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We are looking at our mortgage being paid off in the next few months. I almost feel like a grown up.
The money I have been pouring into getting rid of the ******* thing.
Aside from coke and hookers, is there a better option than simply just shoving that same money into a pension?
Pension. As much as possible up to £60k unless you are subject to the taper.
Max out an ISA first each year, it’s tax free and the rates are good currently, then a low cost SIPP E.g. Vanguard or similar, is my choice, take some time to get some advice on the funds but it isn’t difficult to pick something that will grow modestly, or to pick one of the retirement funds which move from shares to bonds automatically as you travel toward your selected retirement age.
For the same investment a pension wrapper almost always) beats an ISA wrapper. The downside being it’s locked away until you retire. Neither choice is bad though.
If you know youre unlikely to need the money until you hit retirement age then a pension is almost always a better bet than an ISA because you get tax relief on pension contribs, IE you've instantly made 20% or 40% (if higher rate tax payer)on whatever you paid in, just by paying into it, any isa is unlikely to beat that.
If you can do your pension contribs as salary sacrifice you also reduce your ni liability so a further saving there.
Yeh, the money can be locked away. We had budgeted our finances for the mortage so that we also had enough left over for unexpected costs. It can just sit somewhere until retirement.
Whilst what Julian’s said is true, remember that some of your pension is taxed as you withdraw it.
I found this guy has various useful easy to understand short videos:
https://www.youtube.com/@MeaningfulMoney
Whilst what Julian’s said is true, remember that some of your pension is taxed as you withdraw it.
True, but all of your money is taxed before you put it in the ISA.
Kryton - Why ISA then SIPP? It’s almost the opposite of my thinking. I’m 47 and stuffing most of my spare cash into SIPP, some into ISA then a bit into east access saving. My logic being at 47 I can get at the pension part in 8 years anyway but f needed.
The downside being it’s locked away until you retire
Pedant mode - it's locked away until you reach a certain age (55 at the moment) but then you can access at least part of it whether you're retired or not.
@Blazin-saddles, I'd you're 47 now then you'll have to wait until you're 57 before you can get at your private pension. They changed the rules quite recently.
Depending upon your earnings / savings and interest payouts an easy access account can be worth less, becuase if you earn over £1000 (?) in interest you start getting taxed on that.
I use an ISA to build / rebuild easy access money for family holidays etc becuase I will exceed my personal savings allowance otherwise. But i principle I agree with Julians, I max out my salary sacrifice employee/ employer contribution due the the tax efficiency and the “free money” basis of the employer contribution, but I also drip feed a personal Vanguard SIPP by monthly direct debit and just leave it alone.
Im lucky enough to have overpaid my mortgage to the max and could pay it off, but ISA vs mortgage interest is in favour of ISA over the next 12 months before the mortgage ends, at which point it’ll be gone and I’ll be following the OP’s strategy.
once of the pieces of advice / videos in the link I has was to hold diverse investments cleverly proportioned to your desired outcomes which despite me being not that clever I think I’ve achieved…. I’m fairly sure someone will correct me on the point 😀
Pension first for tax breaks on the way in, ability to provide some tax free money on the way out (after 57 for OP) and for for favourable treatment (free) inheritance tax treatment. ISA second favourite for tax free on the way out. NB expect the political parties to show increased interest in all savings after the next election.
But also, do enjoy the fruits of your labour too
I don't know the OPs position, but on top of a similar approach to @blackhat, I pay into my (over 18) kids lifetime ISAs. This gives a 25% govt bonus on top contributions up to £4k per year. There are quite a few restrictions on this, but it's a good bonus if you can work within them.
Depends how much cash you have in you pension, your age, your income. If you're 40 and already have a 500k pension maybe splunking it is a good idea. If you're 60 and have 50k, saving is more sensible
True, but all of your money is taxed before you put it in the ISA.
Indeed, pensions are taxed when you take money out ,ISAs are taxed when you put it in(effectively).
But the key advantage of pensions is that on the way out you get 25% tax free and you can 'schedule' how much you take out to try and spread it across tax years and keep below the various income tax thresholds, also there is no ni due on pension withdrawals.
Depends how much cash you have in you pension, your age, your income. If you’re 40 and already have a 500k pension maybe splunking it is a good idea. If you’re 60 and have 50k, saving is more sensible
Post work income is definitely the main priority. I'll be able to afford retirement, but not retirement to a thrice annual Ski holidays and a second home in the south if France lifestyle.
Pension for sure. Reduces the amount of tax you're paying right now. Then you can do the thing julians is talking about and further avoid tax when you pick that cash up later. Nobody likes tax.
Having said all that I spent a number of years in one job, which had a fairly poor company pension scheme, socking away large post tax sums into a stock/share ISA, and don't regret making that choice one bit, the ISA growth ate up the tax penalty. The "handy in emergencies" value has been invaluable in about three genuine emergencies, since I did it many moons ago.
I pay into my (over 18) kids lifetime ISAs.
A great idea if you have kids. We’ve been luckily to go through the last 14 years of growth me and my wife put £80 a month to each child to a then child investment account. My 14yo currently has £24k he doesn’t know about, a huge financial performance in that scheme! Going to have to be a careful conversation in 4 years time.
Down side of pension is even your private pensions are being locked down for longer*
When I entered workforce it was access at 50. Then 55 and it'll be 57 in a couple years.... and god knows where when I get there in 20 years.
So advice highly dependant on age. If your of an age where rising age may affect then I would be looking at splitting out to more accessible vehicles to give you early access - assuming finances permit potential early retirement.
*The number of folks I've spoke to in my peers who are mostly degree educated who do not realise this is staggering - so many try to convince me it only applys to state pensions.
To be fair to your degree educated friends, the 55 birthday access point stayed there for many years, and it really only matters when it is within a medium term planning horizon (5-7 years out?).
I didn’t actually know personal pensions were locked down for as long either, but not actually a problem for me as there’s balls all chance of retirement before 60 anyway I don’t think, I was late to the starting to save properly party. Just wanted to make sure I wasn’t doing things majorly wrong. I have no mortgage to worry about and have a good amount of rainy day cash so SIPP seemed a no brainer, with ISA and 5% interest instant access for the rest.
once you've got a few ideas, it's worth spending time on somewhere like money saving expert to do a bit more research of the various tax implications of your situation. It's not always straightforward - Mate of mine was all set on clearing his mortgage until after a bit of number crunching left him realising it wasn't what he thought it would be.
There's also a lot of belief that you are going to live a long life - having experienced family members slipping off long before retirement age, it's something you might want to think about.
tldr - it depends
and it really only matters when it is within a medium term planning horizon (5-7 years out?).
Why's that then ? Does burying the head in the sand that you may never actually get there make things better ?
Sad fact is most folk don't get to enjoy their pension fully if at all many folk are ignorantly firing money into pensions for the tax breaks because the government wants them to. - which for the majority of people is probably right sure but without understanding the full impact at the other end.
50-57 during the first 20 years of my career with the plans to keep early retirement access to your personal pensions within 10 years of the state pension means it'll probably rise again for me and others before I get there.
Yeah I'd not (and am not) chucking all my eggs in that basket. Especially when as kormoran points out....family history isn't always in your favour.
To be honest, C&H seems a lot more straight forward.
You say that @MoreCashThanDash, but what ratio of expenditure between the C and the H? Do you go for quantity or quality? Over what time period should you spend. Makes you think? 🤔
You say that @MoreCashThanDash, but what ratio of expenditure between the C and the H? Do you go for quantity or quality? Over what time period should you spend. Makes you think? 🤔
At my age, I'm not sure I could manage either in any sort of quantity
IMO Depends on your tax situation. If you are a higher rate taxpayer the 40% tax relief for pensions is hard to beat.
If a basic rate taxpayer a closer call. No tax relief going in for an ISA but not taxed coming out.
If you need to take out a lump sum for a big purchase - car, house repair etc not needing to worry about going over tax thresholds can be useful.
For me 5lab has it, how far away from your target pension pot amount are you? If you're miles away and a higher rate tax payer then dodging the tax and topping the pot up would be best, if you're bumping up against the 1.1m limit with no idea what you'll spend it on after retiring then having access to it now is more valuable
No lta limit currently.
For me I want retire at 55 so when mortgage was clear we paid a chunk into ISAs so we have say 100-200k for the first couple of years when we expect some big trips to Australia etc. Then pension. Locked away until 57 but that's fine.
if you’re bumping up against the 1.1m limit
No limit anymore
Sad fact is most folk don’t get to enjoy their pension fully if at all many folk are ignorantly firing money into pensions for the tax breaks because the government wants them to
by all means if you have family history of early expiry or pre-existing health issues take this in to account but for the majority of people it is prudent to make arrangements for later life and pensions, especially salary sacrifice, are well worth it.
You stopped reading only one sentence too early before getting your froth in and missed the point entirely.
Which is if you have any desire to stop working before 57 (dependant on current age) you'd be a maniac to stick it all in your pension just for the tax rewards. The younger you are the more so.
Db understood the assignment.
No lta limit currently.
Although Labour have promised to re-introduce it if they get elected.
There’s also a lot of belief that you are going to live a long life – having experienced family members slipping off long before retirement age, it’s something you might want to think about.
But then the flip side if you have good genes and live to 100. Currently there's a 4.1% chance I'll make 100, which makes pension planning a PITA. Be much easier to just have a built in termination date...
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Mate of mine was all set on clearing his mortgage until after a bit of number crunching left him realising it wasn’t what he thought it would be.
Explanation please? I want to make sure I’m not about to make a big mistake but if I understand correctly do you mean calculating mortgage interest cost vs investment gains vs opportunity cost? I did my maths on spreadsheet to ensure that leaving the final lump sum required to clear the mortgage invested vs interest charges over the next 12 months is a £350 net gain. Not much but something.
@kryton yes that is the gist of it. He thought he would save himself a chunk in repayment interest but his circumstances meant he was better off putting the money elsewhere/invested. It was a close thing though, and unless you only focused on the bottom line, there were good arguments for either option. He wanted to retain a chunk of spending power and felt that was more important. His call.
The balance between ISA and pension wrapper can be tricky to get, or at least it was until the LTA was abolished. But it will probably be back.
Do a simulation xls for your forecast based on future needs, retirement age, inflation, asset growth, tax, allowance etc. Mine took about 4 hours to design but is VERY useful.
Small detail but you can still put money into a pension even when you have no earnings and still get 20% tax relief (up to £2,880 contribution pa). Mind blowing facility and quite useful for kids who don't work if you want to efficiently minimise their future IHT liability.
..
Work less days and do stuff whilst you are fit and healthy
I would split it between pension and private investment through an ISA.
I doubt the pension rules will be as they are currently when I retire, so I dont want all my money in a pension I may not be able to access until the goverment say I can.
Working 4 or 3 days a week is another serious consideration. Needs to be balanced against working more now and retiring earlier though.
Work less days and do stuff whilst you are fit and healthy
This. Pensions are very sensible but still a gamble if you don't live long enough to use much of it. I don't have a big pension so I plan to work more later if I need to. If I'm not fit/well enough to work at 70, them I'm also not fit/well enough to do the things I enjoy so might as well get paid to sit at a desk instead of sitting at home watching TV.
I dont really want to be giving too much info on my private circumstances but to add some detail.
Nae kids
Not a higher rate tax payer, never will be.
Work is very rarely stressful
Pension is definitely not amazing, but i still have enough to sort something reasonable.
Family generally makes it to 80+ (apart from a cycling accident which lead to complications during hip surgery).
Ambitions for retirement dont really extend to grand (expensive) plans for travel/lifestyle etc. Im a bit too prone too gratification today than tomorrow, hence Coke and Hookers. (I actually mean living by the sea side as I currently do and living a quietly busy and relaxing old age, and cycling as many years as possible)
Even with the statement of what is the best financial option, Im aware that once Ive made these calculations and decisions that the possibility of picking a longer working life for a different work type/work life balance to do more living now, is also something I'll end up thinking about.
Also, just want to thank eveyone contributing to this thread, there are a lot of interesting suggestions for me to look at, I genuinely appreciate it.
Oh, missed a bit, there will be money already going into a separate pot to account for unplanned significant expenses such as new car/boiler/health etc. And still leaving enough money for hobbies including the occasional new bike.
trail rat,
no froth old chap. i just wanted to counter the oft made 'you might not make it to retirement' argument, which while undoubtedly true for some, most of us are likely to live well in to retirement, so providing for that eventuality makes sense. you are of course correct in what you say regarding locking up money you can't access in a pension if you plan to stop working earlier, but i had figured that as the OP was weighing up paying off mortgage versus putting in to pension they weren't really in that position. sorry for confusion or misunderstanding - not my intention.
there is also an emotional benefit to paying off the mortgage which can't be overlooked. some people just prefer to get that squared away so that they don't have another bill hanging over them if things go pear-shaped on the income front in the future.
It took me a moment or two to realise that this thread was not about whether it’s best to put the central heating on or pay into a pension once you’ve covered your mortgage.
I’m now left wondering about some of my life choices…