a little about me

pop3_2

have an appointment with a financial advisor in a weeks time, and before i go, he suggested i sit and collect some ideas about how i feel i should approach my financial future. although, this is much more difficult than it sounds.

I'm 30 years old, I work on a contracting basis, and earn around 90k per year. my wife stays at home to look after our 2 children, aged 2 and 3. this is something she intends on doing so for the immediate future. i have a repayment mortgage of 70k, which is due to be paid in 2028. furthermore, i have no current pension provisions.

i also have an inheritance of 100k from a parent, and a share portfolio worth 34k, which is performing satisfactory.

basically i'd love some guidance before seeing an advisor, from an independent unbiased view, such as yourselves.
thanks in advance,

richard.

purch

Pay Off the Mortgage

Jonbvn

purch wrote: »

Pay Off the Mortgage

:beer:

Entirely agree with this comment. Why pay interest for 20 years on a mortgage? Since you are a contractor, consistent work can sometimes be an issue, particularly if we go through a recession, as some are expecting. If you pay of the mortgage, you will not have to worry about paying your mortgage should you fall out of work.

Edit: If you just make regular payments on your mortgage for the next 20 years, you will have to pay more than GBP50k in interest. Save GBP50k and pay it off!

dunstonh

basically i'd love some guidance before seeing an advisor, from an independent unbiased view, such as yourselves.

Make sure the adviser is independent and not tied or multi-tied. The first document they give you on the first page should tell you this. (tick boxes in either tied to one provider, from a panel or whole of market). If they are not Independent then they will not be unbiased.

Whilst often investing is a valid option to consider (instead of paying off the mortgage), if you are in a position where income can fluctuate and work may not be consistent then it seems logical to clear the mortgage. Then you can use surplus income to invest over time.

meester

Jonbvn wrote: »

:beer:

Entirely agree with this comment. Why pay interest for 20 years on a mortgage? Since you are a contractor, consistent work can sometimes be an issue, particularly if we go through a recession, as some are expecting. If you pay of the mortgage, you will not have to worry about paying your mortgage should you fall out of work.

Edit: If you just make regular payments on your mortgage for the next 20 years, you will have to pay more than GBP50k in interest. Save GBP50k and pay it off!

Sorry, this is quite possibly wrong.

As a contractor the OP is probably LTD company director receiving dividends.

There is no tax on dividends for basic rate tax payers, and only 25% tax (effective) for higher rate tax payers.

For a normal higher rate tax payer, 6% mortgage rate works out as an effective 10% gross. Which is generally regarded as above the average rate of return for equities in the long term. So it does make sense for most people, and the volatility is of course zero, so the risk-adjusted return is significantly higher.

But for a company director, 6% is either 6% (basic rate) or 8% (higher rate). So paying off mortgage vs. investment is not nearly so good for such people

In fact a cash ISA is better, because the tax on the income from a savings account is 40% vs. the 0 or 25% on income from dividends used to pay the mortgage.

OP: what is the rate on your mortgage? Anything under 6% is certainly not worth paying off.

Are you receiving income via dividends?

The OP's £90k income can probably be extracted mostly tax-free atm, because of spouse's shareholding and dividends via her. This looks likely to change in April.

I would look at tax first:

ensure both OP and spouse receive a p/a salary £5,235/year
OP should receive dividends of ~£30k net/year
wife should receive same for current year, but will need to awai income shifting legislation changes for next year (April 6th)
Balance of money can sensibly be paid into SIPP by your company, gross of Corporation Tax, to you, although not to spouse

My recommendation is as follows:

£3k this year into cash ISA each =£6k total (transfer other cash savings into there first)
£4k each into share ISA = £8k

After April the numbers would be £3.6k cash, £3.6k shares

Try and shelter high yielding investments inside share ISA. Investments with low or zero yield should be held outside ISA, if you still have money left over. These investments would include emerging market shares, etc. which typically do not pay yield. The CGT is not an issue for you at the moment, so you've no need to worry about that just yet. As your portfolio grows it might become an issue, so you have the option, as of April of transferring the cash ISAs into shares, if the tax saving becomes more valuable at some point down the road. Obviously you want to keep some of your wealth in cash, so even though shares have a higher long-term return, it makes sense to utilise the cash ISA tax shelter for the short-term as the tax saving is larger.

Don't pay higher rate tax, if possible - if there is money left over, put it into a SIPP.

Does your IFA deal with contractors and have the detailed tax planning knowledge etc needed?

purch

I would look at tax first

I wouldn't

Pay off the mortgage !!! :j

Fella

Pay off the mortgage.

Jonbvn

meester wrote: »

Sorry, this is quite possibly wrong.

Sorry, but no I am not!

The OP has a GBP100k inheritance. An ISA only allows him to invest 14k per year (with his OH). Since most mortgages have an APR of around 6%. The OP is unlikely to get a guaranteed net return in excess of this, particularly in these volatile times.

The OP would be advised to save as much money in his non-tax paying OH's name, such that the interest/return is just below the income tax limit (5.2k)

meester

Jonbvn wrote: »

Sorry, but no I am not!

The OP has a GBP100k inheritance. An ISA only allows him to invest 14k per year (with his OH). Since most mortgages have an APR of around 6%. The OP is unlikely to get a guaranteed net return in excess of this, particularly in these volatile times.

The OP would be advised to save as much money in his non-tax paying OH's name, such that the interest/return is just below the income tax limit (5.2k)

We don't know how much the OP's mortgage rate is. This is very relevant.

In the long term net returns from the portfolio are quite possibly above the mortgage.

Something like
http://www.digitallook.com/cgi-bin/digital/security.cgi?username=&ac=&id=113230

is likely to outperform the mortgage, and has negligible volatility.

It's true that the £100k if in cash is being taxed heavily.

That's why I would look at:

* funds (capital gains allowance of ~£20k/year not being used)
* index-linked savings certificates
* cash ISAs
* possibly even premium bonds

And then possibly some payment on the mortgage.

On the OH, it would be better to pay the OH a £5.2k salary if it is an LTD company structure. This is better than using her as a savings tax shelter.

dunstonh

In reality we dont know anything of great detail about the OP so none of us can really say what is right.

The investment option could be right. Paying the mortgage could be right.

I personally would invest but that suits my investment knowledge, experience and risk profile. However, I would probably recommend clearing the mortgage in this case (assuming inexperienced investor).

There is no one size fits all solution.

Flynn_2

dunstonh wrote: »

If they are not Independent then they will not be unbiased.

How unbiassed will they be even if they are so called "independent" if, as do most IFAs, they receive remuneration from the investment companies they recommend whether that is as an upfront fee or as an annual trail?

Some investment managers also pay IFAs higher rates of commision than other companies or different rates for different products, presumably not because they want to be generous, but on the well-founded assumption that "independent" advisors are more likely to recommend those products.

If it's the investment company who pays the piper, it's worth considering who will ultimately call the tune. :rolleyes: