Am I on the right track here...

[pmanson]

Hi All,

Just coming out of an intensive (self imposed) debt repayment plan just in time for the start of the new financial year (whoop).

So now it's time to look at saving for the future!

Aged: 32
Savings: £0
Current pension contributions: 4% matched by employer on basic salary
Tax rate: 40%

In the process of remortgaging now that we have enough equity to drop onto a lower interest rate on our repayment mortgage (savings on monthly cost will then go on to overpaying)

My 'plan' is as follows:

1) From 1st April increase my pension contribution to 6% (making a total of 10% on my base salary)
2) Additional voluntary contribution of 10% on my quarterly commissions into my pension (employer won't match this)
3) 'Upgrade my current basic Nationwide current account to their new FlexOne (IIRC) which pays around 3% on balances up to £2.5k
4) Split my April commission payment between said current account and the rest into a new cash ISA to start a rainy day fund
5) Build an initial 3 month contingency fund then look to extend this to the full £15k ISA allowance

All pretty basic but i'm starting from scratch and from looking around this seems sensible as the cash will be 'available'. Then next year look at schemes that are less flexible but offer better returns.


Cheers,
Phill

[fat80b]

Sounds like a good plan.

You didn't mention the interest rate of the mortgage you are moving on to - depending on the interest rate here, I would consider overpaying the mortgage alongside building up your initial buffer.

With most products, you can overpay up to some amount per month, get the interest saving immediately without the tax penalty of savings & can get the money back fairly quickly if you later need it. Even on a 2.x% mortgage, this could actually be better than a savings account paying 3% as a top rate taxpayer.

(For me, it also has the advantage of being psychologically harder to raid but maybe that's just me.)

Regarding the pension contributions, I would be looking at the current total value of your pension today in order to work out how much more to contribute. This probably depends on what your basic is.

Bob

[Claudia Skies]

1. Paying pension contributions to draw the maximum out of an employer is always worthwhile if you can afford it. Collect the free money.
2. Above that point, more thought is needed.

I'm always reluctant to "borrow money I've already got", which is what happens when you are saving and borrowing at the same time. Obviously the decision depends on specific rates of return, tax reliefs and other circumstances.

My rough rule of thumb is,

• With 40% tax relief - probably worth it.
• With 20% tax relief - make sure you've done the sums!

One possible thing to think about is use of ISA for part of your savings instead of pension. The tax relief arrives differently but over time can still be very valuable, especially for a 40% taxpayer. And the big point is that if your mortgage costs rise significantly you can sell ISA investments and pay down mortgage. Can't do that with a pension until much later in life (over 55/58)

[pmanson]

Claudia Skies said:

1. Paying pension contributions to draw the maximum out of an employer is always worthwhile if you can afford it. Collect the free money.
2. Above that point, more thought is needed.

I'm always reluctant to "borrow money I've already got", which is what happens when you are saving and borrowing at the same time. Obviously the decision depends on specific rates of return, tax reliefs and other circumstances.

My rough rule of thumb is,

• With 40% tax relief - probably worth it.
• With 20% tax relief - make sure you've done the sums!

One possible thing to think about is use of ISA for part of your savings instead of pension. The tax relief arrives differently but over time can still be very valuable, especially for a 40% taxpayer. And the big point is that if your mortgage costs rise significantly you can sell ISA investments and pay down mortgage. Can't do that with a pension until much later in life (over 55/58)

New mortgage rate is 2.99%. We also have 10k or so unsecured loan we took out as part of the original mortgage (the heady days of 100%+ mortgages) which is 4.99%.

There is no penalties for paying this back early so I will be using the monthly savings from the remortgage to clear this as quickly as possible (+ lump sum payments once I have my contingency fund).

Interesting point in regards to the tax relief, I was working on the assumption that paying £10 before tax into my pension (with a view that I can get it back later on having only paid 20% tax) would be better than taking the £6 now and saving it in an ISA.

At this point though I do need the flexibility to draw funds in an emergency though

[Claudia Skies]

pmanson said:

We also have 10k or so unsecured loan we took out as part of the original mortgage which is 4.99%.

Ok, so in round numbers 10,000 x 5% = £500 p.a. interest.

But that's paid out of income which has been taxed at 40%, so you have to earn 500/60 x 100 = £833 to pay that interest.

So in simple terms, £500 of interest is costing you £833 of pension.

As you have identified, paying down that loan asap can have advantages. Amongst other things, paying down debt is 100% risk free compared with making investments which, as they say in the risk warnings, "may go down".

[Claudia Skies]

pmanson said:

Interesting point in regards to the tax relief, I was working on the assumption that paying £10 before tax into my pension (with a view that I can get it back later on having only paid 20% tax) would be better than taking the £6 now and saving it in an ISA.

Your reasoning looks sound to me. I'm a firm believer in pension savings, especially if you can avoid 40% tax on the way in and hopefully only pay 20% on the way out while collecting a nice tax-free lump sum as well.

Where the ISA is useful is "flexibility". For instance if by the time you are 45 mortgage rates have increased to >10%, which is entirely conceivable, you can sell the ISA and pay down mortgage. Can't do that with a pension.

As usual, flexibility has some cost attached to it. It's just a question of how you feel about the balance of risks. There's no magic answer AFAIK.

IMO the combination of,

• Paying down debt
• Making pension contributions (especially if 40% relief), and
• Making ISA investments

can be a very effective financial strategy.

[pmanson]

I thought i'd update this as it's been a few months now!

Since the end of May we've (i've) been over-paying the unsecured loan part of the mortgage by £270ish per month (it's £64) with a view to getting this cleared down completely in the next year or so.

Having been playing around with the family budget over the weekend we can see the opportunity to add another £300 p/mth to this payment which would mean we could clear our mortgage about 14 years earlier than planned.

My thinking is that once the unsecured loan (damn 102% mortgages) is cleared, we would simply move these overpayments on to the main mortgage.

We're going to look to move in about 5 years so we can make a good dent in the existing mortgage and build some more equity. Would this also show the mortgage co that we can afford to take on a larger monthly mortgage payment (if required)?

Option 2 is to pump more into my pension (i've asked work if they would match additional contributions) - as currently I/we pay in 8% which seems a little light.

This all on top of standard savings (circa 20% of take home pay) which is currently being spread across a number of Nationwide current account & saving products.

So my question (or thought process) is an extra £300 off the mortgage (LTV is currently 85%) or pump into the pension...

[Ginge R]

I had a client conversation earlier about this very thing. Bottom line is this. Will you be as poor as a church mouse in an expensive house in retirement, or will you need the income too? The client in question was due an inheritance so could afford to ease off a little on retirement planning, he wasn't in the best of health and paying down the debt gave him peace of mind. There's no right and wrong answer, everyone's circumstances are unique.

[pmanson]

Ginge R said:

I had a client conversation earlier about this very thing. Bottom line is this. Will you be as poor as a church mouse in an expensive house in retirement, or will you need the income too? The client in question was due an inheritance so could afford to ease off a little on retirement planning, he wasn't in the best of health and paying down the debt gave him peace of mind. There's no right and wrong answer, everyone's circumstances are unique.

Very true. A varied portfolio seems to be the way forward.