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Pensions, Savings, Mortgages…

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James Malloch:
I need to get my act together a bit with finances and having read the variety of detailed responses about pensions in the Politics thread, here seems a good a place as any to ask.

I’m currently in the decent position of having a well paid contract job which I’ve been doing for the last 3 years. For the first few years I saved a lot, bought a van and went on a long trip. Now I’m back I’m in another contract which lets me save a decent amount again.

We’re keeping an eye out on the housing market as we would like to move, and our savings are in a good position for what we need (basically to be able to move house quickly using them for a second deposit, or have enough cash to throw into the right house if it needs a lot of renovations doing).

At the moment my plan has always been to keep saving and be able to pay off the mortgage earlier, or if we find the right house then chuck it into that to lower the LTV, reduce interest rate, monthly payment commitments etc. It’s like this as I’ve always been quite averse to debt, especially when you start to think of what you pay in interest over the years.

But after a few years off paying into a pension I’m looking to get something set up for the new tax year. I’m in the higher (40%) tax bracket and have been thinking about what to contribute and it’s got me thinking about the mortgage.

Say I could put £20k into a pension / year. That’s the equivalent of £12k of savings after tax.

I’m 31 so over the next 30 years the pension might get to £36.5k (assuming 2% average growth), £66k (assuming 4% average growth) or even £162k (assuming 7% return which one website suggested was the average growth in the last 40 years). It could also go go down but I’d hope not over that timescale!

Putting it into the pension would mean having to borrow an extra £12k on a potential mortgage. But if that was at 5% interest over 30 years, then the total repayment would be £23k (based on mtg repayment calculator - and obviously rates could go higher again).

So putting it into the pension would likely mean a much better return in 30 years, right? In fact the annual pension growth would need to be 0.5% for them to be equal (based on compound interest calcs).

Is there anything that I’m missing with this? Is there anything in particular to think about when making such decisions other than ensuring we would still have enough money available for our needs (with stuff in reserve too).

Or is it worth getting a financial advisor for someone who wouldn’t be confident investing their own money in a SIPP (I’m completely clueless about stocks and funds…). And if so can anyone recommend someone? Basically it seems like for a bit of a change in current lifestyle, there could be some good long term benefits by getting pensions right early but I don’t really know where to start…

Will Hunt:
It all depends on your circumstances but I would consider that, although pensions are important, they're a contingency for retirement and the money only becomes available to you at that point - a point at which your kids are likely to be independent or near-independent and you'll have paid off your mortgage.

The money might grow more in a pension, but it might have more value in your life by spending it now on housing, preparing to start a family etc.

If your income is >£50k then you probably have enough to do some pension catching-up and be doing some mortgage overpayments/saving simultaneously, it doesn't have to be one or the other.

(I've assumed you're planning on having kids in the next 5 years because I think I've heard you mention that. I could be wrong).

lagerstarfish:
(tax relief plus pension investment growth) vs (cost of borrowing interest plus increase in property value)

at 40% tax relief I would be looking at building a secure pension early - it will be there later even if you have to stop work for any reason

also worth considering what can be passed on if you die

lukeyboy:
In a similar position and watching this thread with interest  :popcorn:

I'm about 5 years older, with 2 young kids and no spare income due to eye-watering childcare costs, but the youngest will be 3 soon so will get 30 free hours and then not long until school, when we'll be laughing. My pension contributions are pretty minimal at the moment but I'm keen to ramp this up and will be really useful to hear the views of those more informed.

P.s. Hi James, I remember meeting you at Ceuse about 8 years ago and climbing together a bit. No offence if you don't 😂

abarro81:
Your figures  imply you're quite a bit over the higher rate threshold (33k ish), so seems like it might be sensible to contribute everything you earn above the threshold and save/overpay below that? Unless you live like a king or have kids you'll surely be able to still save/overpay quite a lot?

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