Pensions, Savings, Mortgages…

[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 opcorn:

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?

 

[cowboyhat]

You should talk to a financial advisor, but I think they'd agree with Lagers.

Stuff it in now because compound interest. You can reduce the monthly amout if/ when you need more readies for living.

 

[Paul B]

You're not far away from me are you? If so Rog Hindle (the smartest dressed climber you'll ever meet) would be a good starting point for pensions advice.

He also pointed me to someone for mortgage advice (after Shark's recommendation that was great retired) who has been brilliant; Peter Mullderig (the spelling may be off but I can dig out details).

 

[petejh]

One of your port of calls for good info on the ins and outs of pensions, mortgages, SIPS and ISAs should definitely be Moneyvator. Their content is top notch and you'll learn a ton of useful stuff there. Some of the contributors to the comments are very clued-up. Try this one for starters: https://monevator.com/sipps-vs-isas-best-pension-vehicle/

Don't disregard your £20k ISA - if you think you might want to stop full time work before you're able to draw your private pension then ISA's are great to bridge the gap between the end of earning income and starting to draw income from a private pension, as ISA's can be drawn from whenever you want. Depending on needs and wants you could split your contributions between pension/ISA for a time. There is also a way to get your full £20k ISA allowance every year, over the long term, without having a new £20k each year, if you're in the position of being able to open an offset mortgage. Worth considering, especially for tax-sheltering any possible inheritance lump-sums in the far future.
Obvs SIPPS and ISA require investing commitment and it can be overwhelming working out which fund to put money in. Again Moneyvator is your friend for useful information on tracker funds if you do decide to go down the SIPP route. A mistake some people make is trying to actively pick a fund theme - the general advice is don't. The no-brainer is to make regular auto-contributions into a global index tracker type fund with the lowest ongoing charge possible, and let global capitalism get to work compounding your money over the long term. That's not advice.

As others have said, if you're 40% taxpayer then the pension is virtually a no-brainer. It's impossible to say what income tax rates will be in 30- years from now but you'll possibly/probably not be withdrawing your pension income at 40% income tax, so it's a deferred benefit on the way in and a possible 20% tax saving on the way out at current rates.

 

[petejh]

On the specific question of whether you'd be better paying into a pension or paying down mortgage/starting with a smaller mortgage, they've done a few articles over the years. Here's one from this year: https://monevator.com/pay-off-mortgage-or-invest/

No definitive answer, emotions/peace of mind also come into the calcs.

 

[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

By way of reflection - I only had 2 years paying the higher income tax rate and at that time put everything that wasn't spent on drink and drugs into property. I lost most of that property due to relationship breakdown and not working for a couple of years, but in the end still managed to use the remaining equity to get myself reasonably stable.
I wouldn't have been able to do that if the money had been tied up in sensible pension stuff.
Just saying

 

[petejh]

Thought for a second you were going to drop that classic George Best line: ''I spent a lot of money on booze, birds, and fast cars. The rest I just squandered''.

 

[lagerstarfish]

Thought for a second you were going to drop that classic George Best line: ''I spent a lot of money on booze, birds, and fast cars. The rest I just squandered''.

I spent very little on fast cars

 

[Offwidth]

It's normal for ordinary professional people of my generation and the preceding one to 'have it all'. Owning a house, had a family, have a good works pension, extensive use of PEPs and ISAs, no student loans needed paying off (and Uni grants for the less well off). It sure makes expensive mistakes more manageable.

I think the young are being screwed and I'd be uncomfortable advising anything too firmly. Pension options are much shittier now compared to my final salary DB pension. Housing looks a bit bubble like right now. ISAs are the same as ever but are risky and currently turbulent (but are less tied up in an emergency than property), cash is going backwards (but we all should have a emergency buffer if we can afford it).

Despite all that, the advice above is good.

 

[James Malloch]

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).

yep hoping to have kids in the coming years. It’s one of the things which has actually made me think about starting to chuck a load of this in at the moment. I think in a 3-4 years the nursery bills etc might mean I’m less inclined to put money in to it. It seems especially worthwhile whilst we’ve still got 2.5 years left on our 1.9% mortgage rate. It doesn’t seem worth overpaying it. I’m lucky enough to have plenty spare at the moment but I’ve never really thought how big the tax savings could actually be before by just not storing it in cash…

(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

It sounds like maxing out some contributions over the next few years (before kids come along and whilst I’m still on a decent contract) might be well worthwhile then. Seems to be the prevailing view!

You're not far away from me are you? If so Rog Hindle (the smartest dressed climber you'll ever meet) would be a good starting point for pensions advice.

He also pointed me to someone for mortgage advice (after Shark's recommendation that was great retired) who has been brilliant; Peter Mullderig (the spelling may be off but I can dig out details).

I’m in Skipton so not far away. I’ll drop him a message, thanks.

One of your port of calls for good info on the ins and outs of pensions, mortgages, SIPS and ISAs should definitely be Moneyvator. Their content is top notch and you'll learn a ton of useful stuff there. Some of the contributors to the comments are very clued-up. Try this one for starters: https://monevator.com/sipps-vs-isas-best-pension-vehicle/

Don't disregard your £20k ISA - if you think you might want to stop full time work before you're able to draw your private pension then ISA's are great to bridge the gap between the end of earning income and starting to draw income from a private pension, as ISA's can be drawn from whenever you want. Depending on needs and wants you could split your contributions between pension/ISA for a time. There is also a way to get your full £20k ISA allowance every year, over the long term, without having a new £20k each year, if you're in the position of being able to open an offset mortgage. Worth considering, especially for tax-sheltering any possible inheritance lump-sums in the far future.
Obvs SIPPS and ISA require investing commitment and it can be overwhelming working out which fund to put money in. Again Moneyvator is your friend for useful information on tracker funds if you do decide to go down the SIPP route. A mistake some people make is trying to actively pick a fund theme - the general advice is don't. The no-brainer is to make regular auto-contributions into a global index tracker type fund with the lowest ongoing charge possible, and let global capitalism get to work compounding your money over the long term. That's not advice.

As others have said, if you're 40% taxpayer then the pension is virtually a no-brainer. It's impossible to say what income tax rates will be in 30- years from now but you'll possibly/probably not be withdrawing your pension income at 40% income tax, so it's a deferred benefit on the way in and a possible 20% tax saving on the way out at current rates.

Moneyvator is an interesting site, thanks Pete. I’ll have a proper look through it over the next week. I’ve put some savings into my Stock and Shared ISA to use up this years allowance before the tax years ends, though it’s basically just used to hold money at the moment as I’m not confident enough to know what to do. Is there anything that’s very low risk for investments in ISA’s? Low return but almost guaranteed cash/bond kind of stuff. Would be worth me doing that in the interim at the very least…

Hopefully moneyvator can offer some good insights on lower risk investments though. I noticed that I can actually invest in funds like the Prudential Pension funds too via the ISA which I hadn’t really realised. I’ve a lot to learn in this space. I feel stupid when my own investments go down, but don’t really mind when my current pension goes down as it someone who knows what they are doing is probably working hard to get it to go back up!

I’ve arranged a callback from a local Prudential financial advisor next week. That’s the fund my dad uses and whilst he’s retired and drawing his income from it, it’s actually rising in value still (though he doesn’t take loads out). I think I’d prefer the idea of someone else doing it all for me rather than having to make decisions but maybe I will change with a bit of research… My sister swears by her SIPP, for example, but she also knows what she’s doing!

It's normal for ordinary professional people of my generation and the preceding one to 'have it all'. Owning a house, had a family, have a good works pension, extensive use of PEPs and ISAs, no student loans needed paying off (and Uni grants for the less well off). It sure makes expensive mistakes more manageable.

I think the young are being screwed and I'd be uncomfortable advising anything too firmly. Pension options are much shittier now compared to my final salary DB pension. Housing looks a bit bubble like right now. ISAs are the same as ever but are risky and currently turbulent (but are less tied up in an emergency than property), cash is going backwards (but we all should have a emergency buffer if we can afford it).

Despite all that, the advice above is good.

I’d definitely agree with the young being screwed these days. Just the average salary to house price ratio is bonkers!

I’ve been fortunate to get some decent contracts (some very good) in an section of my industry with plenty of work which have allowed me to pay off the student debt that I had, and made some choices which worked out really well (living on a boat was super cheap and fun, and we then made money on it with the COVID boom), made a good choice with the house we have etc and got in before the rates rocketed.

However with investing I’m completely clueless and have always been a cash saver rather than thinking how we could plan for the future a bit better…

 

[James Malloch]

In a similar position and watching this thread with interest opcorn:

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

It’s partly the prospect of childcare in the future which Is making me think about this now!

Oh god! I’m sure I’d remember your face but I’m awful with names, sorry! I bumped into a few people from that trip in Siurana this winter - it was nice to see some familiar faces.

It was summer of 2013, how time flies…!!! Hope you’re doing well :strongbench:

 

[petejh]

Moneyvator is an interesting site, thanks Pete. I’ll have a proper look through it over the next week. I’ve put some savings into my Stock and Shared ISA to use up this years allowance before the tax years ends, though it’s basically just used to hold money at the moment as I’m not confident enough to know what to do. Is there anything that’s very low risk for investments in ISA’s? Low return but almost guaranteed cash/bond kind of stuff. Would be worth me doing that in the interim at the very least…

If you're putting your annual ISA allowance into a S+S ISA but having it sit in cash for any extended period of time, then you should defo consider opening a cash ISA as well. You can have both - a S+S ISA and Cash ISA. Obvs you can only put in up to the annual allowance between the two. A cash ISA will pay a better rate of interest than your S+S provider will. Best deals currently around 3.2% instant access, 4.2% for a 1 year fix. One other thing to complicate things - if you do open a cash ISA you'll be doing your future self a big favour if you make it a 'flexible' cash ISA - lots of companies offer them (often alongside non-flexible versions that look similar). The 'flexible' part means you can withdraw money from the ISA without that money losing it's tax-free protection, provided the money (or part of it) is repaid into the ISA within the same tax year. This opens up some serious long-term advantages for those with offset mortgages which you might want to consider when you get more time to read up on it.

As for low-risk guaranteed - that's what the cash ISA will do - give you 3-4%. I'm loathe to make a public recommendation on funds as I'm not a fund type of investor I'm an active investor - I would point you in the direction of the generic all-world tracker type of fund provided by ishares or vanguard. If it were me I'd be choosing an all-world with slightly reduced exposure to the US market and slightly increased to emerging markets but straight away that's an active decision which could bite whoever made that call. These 2 article should help you get your head around low-risk global tracker funds and why they're good for 99% of people: https://monevator.com/best-global-tracker-funds/
https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

Congratulations btw, you couldn't have picked a more volatile and nervous time in the markets - which is saying something considering the last 3 years. You're either just before a crash, or a big rally, or perhaps years of sideways chop. In other words it's impossible to know! And impossible to time but it's certainly stormy out there. If you see the markets tanking, invest!(not advice etc..)

 

[James Malloch]

As a slight aside, can you claim pension relief for previous tax years?

I.e. I didn’t work much this tax year, but for 21/22 i know i what would be available to offset against. At the moment im assuming that the coming tax year will allow me to make contributions, but theres every chance i might not find enough contracts (though i think it should be fine).

 

[Will Hunt]

I’ve a lot to learn in this space. I feel stupid when my own investments go down, but don’t really mind when my current pension goes down as it someone who knows what they are doing is probably working hard to get it to go back up!

The feeling that I get is that people are turning away from expensive managed funds and going with much cheaper tracker funds. I believe the research shows that managed funds sometimes do well, sometimes do poorly and that average performance doesn't beat the tracker. The advantage of the tracker is you don't end up paying for some London type to drive a nice car.

 

[Rocksteady]

Just a thought on a financial adviser - unless you have a lot of money or very complex affairs they may not be very cost effective.

Eg. Just a quick google found that Aviva for example would charge £3,500 on a £150k pension. 2.3%. So whatever fund/portfolio they pick has to outperform a fund you'd pick by yourself by this much. There is often a flat fee for advice - for Aviva it's £625.

Doesn't seem like a lot but on a £20k ISA that's over 3%. Again consider whether their fund pick is going to beat a tracker that you could have picked yourself using eg. Vanguard.
You can get cheap 'robo' advice from algorithm based tools using NatWest (£10) or Nutmeg or Moneyfarm or Wealthify etc. If you don't have the time to educate yourself those could be an option.

 

[Offwidth]

There are rip-off charges for managed funds where you can get the same product for lower fees in share supermarkets.