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  • FIRST POST
    • noworries182
    • By noworries182 13th May 18, 4:52 AM
    • 1Posts
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    noworries182
    What to do with our savings?
    • #1
    • 13th May 18, 4:52 AM
    What to do with our savings? 13th May 18 at 4:52 AM
    Over the past years Ive had a decent job and managed to buy a house with around 145,000 left on the mortgage and also squirrel away around 70,000 of savings.

    Recently took a new job with less money (but less stress), myself and my wife roughly earn 60,0000 a year combined, So we are still able to save money each month but not like we did before. We are both 30 and have a baby daughter, hopefully well have another child in the future.

    Based on the above, I just wanted some advice on what you would suggest doing with these savings. Keep them as a fall back in case one of us is made redundant, spread it across various savings accounts, use it to pay off lump sums of our mortgage, invest it (if so where) or put it into a pension plan?

    Thank you in advance for those who take the time reply.
Page 1
    • DiggerUK
    • By DiggerUK 13th May 18, 7:41 AM
    • 2,973 Posts
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    DiggerUK
    • #2
    • 13th May 18, 7:41 AM
    • #2
    • 13th May 18, 7:41 AM
    With 70k in cash earning next to nothing, and 145k of debt the answer is simple. Kill the mortgage asap.
    You will have an immediate drop in your outgoings, a far more affordable mortgage, and a bigger piece of equity in the roof over your head.

    With a combined 60k a year income, and both working, you do not need a large rainy day fund. So only keep a small amount in savings.

    As to your retirement finances, you have enough time to sort that out. The biggest assett you need in retirement is a paid for roof over your head. Clear the mortgage, then work on retirement financing..._
    I am not now, nor have I ever been, a Financial Adviser.
    'Forward to the British Spring' 'Viva Wikileaks'
    • Zorillo
    • By Zorillo 13th May 18, 7:54 AM
    • 156 Posts
    • 84 Thanks
    Zorillo
    • #3
    • 13th May 18, 7:54 AM
    • #3
    • 13th May 18, 7:54 AM
    I broadly agree with Digger, although if you don't want to 'clear' the mortgage you could overpay it instead, to reduce the term and provide a buffer if your incomes do fall again in the future (eg more children, redundancy).

    If you have pension provision through work then you should increase your contributions to maximise what your employer will match. I pay slightly more than that into mine because my employer isn't massively generous (I pay 10%, they pay 6%).

    If you already do either of these, or doing this still leaves you with a big pot, I'd invest the money for the long term in LISAs, ISAs and pensions.

    If you have no current pension provision through work this would take priority.

    Or if you'd sleep easier once your mortgage has gone, you could do worse than what Digger has suggested.
    • MK62
    • By MK62 13th May 18, 8:05 AM
    • 67 Posts
    • 45 Thanks
    MK62
    • #4
    • 13th May 18, 8:05 AM
    • #4
    • 13th May 18, 8:05 AM
    Possibly all of the things you suggested, plus maybe start something for your daughter.

    I'm not sure where you currently have the money, but it's a lot to leave in an easy access account for instance.

    I would probably look at some interest paying current accounts, which also give you access to regular saver accounts - many of these will pay 3-5%, though it is on relatively small sums - this very site has details on these.

    Then I'd probably look at putting some in a 1 yr fixed rate bond - again this site has details of the better paying ones.

    After that, you could look at a couple of stocks and shares ISAs, one each for yourself and your wife (I might wait a bit on that though with the markets currently so high - either that or perhaps better is to drip it in bit by bit over time into actual investments - probably funds or Investment Trusts if you are new to stock market investing)

    You've already mentioned topping up pensions - though it depends on your current pension arrangements as to the best way of doing this.
    It's a judgement call on whether paying into pensions (or indeed ISAs) is a better use of the money than paying off debt (such as your mortgage) - as it's a long timeframe you can only make a guess - at the moment it probably favours topping up your pensions, though this can change. Obviously paying into a pension locks your money away until 55, so that could be a consideration in your planning.
    As mentioned by several in another thread on this subject, you need to run some modelling of various scenarios to get a better of idea of the possible outcomes.
    Also mentioned in that thread, is that you can always do a bit of both.

    Your attitude to risk is also an important factor - by keeping debt and investing spare money on the stock market, you are effectively borrowing to invest - there's nothing wrong with that per se, as long as you do it with your eyes wide open, and fully understand/accept the risks.
    • kidmugsy
    • By kidmugsy 13th May 18, 11:06 AM
    • 10,512 Posts
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    kidmugsy
    • #5
    • 13th May 18, 11:06 AM
    • #5
    • 13th May 18, 11:06 AM
    Consider income protection insurance.

    http://monevator.com/do-you-need-income-protection-insurance/
    Free the dunston one next time too.
    • dawyldthing
    • By dawyldthing 13th May 18, 11:11 AM
    • 2,882 Posts
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    dawyldthing
    • #6
    • 13th May 18, 11:11 AM
    • #6
    • 13th May 18, 11:11 AM
    I'm another to pay the mortgage off. Yeah you can make the money work got you but it's pitiful returns really. I paid mine off and it's a huge relief and now I work to live rather than live for work
    My targets to end 2018:
    1) To get down to 11 st 7lbs then treat to a safari. At start 17 stone 7 lbs *61lbs lost* *30lbs to go*
    1st started SW16st13lbs tues11/7/17 - 38 weeks -53lbs
    2nd -> target 11 st 7lbs
    2) to find new challenges
    • FatherAbraham
    • By FatherAbraham 13th May 18, 11:58 AM
    • 765 Posts
    • 587 Thanks
    FatherAbraham
    • #7
    • 13th May 18, 11:58 AM
    • #7
    • 13th May 18, 11:58 AM
    Over the past years Ive had a decent job and managed to buy a house with around 145,000 left on the mortgage and also squirrel away around 70,000 of savings.

    Recently took a new job with less money (but less stress), myself and my wife roughly earn 60,0000 a year combined, So we are still able to save money each month but not like we did before. We are both 30 and have a baby daughter, hopefully well have another child in the future.

    Based on the above, I just wanted some advice on what you would suggest doing with these savings. Keep them as a fall back in case one of us is made redundant, spread it across various savings accounts, use it to pay off lump sums of our mortgage, invest it (if so where) or put it into a pension plan?

    Thank you in advance for those who take the time reply.
    Originally posted by noworries182
    Don't pay your mortgage off: http://monevator.com/not-paying-off-my-mortgage/

    Ensure that you can pay your mortgage if you lose your income.

    Warmest regards,
    FA
  • jamesd
    • #8
    • 13th May 18, 7:03 PM
    • #8
    • 13th May 18, 7:03 PM
    around 70,000 of savings ... myself and my wife roughly earn 60,0000 a year combined ... We are both 30 and have a baby daughter, hopefully we!!!8217;ll have another child in the future. ... Based on the above, I just wanted some advice on what you would suggest doing with these savings ... ?
    Originally posted by noworries182
    I suggest that you learn about venture capital trusts and effectively stop paying income tax by deferring 70% of your income for five years.

    VCTs offer 30% income tax relief in the tax year of purchase, paid by HMRC as a tax refund or via PAYE within the year, after purchase. Capped at the tax that would have been payable that year. You have to hold for five years or repay the 30%, except after death. After five years you can sell and get the 70% plus or minus investment performance. Most VCTs pay a few percent a year in tax exempt dividends.

    Say you have 25,000 a year of basic rate income between you. That would incur income tax of 25,000 * 0.2 = 5,000. You can get VCT tax relief of 5,000 by buying 5,000 / 0.3 = 16,666. Buys are normally in multiples of 1,000 so say buy 16,000 worth. You get back 16,000 * 0.3 = 4,800 from HMRC leaving the remaining 11,200 tied up for five years as part of the 16,000 of VCTs that you own.

    In practice you'll normally get anther 10-30% of the 16,000 paid out in dividends over the five years from the investment performance. Depends on the specific VCTs used and their performance.

    At the high point you'd have gross 16,000 * 5 = 80,000 in VCTs at the five year mark, hopefully diversified across many. But net cost of 80,000 * 0.7 = 56,000 less dividends, so already doable with your current savings.

    I've done a combined calculation for simplicity but the buys and relief have to be done by each of you as individuals.

    Unlike pension tax relief you can get this 30% relief once every five years, so over the long term your potential relief is far higher than from a pension. You should still use pensions but I'd put VCTs first in priority except for amounts that get employer matching.
    Last edited by jamesd; 13-05-2018 at 7:05 PM.
    • ChasingSunshine
    • By ChasingSunshine 14th May 18, 8:10 AM
    • 128 Posts
    • 992 Thanks
    ChasingSunshine
    • #9
    • 14th May 18, 8:10 AM
    • #9
    • 14th May 18, 8:10 AM
    Just some questions for you to think through
    Is this 70k all of your savings or extra on top of emergency fund? Do you already have a pension plan with work? What interest are you paying on your mortgage, is it a fix, what is your LTV and how much is needed to get you down to the next band? How secure are your jobs (both you and your wife), could you manage on one income in case of redundancy or if one of you took unpaid leave after a second baby?

    I would ensure you had some cash savings earning the highest interest you can - have a look at current accounts and you may need to shuffle some money around. How much to keep in cash varies depending on your circumstances but most people recommend 3+ months of expenses.
    I would also look at pension contributions. Does either of you pay higher rate tax? Does your employer offer a match on pension contributions? At 30 retirement seems far away but your expenses are likely to rise as your child gets older so contribute what you can now plus you will get employer contribution and tax relief on what you can put in.
    Depending on your mortgage you might want to overpay. How much will depend on the particular deal you are on. If on a fix overpayments are often limited to a % so don't put in more than this. Also look at what LTV you have and if you can get down to next band by overpaying or keeping some of the money aside for when you next remortgage. Interest rates decrease as LTV falls eg 90% mortgage is generally higher interest than 80%.
    S&S ISA are a good option to avoid paying tax on investment gains in the future. There is lots of information on beginning investing so have a read around. Often global index funds are recommended but you may decide something else is suitable.

    I would keep well away from venture capital trusts on the information you have given they are very unlikely to be suitable.

    I would probably do a little bit of everything - have cash savings in highest interest accounts, enough in pension (both you and your wife) to get employer contribution / get out of higher rate tax band if appropriate. And then split between the mortgage and starting a S&S ISA.
  • jamesd
    I would keep well away from venture capital trusts on the information you have given they are very unlikely to be suitable.
    Originally posted by ChasingSunshine
    That seems odd given their circumstances that make them look like a good match (lots of savings, potential child need for the money before pension age, still saving, time to get multiple lots of 30%, unlikely to get more than basic rate pension relief and once only, mainly not short term investing), what about them causes you to have that view?
    • kidmugsy
    • By kidmugsy 14th May 18, 6:01 PM
    • 10,512 Posts
    • 7,206 Thanks
    kidmugsy
    I suggest that you learn about venture capital trusts and effectively stop paying income tax by deferring 70% of your income for five years. ... Most VCTs pay a few percent a year in tax exempt dividends.
    Originally posted by jamesd
    jamesd, I know you're a consistent fan of VCTs. Where is the best place to learn more about them?

    For instance would you please give links to some of your own posts on the subject?

    Specifically: do the dividends remain tax-exempt in the hands of whoever inherits them after the death of the original investor? Even if the inheritor is a discretionary trust?
    Free the dunston one next time too.
    • bostonerimus
    • By bostonerimus 14th May 18, 6:34 PM
    • 1,814 Posts
    • 1,166 Thanks
    bostonerimus
    My issue with VTCs is in the title "Venture Capital". So it's speculative small cap. I would advise the OP to maximize other tax advantaged options like pensions and ISAs first. Also paying off the mortgage is a very conservative approach and I would once again only think about it once pensions and ISAs are fully funded.
    Misanthrope in search of similar for mutual loathing
  • jamesd
    Where is the best place to learn more about them?
    Originally posted by kidmugsy
    The VCT section of The Lemon Fool is useful.

    For instance would you please give links to some of your own posts on the subject?
    Originally posted by kidmugsy
    Use the forum advanced search with jamesd as the poster and VCT as the keyword. Albion would also be a useful keyword.

    do the dividends remain tax-exempt in the hands of whoever inherits them after the death of the original investor? Even if the inheritor is a discretionary trust?
    Originally posted by kidmugsy
    Yes, the dividends are also income tax exempt for those who buy on the stock market instead of via a new issue.

    I don't know about the discretionary trust interaction but expect the to be exempt when the trust is paid. A different thing to how those being paid from the trust are taxed. Get advice on this.
    • Thrugelmir
    • By Thrugelmir 14th May 18, 10:03 PM
    • 58,442 Posts
    • 51,814 Thanks
    Thrugelmir
    If something is too good to be true it normally is. Sometimes being boring is the safest approach. As one should only invest what one can afford to lose. Capital can take years to accumulate yet minutes to be wiped out.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
  • jamesd
    My issue with VTCs is in the title "Venture Capital". So it's speculative small cap.
    Originally posted by bostonerimus
    It's smallish companies, compared to the main stock markets

    1. Company gross assets no more than 15 million
    2. No more than 250 employees
    3. Less than seven years old

    All at the time of the investment, which can be up to 5 million.

    VCTs vary greatly in what they look for, ranging from highly speculative completely new companies trying to exploit a new invention to older late-stage companies with a proved product and plan which are looking to expand.

    If you pick a VCT that's been around for a while instead of a completely new one you get some possible advantages:

    A. The companies it previously invested in have had time to develop and you're buying these more proved investments, not just those within the original investment limits.
    B. It may hold investments in things that are now deemed too low risk to be allowed for new money, good if reduced risk is what you want. My biggest holding has hydro and wind power, schools, hotels and care homes, all no longer allowed for new money.

    I would advise the OP to maximize other tax advantaged options like pensions and ISAs first. Also paying off the mortgage is a very conservative approach and I would once again only think about it once pensions and ISAs are fully funded.
    Originally posted by bostonerimus
    None of those come close to the tax advantages of VCTs. A 30 year old can get 150% tax relief before reaching pension access age, five lots of 30% Plus the benefit of the tax exempt dividends along the way.

    You do need to pay attention to your overall mixture of investments. It looks as though noworries182 wuld still be decently diversified, given the savings, continuing to save and being able to decide what potion, if any, to put into VCTs.

    Pension and ISA maxing first eliminates those who can get some of the greatest benefit from VCTs: income in the basic rate band.I haven't done any VCT investing with money taxed at higher rate, only basic. Then after five years they/I just keep on recycling the same money while upping the ISA and pensions with the boost from the ongoing income tax saving.

    I'd definitely go with enough pension contributions to get full employer matching.

    I'm now less keen on always trying to use the full ISA allowance because it's so high now that most people can't use it: 20,000 per person, so two thirds of noworries182's combined income. I've even withdrawn over 50k from my ISAs a year or two ago because of the relative ease of replacement later. Good for those with high enough incomes to be able to do everything, though.

    The VCTs I've held long enough to show results have been delivering reasonably, particularly my largest holding, Albion (AAVC). Not all and not perfect but good enough. But I've been saving so much for so long that VCTs are only about 8% of my savings.
    Last edited by jamesd; 16-05-2018 at 12:58 AM.
  • jamesd
    I know you're a consistent fan of VCTs. Where is the best place to learn more about them?
    Originally posted by kidmugsy
    If you're curious, my current holdings are given here.
    • bostonerimus
    • By bostonerimus 16th May 18, 1:22 AM
    • 1,814 Posts
    • 1,166 Thanks
    bostonerimus

    The VCTs I've held long enough to show results have been delivering reasonably, particularly my largest holding, Albion (AAVC). Not all and not perfect but good enough. But I've been saving so much for so long that VCTs are only about 8% of my savings.
    Originally posted by jamesd
    Anything giving dividends like 8% is going to be on the riskier end of the spectrum, you don't get lots of tax relief and big dividends for nothing. If it's only 8% of your portfolio then go for it. But I would not advise the OP to use VCTs just yet as they are still learning and even when/if they do get into them I'd keep the allocation small.
    Misanthrope in search of similar for mutual loathing
    • atush
    • By atush 16th May 18, 12:33 PM
    • 16,690 Posts
    • 10,398 Thanks
    atush
    I dont agree With Digger at all.

    What is your LTV? if it isnt ideal, putting Some of your money into the mtg might be a good idea, but not alot/all.

    What pensions do you both have? Pension is a good idea for some of your money (esp from earnings not savings in your case).

    You do need some of the cash to remain in cash- but getting some interest so keep maybe 6 months outgoing in cash- 30K maybe? Then put some in pensions (particularly for the OH if they are taking a career break), some in S&S isas and maybe some towards the mtg (or not) depending on the LTV.
    • theoretica
    • By theoretica 16th May 18, 8:19 PM
    • 5,151 Posts
    • 6,399 Thanks
    theoretica
    How much interest are you paying on the mortgage? How likely are you to want to move as your family grows?
    But a banker, engaged at enormous expense,
    Had the whole of their cash in his care.
    Lewis Carroll
  • jamesd
    Anything giving dividends like 8% is going to be on the riskier end of the spectrum, you don't get lots of tax relief and big dividends for nothing.
    Originally posted by bostonerimus
    Albion is actually towards the lower end of the VCT risk range. The deals were asset-backed, typically with a building that could be sold if necessary. So the school building, the care homes or the hotels. That's why I favoured it. Asset backed investing of this sort was banned for new investments as too low risk in the last batch of VCT rule changes.

    One quirk of VCTs is that because the dividends are tax exempt many look to pay out most of the total return after costs that way. So my AAVC holding is up 31% based on its cost to me after 30% discount (which means 91.7% of the undiscounted price, a capital loss on that). But it's paying me 2,1614 a year in tax exempt dividends. Based on current undiscounted valuation that's 7.6%. At the time of first purchase a review service estimated that it'd be losing about 1-2% a year of capital paid out in dividends, so not unexpected to get some capital back that way. At the moment the directors expect that revenue from the care homes will produce an ongoing positive capital change.

    Albion recently cut the dividends of most of the other VCTs they run a bit to prevent them from dropping in capital value via their dividend payments.

    If you compare to the main UK stock market at a bit over 5% plus inflation annual total returns long term, 7.6% minus the capital loss before inflation is not actually high. Fairly comparable, but the smaller companies are riskier. That's the price paid for the tax treatment. How much of that 30% discount ends up being realised on sale is one of the unknowns.

    The top five FTSE100 companies are paying dividends of 9.5%, 7.8%, 6.7%, 6.6% and 6.5%. With anticipated capital gains. Centrica, SSE, BT, EVRAZ, M&S. Three regulated utilities, a mining company and a retailer.

    Definitely expect more risk than a UK stock market tracker but it doesn't have to be very high risk unless you deliberately choose that sort of VCT. You can find rankings of them based on their investment types to get some idea where each one sits. I don't think any VCT is lower than the high risk classification of the UK stock market, though.
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