Late twenties and fairly clueless. What should we be doing?

Captain_Hook wrote: »

That's really interesting advice and thank you for explicitly spelling out a couple of things! I ran a through calculations based on switching to a 1/45th Accrual Rate - based on my current salary being £46,497.

Additional Cost for the Year of faster accrual: £2,408.54
Total Pension Amount for the Year: £1,033.27 (1/45th)
Standard Pension Amount for the Year: £815.74 (1/57th)

So, based on current salary, I believe that means that I have to decide whether paying an extra £2,408.54 per year in employment is worth the additional £217.53 to the pension amount per year. That would indeed bring me back to the basic rate of income tax (although I'm seeking promotion to assistant headship so that may be temporary) and could also lead to savings in National Insurance contributions and Student Loan repayments.

Yes, promotion may push you back into higher rate tax, but you would still continue to get tax relief on the contributions, so it would stil be a tax eficient use of the money.

Obviously the figures you've worked out are pension accrued from one year, so the real figure at retirement will be many times greater and, as you say, it has additional benefits during your working lifetime.

Captain_Hook wrote: »

Keeping in mind that 2056 (our NPA) is a long way away - and it's not unlikely that this is revised upwards before we get there - I suppose it makes sense to have a relatively diverse 'portfolio' of savings/investments to fund any early retirement (without needing to draw (actuarially adjusted) pension benefits. Correct me if I'm wrong but there there seems to be two difficulties: 1) inflation eating away the value of low-yield savings, 2) government changes to pension schemes and tax laws.

Inflation is the big problem with cash savings. You should keep an emergency fund in case of unexpected expense and loss of employment, but beyond c. 6 months of expenditure - "rainy day" - plus another lump for "large expenditure", like new cars (re-build the fund when you use it) it is not really worth keeping your wealth in cash. If you don't have a fund of money like this then I'd suggest building the "rainy day" section up first and then split new savings between S&S investments and building up a "large expenses" fund. (With cars, for example, you are always going to be better off if you can pay in cash rather than taking finance deals - oh and buy secondhand too, even 1 year old cars come with a hefty price reduction on new and you couldn't tell them apart).

Captain_Hook wrote: »

With the latter in mind, upping my pension contributions sounds like the most tax-efficient way (currently) of saving for retirement. However, in order to give us the opportunity to retire earlier should we wish to, we need to consider ways of funding 'the gap' - let's say NPA-8 if we were to aim to retire at 60. With inflation in mind, shoveling money into cash ISAs are presumably a 'Don't bother'. SIPPS could be a consideration but, if I become a deputy or headteacher or my wife move closer to FT, we may well approach LTA.

Even as a deputy in a large school you are unlikely to reach your LTA. Headship may make that more of a possibility, but the size of school has an impact on salary, so you may not. However, you are right that the LTA could be reduced and then you may find that you do reach it. There have been reductions in it, so it is not entirely unlikely.

"Funding the gap" is probably quite a good way of looking at the situation. If you can build up an investment pot that will cover that period then it will help not to draw your pension. However, it might be that you still decide to draw it early and use the investment funds to augment your pension income. This is obviously something you'd need to give consideration to closer to the time, but a Target Retirement fund (see below) may help in this way - you could choose a target retirement date near your 60th birthday and have another fund that was intended to add in additionally at 70, perhaps.

Captain_Hook wrote: »

That leaves us with making better use of non-cash ISA tax wrappers - namely S&S ISAs and LISAs. To matters keep matters, we could invest in funds like the Vanguard LifeSystems offerings and aim to beat inflation between now and, say, NPA-8 (i.e. 2048).

I think the Vanguard LifeStrategy funds are a good option, particularly where investing is not something you have a great passion for and gain enjoyment from researching and trading. You might also want to have a look at their Target Retirement funds. These are similar to the LifeStrategy, but rather than being a fixed ratio of equities to bonds, they change over time, reducing equities as you approach your retirement. They may be a suitable alternative. Have a look at the Vanguard site.

If you do go down the Vanguard route then to begin with the cheapest way of doing it is through their own platform which only charges 0.15% platform fee. Once your investment grows past a certain point, however, you would probably want to move to a fixed fee platform like iWeb to reduce your costs. It would probably be a few years before you got to that point, but it is worth keeping in mind to do an annual review of costs.

Vanguard don't offer a LISA, so investments with them would be through a normal ISA, but if you were using both products there is nothing stopping you using a different platform for the LISA and (if you wanted) still investing in the same funds there. If it were funds you intended to invest in then your options for LISAs come down to AJ Bell Youinvest and Hargreaves Lansdown. For my money Hargreaves Lansdown work out cheaper to use for a LISA investing in specific funds like those offered by Vanguard.

You might consider having a Target Retirement fund through Vanguard's ISA and a LifeStrategy fund through Hargeaves Lansdown's LISA. It is an option to consider. That's all I can offer - things for consideration. I hope what I say is helpful, even if it is to consider it and then dismiss it as not th best option for you.

Captain_Hook wrote: »

In the next few years, we should also be looking to overpay our (hopeful) mortgage (2.49% fixed rate to 2023 on a 90% LTV) and building up short-term savings goals (replacing cars, holidays, home improvements, funding maternity leave etc). This means that that we'd be talking about investing £hundreds rather than £thousands per month in ISAs - nowhere near maxing out our ISA allowances.

Even if it were only hundreds a year to begin with, it would still be worth doing. When you have worked out what your disposable income is after paying the bills then you can create a plan to reach your savings and investment goals. It sounds, however, that what you are looking at is hundreds per month, so that is a pretty healthy amount on which, over the long term, you should see pleasing returns.

Captain_Hook wrote: »

Very good points. I'm definitely talking about cosmetic changes and modestly upgrading the kitchen and bathroom - possibly upgrading the conservatory to a more useful structure in time - rather than multistory extensions.

When my partner and I bought our house we made a conscious decision that we would only spend money on things that we wanted to make the house "ours". Our attitude has been that if it does make it more attractive to a future buyer then great, but that it would probably ony be in the sense of getting them through the door and more inclined to make an offer, rather than make us a huge gain beyond simply the rise in prices.

I hope that you manage to work out a good way forward, and best of luck with looking for promotion.

atush wrote: »

Uhh- No.

As a HRTaxpayer, 100 into a pension costs you 60. How can paying off your mtg be better?

As for buying extra years? Well all depends on when you want to retire. If you are buying pension paid at 67, and want to retire at 57, you could be paid only 50% of that pension. Not a good deal to me.

So might be far better to pay into a DC pension of some kind (be it a PP or sipp or AVC).

The OP is a teacher and therefore in a defined benefit scheme. Your point is not relevant given how that scheme works. My suggestion isn't about buying extra years (sadly that was ended for teachers quite some time ago), but rather paying for faster accrual which changes the denominator from 57ths to 45ths, i.e. accruing benefits at a faster rate, so pension paid per year is larger. Yes, this would be affected by actuarial reduction if the pension is taken early, but that reduction is on a larger figure to begin with, and if you read my posts you will see that we were actually talking about using investments to fund the gap between actual retirement age and age for drawing the pension (as one possibility). Furthermore, they would not be a higher rate tax payer if they were to use faster accrual, and even if they once again became one it would still benefit them.

Anybody in TPS who can afford it would be unwise not to give serious thought to using faster accrual. TPS is a defined benefit scheme (like other public sector schemes) and therefore not even remotely the same as defined contribution pension schemes. You need to understand the rules of the specific scheme as they are very different.

BobQ wrote: »

Yes Faster Accural can be used to increase the pension but surely the point being made is that the pension is payable at normal retirement age and 10 years of actuarial reduction will significantly impact this (higher pension) by as much as 50%.

The alternative is to create another means of funding the gap between early retirement and NRA, and that may well be a DC scheme. Someone paying Faster Accural of 1/45 will presumably be paying an extra 5% or so into the CARE scheme. The same money put in a SIPP would provide a more flexible solution to bridge the gap.

Both OP and partner have some risks of breaching the LTA of course which would be a risk for someone on a GP's salary. If the OP is a high achieving teacher it also could be a concern for someone on a Headmaster's salary at a large school.

All points I've already covered in previous posts (potential to reach LTA, funding the gap - including buy-out options).

The faster accrual is a guaranteed return, whereas a DC scheme is not.

atush wrote: »

Rubbish.

A teacher can have a DC scheme running alongside and should, if they want to retire earlier than scheme age.

Enhancing their pension, then taking a 50% hit is an absurd choice. It would be a good choice if they plan working until scheme age (ie 67).

No it isn't rubbish. You may prefer a different strategy, but that doesn't mean that what I said is rubbish.

I never said that a teacher couldn't have a DC scheme in addition to their DB scheme. Don't put words in my mouth.

It isn't an absurd choice at all as it offers a guaranteed return. You've also completely ignored the fact that I had actually been discussing with the OP the idea of "funding the gap" alongside faster accrual.

Actuarial reduction is not 50%. Check the GAD for actuarial reduction factors. You aren't even close.

Oh, and NPA is 68 for the OP not 67, but then why would you worry about getting that fact correct when you haven't with any of the others?

Please take your straw man with you.