What do you invest in if you’ve paid off your mortgage?

[Twoshoesnewshoes]

I’m getting in a right muddle!

looking at a house which is a bit smaller than ours - we want to downsize at some point as our DC have left home.
Im late 40s so intend to work and earn at the same level I am now (ish) for at least another decade.
we spend around £1k a month on mortgage currently and try to save a further £1k a month, doesn’t happen if we’re on holiday or a big car bill etc.

so - if we downsize, we could pay off our mortgage in 5 years instead of 19.
Im concerned though that, after that, we’re no longer investing. Our property would obviously be worth less than the one we’re in now, so we would get less return from property prices increase.
we would still have the £2k per month for at least five years after paying off the mortgage.

should we stay where we are and pay more on our mortgage?
downsize and buy another property?
downsize and invest in SIPP and ISAs?
any other options?

thank you!

If I increase my NHS pension payments with the employer contribution go up too does anyone know?

No, that's not how the NHS pension works. It's defined benefit, not defined contribution - so what is paid in is irrelevant. And you can't just 'increase contributions' to the scheme. You either buy an additional.sum of final pension, or open a DC AVC pension alongside.

I think the OP is thinking of this https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/money-purchase-additional-voluntary-contributions-mpavc

Yes, that's the DC AVC pension I mentioned.

I’ll have a look, thank you.
also, this is possibly a really thick question-
when comparing investments eg property, ISA etc, by annual interest- do you include the 20% government uplift? So the interest for comparison would be about 23%??

Oh no, cos it’s not 20% of the total….
confused

Do you mean the tax relief for paying into the pension? It's certainly something to be very aware of and it's a significant reason for paying into a pension but I wouldn't just wrap it up in any interest or growth as they are different points. In particular, remember that pensions are taxable when you withdraw them. If you are a high tax payer but expecting to pay 20% when you withdraw then this is very significant because the difference between the relief you get and the tax you pay on withdrawal will be large. If you are not currently a higher rate tax payer then the advantages are not as high. You are avoiding 20% tax now but are really just deferring that to withdrawal. The main tax benefit of the pension in that situation is that 25% of your withdrawal is tax free (up to a limit).

I‘M not a higher rate tax payer, yes I need to look into drawdown limits. Is it 25% of each withdrawal?

Funds, ISA, premium bonds, savings accounts, stocks. I’d probably look at my pension more seriously if I wasn’t under 40. I don’t want to lock the money away just yet.

Broadly yes but there are different ways in which you can take it. This explains it quite well https://www.hl.co.uk/retirement/preparing/tax-matters/tax-free-cash

Of course one of the tricky things with pensions is that governments might change the rules!

You’ve mentioned buying a property to rent out.

Dont!

As a landlord of a single property you are on a hiding to nothing and with a change of Government I fear it’s going to get worse.

Maintaining a property, aka your investment, is very expensive because trades will rip you off (even if they turn up to quote) & materials have rocketed in price.

Tax man will screw you.

Some tenants are disrespectful and wreck your property at great expense to the landlord with no recourse. You can’t even do them for “criminal damage” which can cost thousands to put right.
Some tenants stop paying rent for months on end. Baliffs are very expensive.

This is just the tip of the iceberg.

Nah, don’t go down that route. Follow up what other wise ones have advised you to consider, further up the thread.

Good luck.

The 20% isn't added to the interest but to the capital.

The tax free withdrawal amount for a pension is 25% of the total pot. For a defined benefit (NHS and other public sector type) pension you usually get this as a lump at the start. For a defined contribution (ordinary employer or private) pension you can choose to take the whole 25% in one go, or as 25% or each withdrawal.

Okay, thank you, so - with a pension the gov add 20%, but then 75% is taxed at 20% in the future.
an isa there’s no incentive added but no tax paid.
I literally can’t work out which is better.
presumably with the pension you get the 25% tax free but the rest equals itself out?
the isa, there’s no benefit added but no tax paid so it’s all equalled out?
so the pension is better cos of the 25%?
???????

Some PP have suggested retiring early. However - if you enjoy your job could you reduce to part time? Personally, I feel that you never know what the future will hold so I rather enjoy a little me time now whilst I'm healthy than take a gamble and wait until after retirement.

I've also found stocks & shares ISAs to be pretty good in the long term - eg FTSE 100 trackers.

Yes essentially that. So you have to work out whether the additional benefit from the tax free amount is worth the fact that you can't access it till you get to pension age.

If you can salary sactifice the pension contributions then you also save NI, which makes it more advantageous. Of course if you are getting extra employer contributions or are a higher rate tax payer then the pension has more advantages but it sounds as if neither applies here.

Image you pay £100 into a pension and £100 into an ISA.

Once you've accounted for tax going in and coming out:

You get £100 out of the ISA.

The £100 in the pension becomes £120. You can take 25% of that tax free = £30. The remaining £90 is taxed at 20% = £72 net. Plus the £30 tax free gives you a total of £102.

Slightly ahead.

But that doesn’t take into account the effects of growth.

If the ISA and pension both grow at 5% a year for 20 years the ISA will be worth £271.26 and the pension £325.52 (£276.67 after tax).

Still not a huge difference, but the pension is bigger.

I’d use a SIPP but also ensure I use the maximum stocks and shares ISA allowance each year.

I can probably save about £800 a month so I think that would still be well in my ISA limit.

I’ve done some more reading on this.
im actually thinking we may be better off not downsizing and paying off the mortgage as this stage - actually thinking I should upsize (financially?) and have a bigger mortgage?

if I have £800 a month to invest, and we’re both intending to work as we are for another ten years, that money would be best invested in a more expensive home?

then downsize when we work less, after ten years?

Neither is better, they are just different.

I'm about to semi retire. I have c£120k in S&S ISA, £100k cash, £600k pension. And I'm about to inherit c£200k more. No mortgage or debts.

I will (at some point), take the 25% tax free from the pension, then eke out the cash and S&S ISA money, making sure I at least take the £12,500 annual income tax free amount from my pension.

There's no tax on using my own money. There's income tax on pension, but that's good because I didn't pay tax on it going in (and have been a higher rate tax payer) and can use the annual allowance.

At 65 I'll add c£6pa from a FS pension, and at 67 the state pension. That, using today's figures, will be over the annual tax free band (unless Reform win the election 😂) so at that stage I'll be wanting to only take from the ISA if I can.

It's about having a mix to utilise all the rules and allowances.

Btw - a mortgage isn't an investment, it's a debt.

Btw - a mortgage isn't an investment, it's a debt.

This is so true. Lot's of people mistake paying down an existing mortgage for investing in property. Of course taking out a mortgage can be a route to investing in property, but paying the mortgage you have is just paying off a debt.

Upsizng and downsizing a house costs a fair bit. Stamp duty, legal costs, moving costs, renovating and redecorating, new furniture, extra mortgage interest....

And many people who intend to downsize don't - when it comes to it it's too much hassle, they've got used to the extra space, they've filled that space and don't want to get rid of things.

Yes that’s true re moving costs.

i do want to downsize sizewise at some point though, I don’t like having rooms we don’t use, and we’re very conscious not to hoard. DH’s Mum is a hoarder, they need to move as their house is not practical for them now but it’s an impossible task!

I think that, we’re probably better off paying for a more expensive house whilst we are working than putting the money into savings? Because house price increases will be a bigger gain than savings?

Remember to subtract mortgage interest payments from.your gain, and that the house you downsize to will also have increased in price.

I know someone who's recently done some.modelling of historic stock market performance. He found that investments took between 6 and 16 years to double, depending what time period you look at. Do you know the equivalent figure for houses?