Advice on my plans please

Hi Guys,

Apologies in advance for the long post, looking for a bit of a health check on my current situation and if my strategy going forward sounds in anyway sensible. I have posted like this a couple of times before quite a few years ago, but I am now a bit older and have more dependents so thought it best to check in again for some critique and advice.

So here is my current situation I am a self-employed contractor in the finance industry operating through a Ltd company which also employs my wife (we are both 36), we have two children 6 and 4.5 years old (both now at school). We moved into our house 4.5 years ago and it was a big push for us to afford especially with two young children however we have done OK but the house is old and we have had to put a lot of things right over the last few years so that has affected our finances.

My earnings as a contractor have provided well for the last 5 or so years and I have been lucky enough to have had hardly any breaks between contracts however my current financial situation leaves me feeling uneasy, along with the fact that our spending is too high, I must clarify though that the spending is not so much on ourselves and fancy things but a lot goes on our kids (we have next to no other family so we provide everything for them, birthdays, xmas, activities etc...), we now realise we haven’t realised just how much we have been spending month to month that was at the detriment to savings and preparation for the future.

With all that said let me give the picture, our current situation is as follows:-

House current market value - 720k approx.
Current Mortgage - 420k (including 113k I have just re-mortgaged for to do a 2nd floor extension and ground floor re-layout) just fixed for 5 years @ 1.94% over 28 years

My wife and I have a stocks and shares ISA each with Robo-investor Nutmeg - total value currently about 25k running at currently a 10 - 12% return on monies invested

We have opened two Marcus accounts and have put the extension money from the mortgage and an additional 12k in there at 1.5% easy access (we did two accounts so that we do not have over 85k in any one account). The extra 12k was something I had managed to save over the last 2 years as we agreed to take all four of us to Disney Florida in October 2019 with this covered I can focus purely on savings and investments.

My wife and I hope to have full state Pension as we are both paying the contributions although this will depend on how my working life continues obviously.

Here is one sticking point we have no private pension, I never signed up when i used to be an employee and I went contract about 6 years ago.

We have no debt other than our mortgage and two cars which are personal lease contracts, no credit card debts or other loans.

I also only have 1k left in my emergency / out of contract monies as I had to use what I had in there to put a few problems right on the house and some various other day to day bits.

So without going into a total SOA at the end of a normal month after paying all bills and outgoings and allocating £450 each into mine and my wife’s current account (this is what we do to live off in the coming month, kids school clubs, going out at weekends with kids or the occasional meal out etc...), after sorting all this we are typically left with 2-3k however it has been the case for the last little while that we have been occurring debt in the form of overdrafts totaling anything from 1k - £1500 which has been severely denting my ability to save or invest as this would leave anything from only 1k to £500 or so.

My plan going forward to tackle this situation is as follows:-

1. We will do our best not to overspend the money we budget and economise more which then reliably should leave 2-3k a month after all expenses (hopefully more).
2. Based on above contribute a total of £1000 between the two stocks and shares ISA
3. Based on above overpay the mortgage by £800 - £1000
4. I wish to open a pension and pay into it directly from my Ltd Company, approximately £500 a month which I believe would reduce my take home by about £400 a month but would actually add £600 to the pension due to government top up.
5. Based on above pay £500 or whatever residual there is into my emergency / out of contract fund monies.

I have actively steered away from things like Buy to let as although I could probably get a BTL mortgage for a small flat somewhere the yield against the initial costs and ongoing management have always put me off, maybe I am wrong though?

Also just to be clear I am currently trying to get planning permission for my extension which is proving troublesome as I live in the Greenbelt, however I am hoping to resolve this as this is hopefully our forever home and will form part of our long term investment. I believe by doing what we plan on the house the house would in today’s market have a value of above £850k and I hope due to the scarcity of property in our area and still being commutable to London this will continue to appreciate over the next 15 years. So once the extension is done I would hope our LTV would be sub 50% and coupled with over-payments I hope to seriously reduce our mortgage debt.

It is forever present in my mind that we will not be having any windfalls in the future, no inheritance or family assistance in any form so the responsibility of our family's future and our retirement situation rest with us and us alone. I often feel I have made mistakes and should be in a better position but this is where we are and I am now facing it all head on trying to put a decent plan in place. Please give your opinions and if I am missing a trick or have got my priorities wrong, I really appreciate everyone’s input.

Thanks Guys :)
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Comments

  • greenglide
    greenglide Posts: 3,301
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    You aren't "self employed".


    You are employed by your limited company.


    A huge difference.
  • Prism
    Prism Posts: 3,791
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    kerrjp wrote: »
    4. I wish to open a pension and pay into it directly from my Ltd Company, approximately £500 a month which I believe would reduce my take home by about £400 a month but would actually add £600 to the pension due to government top up.

    I just want to focus on that part for the moment. If you pay directly from your company into a private pension or SIPP the government does not top it up. However what does happen is it reduces your company profits by the same amount (its a company expense) so you don't pay the corporation tax on it (19% of that amount better off). Also, since its not salary you don't pay any NI, Income Tax or Dividend tax either.

    Its pretty much the most tax effective way of extracting money from your limited company.
    It could work something like...

    Pay salaries to you and your wife up to no more than the NI primary threshold - currently £8424
    Keep enough cash in the business to cover expenses, growth and loss of work for an extended period.
    Pay dividends to each you to top that up to your required living expenses but not enough to pay the 40% tax rate (unless you absolutely need that)
    Pay the rest up to 40k per year into your pension (monthly or yearly up to you)
  • kerrjp
    kerrjp Posts: 35
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    Hi Prism,

    Thanks for the clarification, I got confused between the employer contribution and any personal one, I believe I am still best off paying into the pension straight out of Ltd company for the reasons you state. Our income structure from the Ltd Company is as you describe with the salary and dividend payments, all that is missing is the pension contributions.

    Hi greenglide,

    Sorry for the confusion a poor choice of description on my part. :(
  • Alexland
    Alexland Posts: 9,652
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    In addition to the Ltd company pension contributions have you considered S&S Lifetime ISAs for a 25% bonus with no tax on withdrawal from age 60? Your rate of return from Nutmeg looks optimistic suggest you consider switching to someone cheaper and investing in a comparable mixed asset fund series.

    Alex.
  • kerrjp
    kerrjp Posts: 35
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    Hi Alexland,

    The Nutmeg return was only what it currently shows but has only been in there 2.5 years, I as thinking a return on average of 6-8% on those accounts would be feasible over the long term, I am looking at a 10 - 15 year investment possibly longer.

    I presume the S&S Lifetime ISA would have to be personal contribution? I am unsure if i am better of in a pension through the ltd company due to the tax savings or to do personal contributions due to govt top up or to as you say do the lifetime ISA for the 25% bonus? or maybe spread across each?

    Thanks
  • pip895
    pip895 Posts: 1,173
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    My slight concern is that you are potentially going into a major building project without much contingency - these things have an awful tendency to over run both in time and money. I am surprised you took out the additional mortgage before getting planning?

    If you do get the planning sorted, then you will need to keep a carful eye on costs. We built our current house and ended up overspending on the structure (rogue roofer) and had to economise on things like the kitchen and bathrooms. Unfortunately for a forever home, putting in a top range kitchen rather than a more ordinary sensible one (which is what we went for in the end) makes little financial sense. Once its 15 + years old, who ever buys from you will want something different anyway:(.

    So personally unless your moneys put aside include a sizable contingency I would put the pension on hold and build up your reserves - once your building project is behind you, pension is a great idea though.
  • kerrjp
    kerrjp Posts: 35
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    Hi pip895,

    Without boring you with all the details of our plans for the extension I should explain for the build we are doing we are increasing the size of our upstairs over an existing extension which already has footings to take the weight, so essentially creating an additional bedroom upstairs and moving our current downstairs bathroom upstairs also, the down stairs works are largely cosmetic and re-purposing of rooms with the removal and re- positioning of two internal walls.

    I have had quotes for all the works and the extra mortgage I have contains some contingency, we have some options on reducing cost on some things such as type of new stair case, flooring options and bathroom suite, but we are not touching our kitchen as we only did this 3 years ago. I had to take the mortgage as my last mortgage deal was with TSB on a higher rate with 2 years to run on a fix, due to all their computer issues early this year I was offered to leave them without any early repayment charges, so given that interest rates are very low now I had the option of coming off a 2.5% fix to a 1.94% fixed for 5 years with the additional borrowing so was a bit of a no brainer.

    If we do not get the planning then we will have to rethink on what we want to do, either way I would guess that if we decided to stay in our home for the next 5 -10 years and not move that i would be able to get a better return on the extra money that 1.94% so would be better of to invest it and then use it to pay down the mortgage when needed.

    Totally agree with your view that these things overrun but in my mind there are always going to be competing uses for money but my head is telling me if i do not start putting something substantial away for later on we will come unstuck.

    Thanks
  • pip895
    pip895 Posts: 1,173
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    Sounds an eminently sensible plan - I actually did the plans for someone with a very similar project - moving the bathroom upstairs is always a good move if you can do it. We got it through planning second time round - hope it works out for you to.

    Contingency in place, then pension through a Ltd company is a very good move. I wish I could say it gets easier but teenagers are even more expensive - make sure they know that Florida is a special holiday and not an annual event lol.
  • gary83
    gary83 Posts: 905
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    I'm not trying to being too critical but it seems to me from reading that you've recently realised how expensive young children and old houses both can be.

    You've taken out a new mortgage for £113,000 fixed at 1.94%, an impressive rate for a five year term, however then you've had to put that money in the best account for easy access, but that only pays 1.5% so your losing 0.49% and haven't managed to get planning permission yet? How long would you anticipate it take to get planning permission? What if you couldn't get it? Or the usual unexpected problems cropped up during the build.

    Working as a contractor has provided a good income for 5 years, you recognise that & In your own words say you've been lucky, again I'm not trying to be negative, but that luck could eventually run out, due to the kids expenses and house expenses your emergency fund has dropped to "only a grand" (again, probably better than a lot of people's) and your having to use an overdraft facility. If you had a period without a contract or the building work developed extra costs that £1000 probably wouldn't go all that far & im presuming you really wouldn't want to touch your S&S ISA unless it was a real dire emergency.

    Saying all the above you then have an additional £12,000 but you've ringfenced that in your mind and have already mentally allocated that to spending on a holiday in only 12 months time, do you think you'd be comfortable spending that much money on a couple of weeks away?

    Don't get me wrong, family times important, you should spend time enjoying it - I'm not saying don't have holidays or anything but I'm not sure in your position I'd be spending such a large amount, just personally think I'd probably look back and regret it.
  • kerrjp
    kerrjp Posts: 35
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    Hi gary83,

    Thank You for your comments, I took the extra money early as I did not want to lose the 5 year fix deal opportunity and then not be able to raise the money to do the house. We have been refused planning and we have made an amended application trying to mitigate the concerns of the council, the reasons for refusal are ridiculous and incredibly biased but long story short we are trying our best, we would know within another month if we have permission, if not then we would have to appeal and that would take at best another 8 weeks on top, so as i see it we wont be starting until January at the earliest if we start at all. However if we appeal and cannot do what we need there is still modification that can be done under what remains of our permitted development rights at the ground floor level. This is my last resort fall back but what I am trying to say is that either way by January / February next year I will be able to use some of that money to improve my house as well as add value. whatever I do not end up using should I not be able to do all of our plans i would have to decide whether to use to overpay the mortgage back as fast as I can within the over payment limits or use the money to top up our S/S ISA's and pension with the idea of getting better than 1.94% in the longer term.

    As for the work situation I work on year long contracts at the moment and have just renewed for another year, although there is always uncertainty, there is every reason to think that I will be in work for at least another year if not two so I have some security although not 100% (but then no job is).

    Totally take your point on the holiday, it is something I committed to and was a dream of ours to do as a one off for our children, this would certainly not be a yearly event. I have worked very hard including secondary contracts to amass the money to cover that holiday and ring-fenced it for my own piece of mind.

    Obviously hard times could always hit for a multitude of reasons, which is why I wish to increase my emergency fund as well as the other objectives. You are also correct we should not be going into our overdrafts, this is in all reality overspending on both our parts on the day to day items that we need to economize on.

    Thank you for your input you make some valid points and I am trying to take on board everyone's views to make sure I am doing the best I can, the one thing I am very nervous about i the fact I have left it this late to start my pension and that trying to get that in place is now that much harder.

    Thanks
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