Optimising for early retirement - mortgage, S&S ISA, cash ISA etc

Mistermeaner

hi would appreciate some thoughts and advice on optimisation of pre-pension savings to fund early retirement (or at least stepping back from serious work)...

Brief situation i am 45, partner 40 - our pensions are pretty much sorted with well over £1mil+ in DC pensions / LISA's and my partner is in the LGPS. We both have full state pension contributions to date. Barring any global financial meltdown our post age 58 retirement is likely covered (I am still contributing ~30K a year into my DC pension anyway to enjoy comp contribution and tax relief)

I earn just over 100K, with bonuses of around 10-30K on top, as above sal sacrificing ~30K to stay below the 100K threshold.

Target for the next 5 years or so is to fund 2 kids through A levels and uni and ideally save enough into non-pension vehicles to fund full or partial retirement from age 50.

The 3 'pots' i want to optimise are my mortgage (only debt), my cash isa and my S&S isa. 

Current mortgage balance is 175K, rate 3.89% fixed until 2029. The capital repayment (interest) is approx £476/month, the required payment is £1047/month but we have a regular payment set up of £1500/month (£453 overpayment each month) so in essence are paying off £1000/month of the balance. House is worth 500K+

Once all monthly outgoings (inc funding kids) are taken care of we have £1750/month spare cash. At the moment this is going into a cash isa and a S&S isa.

The S&S ISA has £57K in it, all in globally diverse index trackers. I am adding £250 a month into this

The cash isa has £13.5K in it earning 4.4% (using HL and 3rd party cash isa access service) to which I am adding £1500/month at the moment

(PS I am aware of the 20K/annum limit i'll stop payments before that is hit each tax year)

Would appreciate peoples thoughts on the optimisation of mortgage overpayment vs S&S ISA vs Cash ISA with a view to being in the strongest position in circa 5years time.

In addition to this our joint account (Santander) typically has around 8-12K in it so short term emergencies are likely covered.

My random thoughts:

- Mortgage overpayment probably not cash optimal but has psycological benefits

- Cash ISA feels low compared to S&S balance, provides certainty of return at reasonable interest rate currently but capped upside

- S&S ISA provides best chance for large gains but with timeframe of 5 years may not be best place to continue to invest heavily, hence current bias to cash isa


Thanks

MallyGirl

Hopefully the Santander money is in one of their savings offerings and not the current account.
You are likely to beat the mortgage rate with investment growth and your investments won't all be needed on day 1 so they will continue to grow beyond 5 years.
Do not underestimate how expensive kids in uni are!
50 is quite early to retire- is your OH going to carry on longer as she would only be 45?

ali_bear

Sounds like you're comfortably off. But would you be happier in a bigger or nicer house or in a nicer area? You can afford a bigger mortgage, no? How about a second property abroad? How about a rental property in your kids preferred uni area, ready for them to use when the time comes? 

artyboy

ali_bear said:

Sounds like you're comfortably off. But would you be happier in a bigger or nicer house or in a nicer area? You can afford a bigger mortgage, no? How about a second property abroad? How about a rental property in your kids preferred uni area, ready for them to use when the time comes? 

We just bought a place for our 2nd child in her uni town. Gets her on the property ladder, means we are not paying anyone else's mortgage for them, and helps with the IHT planning. Wish we had done that for the other child too, but never mind, we'll help them when they are ready to go.

Mind you, we have no mortgage on our house unlike the OP, and their question about whether to pay it off quicker or not is (I believe) more a psychological than a practical decision. If you want the security of knowing it's all yours and it can't be repossessed, then that will override the harder headed arguments that you can generally make more by investing that same money.

hugheskevi

I was in somewhat similar position, so I'll outline what I concluded was best as it might be something you could consider as you get closer to retirement.

• Contribute more to pension, building up far more than I need for period after I can access pension
• Prior to retirement, remortgage house to maximum level with a nil fee offset mortgage from Yorkshire Building Society.
• Fully offset the mortgage so no interest payable
• Use remaining other assets (cash, ISAs, etc) for first part of retirement
• When other assets run out, withdraw from offset mortgage saings account - the interest paid will be more than covered by benefits from tax relief and tax free lump sum (or a variant would be to switch to a product with a lower interest rate prior to withdrawing, assuming that was with about 5 years of reaching minimum pension age)
• When reach minimum pension age, use pension commencement lump sum to fully offset or pay off mortgage.

El_Torro

My first thought is that your plan to retire in 5 years time is ambitious, perhaps too ambitious. 

You have £70.5k in ISAs (Cash and S&S) and this needs to see you through from 50 until you can access your pensions at 58. I don't know how much you plan to spend every year (I may have missed it in your post) but even if you contribute £20k a year to your ISAs every year for the next 5 years this leaves you with £170.5k when you are 50. About £21k to spend a year from when you are 50 to when you are 58. Is that enough? Especially considering you may still be making mortgage repayments for some of this time. 

I am not a great believer in paying off the mortgage early but I do believe that it should be paid off by the time you retire. Currently you are getting more in Cash ISA interest than you are paying interest on the mortgage, this is unlikely to be the case in a couple of years time though. 

Even assuming your pension provision is good enough to see you from 58 for the rest of your life I just don't see how you are going to comfortably make it from 50 to 58. 

Mistermeaner

Damn it why has no one said I can retire  

Partial retirement seems a distinct possibility especially if the missus continues working 

im going to keep up the daily grind and saving / investing heavily

will check back in a few years with status update and see if you’ll all let me go then 

Mistermeaner

hugheskevi said:

I was in somewhat similar position, so I'll outline what I concluded was best as it might be something you could consider as you get closer to retirement…….

Thanks 

I guess the equivalent of what you suggest would be to go interest only on the mortgage and instead of paying £1000/month off the balance invest that (or ‘offset’ in the cash isa while rates are higher) with a view that the mortgage balance is defo covered with pension lump sum in 10-12 years time - the hope being I can do better with that £1000/month in hand rather than paying off a mortgage with a set interest rate…..

this is something I’ve really thought about but can’t get past the psychological safety feeling of paying it down each month 

I’ll mull it some more as there’s defo a logic to have cash in hand rather than tied up in illiquid family home - much better redundancy protection for instance to help with short term cash flow if I was to lose my job 

thanks for input 

SarahB16

Mistermeaner said:

hugheskevi said:

I was in somewhat similar position, so I'll outline what I concluded was best as it might be something you could consider as you get closer to retirement…….

Thanks 

I guess the equivalent of what you suggest would be to go interest only on the mortgage and instead of paying £1000/month off the balance invest that (or ‘offset’ in the cash isa while rates are higher) with a view that the mortgage balance is defo covered with pension lump sum in 10-12 years time - the hope being I can do better with that £1000/month in hand rather than paying off a mortgage with a set interest rate…..

this is something I’ve really thought about but can’t get past the psychological safety feeling of paying it down each month 

I’ll mull it some more as there’s defo a logic to have cash in hand rather than tied up in illiquid family home - much better redundancy protection for instance to help with short term cash flow if I was to lose my job 

thanks for input 

I'm seriously considering moving house (in c.2-3 years) and expect I will need a mortgage of c.£80k (I'm currently mortgage free but don't wish to use my various ISAs to fund the house price difference and am happy instead to have a mortgage).  What I have highlighted in bold is what I am currently thinking I will do, i.e. take out an interest only mortgage and then repay the mortgage capital when I can draw my AVC tax free pot (which is linked to my DB pension). 

Do try to get past the psychological safety feeling of paying your mortgage down each month as every £600 you pay each month towards repaying your mortgage you could instead be investing c.£1,000 (or even more if you are a higher rate tax payer with salary sacrifice as you would also have the NI saving too).  

cloud_dog

We took the pension route with our interest only mortgage to use the TFLS to repay the mortgage.

Mathematically it is great, e.g. the TR and NIC saving going in plus growth.  And whilst I fully understood and bought into the mechanism to repay the mortgage, now I am retired it (crystallising the pension) has removed a degree if flexibility in how and when I draw the pension, and kind of removes it as a source of funds should I require a lump sum etc (obviously I can but taxation on it would make me sad).

I sort of want my cake and eat it 🤭

MEL1981

We are in a similar situation and same age range. Combined pension is approx £1MM and trying to build up the funds to bridge from 50 to 58.

Sounds like you'll be out of the woods with kids by then, although we will be behind as they are a bit younger. I like the idea of investing in property for the kids wherever they decide to go. 

We paid of mortgage a few years ago and the psychology of that was great for us. Wether it's the right financial decision or not, it's a great feeling and I'd highly recommend!

Good luck! 
MEL