give a good lump sum tax free when I take my pension for the mortgage. I did have a buy to let flat which would have more than paid the mortgage, but I have given this to my ex-partner. I do also have total savings of £60k in a cash isa, a bond and investment isa. Perhaps this is the way forward and I would then have a £120k mortgage left in 5 yrs. Which would need  to be paid off. Thanks again.

The big missing info is how much you're actually spending now (excluding pension contributions and mortgage payments). Plus, are there any reasons to expect that figure to go up or down at any future events (e.g. age of child, (semi-)retirement)?

If you're currently spending all your income (after tax, pension contributions and mortgage payments), then if/when your income drops, you may have to look at downsizing and/or spending less.

But if you're spending much less, then there may be no need to downsize at all. You could consider massively increasing your pension contributions. E.g. if you put in £3,650 per month instead of £940, that would all get 40% tax relief (and perhaps also restore Child Benefit, if that's currently lost due to your income? — though I don't know whose income is relevant in a co-parenting scenario). Including employer contributions of £940 per month, that would give total annual contributions of c. £55k (within the £60k annual allowance). After 5 years, that's another £275k in pensions; with the existing £400k, a total of £675k, of which 25% (£169k) could be taken tax-free to pay off the majority of the mortgage. And that doesn't allow for any investment growth within the pension, so realistically it should be a bit better than that.

On lifetime mortgages: there is a distinction between equity release, in which you effectively sell your home at a large discount in return for being able to stay there for the rest of your life (and of course, the younger you are, the larger the discount) and more conventional mortgages which some lenders offer to people after retirement age on the basis that their regular income in retirement is high enough to support the mortgage payments. For the latter, paying more into a pension is also going to put you in a better position.

LegacyMum

Thanks to you all for your kind time and advice, most helpful, what a great forum this is, any further advice do please share, it is all gratefully received. 

BrilliantButScary

If you are really serious about this, I would post your SOA (Statement of Affairs) on the Debt Free Wannabe forum and see what suggestions can be made to reduce your monthly outgoings. Do you know what you spend money on? £3,680 a month expenditure, sounds a lot, when there is only you and your son and the fact you are paying an interest-only mortgage.

I would also be inclined to put your original post on the  'Pensions, annuities and retirement planning' board as I think you would get more suggestions there.

LegacyMum

Subject: Advice on financial priorities for the next 5 years – retirement planning & mortgage

Hi all,

I’d really appreciate any thoughts or advice from this wise forum – thank you in advance for your time and generosity in sharing your insights.

I'm 57, single woman, and co-parent to a 14-year-old. I work full-time and earn £94k. I’d love to retire or at least go part-time in about 5 years - or less if I can.

I live in London and own a property worth around £950k, with an interest-only mortgage of £280k (6 years remaining, current rate 1.44% fixed until Feb 2027). Ideally, I’d like to stay in the house until my son is 18 – he may or may not go to university then. I did have a buy-to-let which would have more than paid the mortgage but I gave this to my ex.

I realise I may need to downsize eventually to clear the mortgage, but I’m wondering if there are any realistic alternatives (e.g. later-life/lifetime mortgages) that might allow me to stay longer.

My pension pot is around £400k, with a new workplace pension (currently at £16k) getting £940/month from me and the same from my employer. I also have £65k in savings split across a cash ISA, shares ISA and bonds.

My main question is:
Where should I focus financially over the next 5 years to improve my retirement position and give me the best chance of staying in my home for a while longer?

Should I prioritise pension contributions (to make use of tax advantages)? Or keep more flexibility with ISAs/savings? Any tips on maximising my current position? I'm seriously looking at my outgoings to now only to spend £3,600 a month from my take home salary. 

Thanks again for reading – I’m so grateful for any guidance!