What to do with new additional income

[SwanShaped]

I’m hoping to start work soon after nearly 6 years off for kids. It will be part time and I’ll earn about £10k a year to start with. What would you do with the extra income? I’m hoping to save a lot of it seeing as we’ve got used to living on one income. Should I: save, overpay mortgage, put in pension? We have about £5k worth of savings and no debt except student loan and mortgage. Some of it will go on things like buying myself some new clothes, fun stuff now lockdown is easing, additional childcare. But the rest??

What rate is your mortgage?
Are you able to overpay more than 10% of your mortgage each year?
Do you utilise your tax free Isa allowance of £20k per year?

I agree with spending some on fun stuff and new clothes! You want to feel the benefits of going back to work in your everyday life not just in increased savings and mortgage contributions!

Life is for living but balance is important too. I'd probably give yourself an £50-£60 or so a week to enjoy (depending on how many hours you're working) and be responsible with the rest!

Depending on your mortgage rate and how much you’ve got in pensions, I’d go for a stocks and shares isa. You can do one like Nutmeg or similar where you set a risk level and they manage it for you if you’re not comfortable managing it yourself.

If your pension is low, the 25% govt top up would be good also

I have a Santander 123 bank account because the interest rate on the balance was good for a while. It's now reduced and I get around £5 for a £10000 balance, but pay a £5 fee. I want to stay with them but stop paying the monthly fee. Is this possible. I will put the savings into premium bonds.

Please ignore the last post..... I thought I was posting a new thread! Not sleep well lol!

Mortgage rate is about 2%. We have about £156k left on it. We get penalised for paying more than £10k over. But I wouldn’t be able to do that anyway. Not sure about my pension, think I’ve only got a few grand in that. I hadn’t heard about the govt top up so I’ll look into that.

Pension, all the way, unless you've got decent provision (in your name) already. Also check you have full NI contributions for the state pension, whether you need to pay the top ups to get the full state pension. Then overpay mortgage as much as possible.

I don’t use all of my isa allowance. Just have savings in a different current account with my bank.

I need to look into my pensions. I have a couple but a very minimal amount. Husband has an nhs one.

Pension, all the way, unless you've got decent provision (in your name) already. Also check you have full NI contributions for the state pension, whether you need to pay the top ups to get the full state pension. Then overpay mortgage as much as possible.

As stated by Adventureiswaiting - boring but sensible.

As your mortgage rate is low, you don't get a huge value in paying it back faster as interest is accruing fairly slowly (always worth keeping an eye on whether you can improve via a remortgage). However, money in pensions placed in a suitable risk investment is a good idea, especially if you have very little. The earlier you add to pensions, the better. Depending on your age, your tolerance for more/less risk in your pension investments will vary (rule of thumb is the further from retirement the greater risk tolerance because you have more time for markets to recover from drops and benefit from faster growth) but this is financial advisor territory so you should get proper advice. Some of the online platforms that are regulated in the UK can help. As others have said, worth checking state pension, nics and govt top up options. Again, a good advisor should be able to help.
On the other hand if you want to save to access funds in a few years eg for a renovation or special holiday then ISAs are the way forward, as you can take the money back out.
Good luck with your return to work. Hope you enjoy!

Thanks so much. I’m late 30s. We do want to do some work on the house in a few years so may put that on the mortgage. So maybe I should just focus on pension seeing as we may add to mortgage if we can. Is a financial advisor worth it for people who don’t earn loads and loads? I guess maybe it’s even more worth it! I do get anxious about lack of pension. That’s been on my mind for a while. I didn’t grow up in a family that had any financial sense and so this is all coming to me a bit late.

Are you married? You mentioned husband above so I assume so but checking it wasn't just a turn if phrase. If you're not married, you need to ensure you have retirement assets building in your own name.

Yeah we’re married. He has 20 years of nhs pension snd I think I have about £6k with Virgin. So big difference.

Probably a decent chunk building up your own pension. The tax relief makes it so much more worth it than overpaying the mortgage. You can get a low charge SIPP with Vanguard, no need to pay an IFA.

Don't be afraid to live a little on some of the money too, even if it's by using the money to pay for things like home improvements or better cars than you'd normally have. You could also boost your short to medium term savings and then decide what to do with them later.

A friend of mine once said that he split any new/extra money he got into thirds and put a third to the past (in your case paying off mortgage), a third to now so spending, holidays etc and a third for the future, so in your case, pension.

You might think the thirds approach isn't in the right proportions, but it's a good rule of thumb and you can tweak the percentages as you see fit. Maybe 50% pension, 25% day to day life and 25% towards mortgage/savings for home improvement, which is effectively the same thing if you're planning to remortgage for home improvements, although overpaying the mortgage is likely to work out better, interest rates wise.

That’s really helpful, thank you. Consensus seems to be pension so I’ll take my head out the sand with that and properly look into what’s what and try to find out about a pension I had years and years ago as well. Think it’s prob only worth a couple of grand if that. But it’s still my money. And that makes a lot of sense re overpaying mortgage now for remortgaging later. Our car is old but we’ll just drive it til it dies, that’s fine. Might splash out on a valet tho! A winter of muddy walks with small children has not been kind to its interior. I am looking forward to new clothes!! I always put myself last with these things so I keep imagining spending a whole first month’s pay on some new clothes just for me! My current clothes have holes in.

Take a look at this flowchart. Very useful. flowchart.ukpersonal.finance/

Oh thanks!! I was fine with it until I got to the pensions bit. Then it totally lost me. Which makes it even clearer what I need to focus on. And that flow chart talks about building up emergency savings first so that’s really useful to know. And gives an amount for targets. Gonna print it out.

Have a listen to the meaningful money podcasts too. I think he generally suggests filling up your ISAs first before SIPP pension as they are more flexible, depending on how old you are. I would definitely concentrate on your work pension though. If they match additional contributions then take the free money.

I’m usually the first to shout PENSION but with only £5K savings, I’d save some in a way that’s accessible first (ISA) until you have 6 months outgoings (at least) as an emergency fund.

Then I’d go pension.
But... how much does your husband earn? If he pays 40% tax you’ll get twice the tax relief back by contributing to a private pension in his name, than in yours. I wouldn’t suggest it if you weren’t married, but it’s worth considering.

[quote MrsWombat]Take a look at this flowchart. Very useful. flowchart.ukpersonal.finance/[/quote]
Nice chart 👍🏻

@SwanShaped, is your work a private company of public? You are likely to be enrolled in a pension scheme so straight away ask about adding max income to it. That way you won't miss the money each month.
Once you have pension provision then consider savings, then the rest could be guilt free spending.

Honestly, I’d allocate some of it towards a cleaner!

I've not found financial advisors that useful, beyond educating me on tax relief on pensions with a forecast plan. I found they steered me towards higher fee investments. I found it easier looking online for info myself, playing around with retirement calculators and compound interest calculators.

Having read your update, I'd probably put some in pensions and some in a stocks and shares ISA. Because you can access the ISA within about 5 days if the money is needed. But as someone else mentions, good to keep three months of the mortgage payment in cash. For stocks and shares, I prefer to invest in a portfolio - I use a variety of different ones but something like Nutmeg is easy for a beginner and you can set a small direct debit up - say a couple hundred a month and see how it goes. The fees are slightly higher at 0.35% than doing it yourself, but its fuss free and easy

It’s a private pension. Not a clue about the other one I have somewhere. My husband doesn’t earn at 40% tax rate. And I’ll be nowhere near that amount. I didn’t know there were retirement calculators. That sounds useful. I think what I need to do is to spend some time looking into it all. I do like the idea of having 10k worth of savings, it just feels safer to me. I’ll look into nutmeg too. And the Sipp that someone mentioned. I feel like I could work it all out, it’s just a new language to learn for me. So I think I’ll do that first and then see a financial advisor if I’m still stuck. You’ve all been so helpful n