Pensions-unrealistic expectations?

[Monster6]

This is a ‘money in the future’ related WWYD…I’m hoping for some good advice, and maybe a bit of a check-in. I’m mid 40s, in a stable 20yr relationship, 2 teen kids. I find myself worrying about pensions/future money so much these days! With the WASPI women in the news a lot, my thoughts really have turned to retirement age and the completely unrealistic expectations I may have to EVER stop working.
I have about three pensions, totalling £30k, some savings in ISAs etc, probably only about 10k, a joint mortgage which has £80k remaining, on a £350k home. When I started my career after a few false starts I was 28. I paid into a pension, however due to taking years out for childcare and going very part time…I think at one stage I was only able to put in about £40 per month!! 🙈 (full time childcare was so expensive, I made the decision to look after my own kids) I am now self employed and putting in 21% of earnings into a SIPP. To that end, I do expect my pension savings to grow significantly. I just would like to know, any other (younger) middle aged mums (44-46) with this dilemma? What are you doing about it if anything, and could you share some tips please! We do plan to downsize home once kids are grown. We’re also overpaying aggressively so should be MF in 6 yrs.

Have a look at Guiide. https://www.guiide.co.uk/ It will tell you what you will achieve in your pension and allow you to run some scenarios to see what your options are. (not affiliated!)

Because a mortgage typically allows your to borrow money at a lower interest rate than the returns you make (due to leverage). From a financial perspective, you want a decent sized mortgage.

If someone (eg) lets you borrow money at 4% which you can invest to make 7% returns, then you do it. And the leverage from mortgages is close to being risk free.

If you can get interest on savings higher than your mortgage interest rate you're better of saving the money then paying off a lump sum when you come to the end of your fix.

Firstly - I think you are in a great position to make a really big difference to your retirement savings. The fact you have so little left on your mortgage means that you can probably afford to push more into pensions.

Start dialling up how much you're paying in and get your partner to do the same. Don't wait until your mortgage is clear, six years is too long to put off pension saving. Consider whether you could make smaller mortgage repayments to pay into a pension instead.

Also, make sure you are both on track to build up 35 years of National Insurance qualifications so you both get the state pension. It will be your biggest source of income even if you save a decent sum before your retire.

Are you basic or higher rate taxpayers? If you are higher rate, £100 paid into a pension only costs £60, if you are basic rate then it costs you £80 - so it might be cheaper than you think.

Consider that if you paid £300 a month into a pension - costing you £180 or £240 in take home pay depending on your tax band - you could build a fund of about £144,000 in the 22 years before your retire. (Assuming 5% growth).

That's well worth having.

@Winter2020 @JustMyView13 @Addictforanex @LizardQueeny combined your advice is excellent, and much appreciated. Yes we have wills, yes we are joint owners, yes we have comprehensive life insurance. The compound interest you mention addictforanex is absolutely amazing, and probably the first illustration that’s made sense to me. Can I ask, did you go through an IFA?

You dont make 25% out of the block, thats a myth. You get a tax rebate when you put money in, but you then pay the tax when you take the money out. It works out as being identical, you dont save any money.

The main reason why pensions can be tax efficient are 1) if you are in a higher tax rate band (eg if you are paying 40% marginal tax now, but expect to pay 20% when you retire), 2) if you save on national insurance/student loans through salary sacrifce, and 3) the tax free lump sum does result in a small tax efficiency (20% tax down to effectively 16%)

@EcoChica1980 we are both fairly recent high tax payers. I’m paying 21% into my SIIP now, with is a fair chunk per month…now. I’ve got major ground to cover though.

Pension/ISA funds shouldnt be in a savings account (unless you are going to need the money in the next 5 years), they should be in equities

Again that isnt really how it works (as a basic rate tax payer). £300 costs you £300. The money you save in tax now just gets deducted when you eventually withdraw the money, there isnt any saving (except the small amount from the tax free lump sum)

Yes I do go through an IFA. They take a fee but honestly it’s completely alien world to me - I wouldn’t get nearly the returns they get - they are more than worth the money for me.

I understand where you are coming from @Monster.

In my case our 20's were spent saving to get together a deposit & then furnishing a home while paying off student loans (which are a fraction of those today!), our 30s were dominated with childcare costs and moving up the housing ladder, then suddenly you are in your 40s thinking 'I'm knackered I'd like to get off the hamster wheel' while in reality looking at more costs incoming in 50s if the DC go to Uni.There's just never been much spare money to put additionally into pensions. When my parents were retiring at around 60 years old it fell doable to hold on working until then, whereas 68 or even older when state pension kicks in feels aeons away! 50 years of work in some form or other.

My saving grace is that we own a business that we could either sell or continue to draw dividends from. We also live in an expensive area so downsizing and or relocating can also raise future funds for us. I look at my pension pots from various jobs over the years (some of which are defined contribution so they advise not to merge) and the amounts are so piddling they might buy us a takeaway once a month!

@Sixthform25 this did make me laugh. I like Indian, myself. 🥳

You don’t pay tax (so yes for an higher rate tax payer, an 40% boost) and it grows tax free. And you can take 25% tax free at retirement. So it’s not as straightforward as ‘you don’t pay tax now but you do later’. Pensions are highly worthwhile and I agree with PP - don’t pay down your mortgage. Your house will appreciate whether there is outstanding debt or not.

Just echoing here - prioritise the pension! I'm like you and was fixated on the idea that all debt is bad and the priority should be to pay it off. But when I did get a financial adviser he said his first advice to people whose pension fund is low is to increase the mortgage (or take one out if it's been paid off) and stick those funds in the pension. Mind blown.

@honeylulu i didn’t actually think you were allowed to do that?! Borrowing to invest. I am so naive

The tax free growth is irrelevant, you still pay the same tax. There is no saving in that sense (as a basic rate payer)

I mentioned the tax free lump sum, it does mean you get a slight reduction from 20% to 16% tax rate (assuming that the tax free lump sum will still exist when you retire)

Honestly, I try not to think about it too much as we'll be screwed financially and I don't see we can do much about it at the moment. Except not plan on retiring.

In your position, with loads of equity, I agree with others - stop overpaying your mortgage (or overpay by less), put more money in your pension.

@EilonwyWithRedGoldHair I do see now how this is viable. I was just kinda proud that at least one goddam financial decision was paying off for us. 🙄I guess not so much after reading some of these responses

I paid into a pension, however due to taking years out for childcare and going very part time…I think at one stage I was only able to put in about £40 per month!! 🙈 (full time childcare was so expensive, I made the decision to look after my own kids)

I’m basically the opposite of you.

Paid into a pension since 18. Bought house at 19. Built career. One mat leave. Never went part time, DH and I worked our consultancy around DD. Paid into pension throughout.

Mortgage fully offset for about 15 years and almost paid down. Pay more into pensions per month than the mortgage.

I have nightmares that I have all this money in pensions and will go under a bus within 6 months of retiring.

What I will say is that the “I”s in your post are very telling. My husband is playing catch up on his pension provision now but I never let mine be eroded just because I was the female in the relationship. Any childcare we would have paid for would have come from joint income, and we managed the childcare between us to enable us both to work full time.

Psychology matters -- from. a purely logical financial standpoint, overpaying your mortgage is probably a worse decision than saving into a pension/ISA.

However people will save more money if they have specific goals to work towards, that they care about. So if reducing your mortgage is helping you to psychologically save money that you would otherwise be spending on junk, then its a great thing to do.

Also some people say that having no mortgage gives them a sense of security (which doesnt make sense to me personally, because surely having a £100k mortgage and £0 in your ISA doesnt make you any more secure than a £0 mortgage with £100k in your ISA, but again, psychology matters)

(oops, i meant £0 mortgage vs £100k mortgage with £100k ISA)

To be honest, my first instinct would always be to put the money into the house - we got horribly stung by negative equity as we bought in 2008 just before house prices crashed, paying more than we needed to on a fixed rate because everyone was predicting interest rates rising. The value of our house never recovered and we ended up selling at a significant loss ten years later. And this was a cheap house to start with - genuinely cheap, as in less than 100k.

You’re commenting on a post about whether it’s better to save or pay off the mortgage. For this, a savings account is exactly the right place- you save at a higher rate than the mortgage interest then pay off a big chunk when the fix ends.

Obviously you wouldn’t put these funds into a pension, because you need to access them when the fix ends. You wouldn’t use a S&S ISA either for something so short term. Cash ISA maybe but I’d rather use an ISA allowance for S&S.

Please check what you’re replying to before wading in, as telling OP to put money she wants to use to pay off the mortgage into her pension is not right.

@Monster6 seen as you’re on a run here, do you have an LPA for Health & Wealth? You can set up directly with government (no need to pay a firm). £82 each.
It’s important incase one of you is incapacitated, because the bills & financial affairs still need seeing too. Also, someone you trust to make health related decisions for you.
Personally, the person in charge of my wealth is not the person in charge of my health 😂
Can’t be too sure 👀😂

For me to pay off £100k of a mortgage, I either have to earn £150k if I just pay it out of taxed income, or I need to earn approximately £50k if I bung it in a pension and allowing for 10 years of growth and a tax free lump sum at retirement. How is that no benefit?