Not sure what to do

[alittlefishy]

Hi all

I've seen some really sound advice on here so I wondered what you would advise on my situation.

DH and I jointly earn 6,500 pcm net.

We have a £280k mortgage, no car or debts.

We have just paid our last childcare fees and not planning any house moves, more kids or major spending projects like home renovations.

We like travel, arts and theatre and eating out and live in central london which is obviously v expensive but we don't commute so save money that way.

My question is - would you pay any spare cash into pension or to pay off mortgage?

We have £20k in savings but obviously saving rates are pretty low so don't want to have tons in savings when we have such a big mortgage.

We both have pensions, mine is good (civil service) and his is private and smallish.

Pensions and making everyday life as nice as possible!

Could you not do half and half?

Pensions.

I would a combination of all three:

S&S ISA - build up a pot of money that you can access at any time, tax free.

Pension - I would not add to the Civil Service one as that is very likely a Defined Benefit scheme (do check). I would add to the personal pension/SIPP but be aware of Annual Allowance an Lifetime Allowance - also note that Government may be playing with the Lifetime Allowance in the near future, reducing the threshold.
Podcast about Annual Allowance and Lifetime Allowance.

Personally I do not have a mortgage. It is very nice not having that payment going out each month. So I am a fan of paying off the mortgage, though I know mathematically you may make more by investing the money in equities. Investing the money in your primary residence is still an investment, it can go up and down. Look at your mortgage deal to see how much you can pay off your mortgage without incurring a fee.

Where you can, maximise tax allowances. You each have a £20k per tax year ISA allowance which is split across all types of ISA. You have pension annual allowance (for the Defined Benefit scheme you need to find out the Pension Input Amount which the administrator can tell you).

If you do not want to do a bit of everything, then I would pay the required minimums to pension and then focus on ISA's initially. Build up a pot of money, however big you like but maybe £100k, then reduce what you add to ISA and increase amount to Mortgage. The aim I feel is to be mortgage free by the time you retire and to have money you can spend - money in a pension cannot be spent until you retire and you may want to go on a holiday, buy a car, fix up the house, before then.

I was thinking about 1/2 and 1/2 but I lay awake worrying about the mortgage more than I worry about pensions.

But then mortgage on 5 year fix on low rate, and pensions obviously worth a lot in the future.

But then we like our jobs a lot and no need or reason to retire early (although who knows what the future might bring)

We are mid 40s

Gaah

And - yes to living well! Don't want to be come joyless money bore or miss the chance to just enjoy life

When I try and answer the same question, it helped me to see what position I wanted to achieve on retirement, and then how best to use the extra money I had to get there.

For example, I want the option to retire at 60 (I may go longer, but I want the option, so this plan is based for that. Obviously I can re-adjust either up or down). At that time, I want a paid-for house, all improvements needed for retirement completed and paid-for and a new car and/or a fund with money in it for a new car/boiler/etc (whatever might break and is expensive!)

I also want to be in a position to receive my current salary, after tax each year from my pension. This is controversial, as people say you spend less in retirement, plus I won’t have a house payment, but there will be inflation from now until retirement, and in my early years I want to travel more, and later years may be medical costs. Rightly or wrongly, I decided to aim for my current after-tax income as the amount I want from my pension, and I know the figure I need to have in there to achieve that.

I also want an Emergency Fund of 12 month after tax income, available to supplement bad years or for big expenditures. I currently have this growing in the stock market.

So, from there, I work out a plan to have each component paid for by retirement. To a certain extent, it doesn’t matter whether money goes to retirement or mortgage, as I still need to pay it out into my plan. Paying the mortgage reduces the interest I pay, paying retirement increases the return I get from the sharemarket.

I think once you have the plan, you won’t worry at night anymore. You’ll just ‘set and forget it’ and hopefully in 15 years look again and be grateful you did.

PS don’t not look at it for 15 years. I re-assess all my money on the first of every month to check it’s on track.

Having a large emergency fund has been invaluable for me, as I was made redundant in April and it's now July. You never know when you will stop work, due to illness, redundancy or any other reason. Getting the balance right though is hard, as an emergency fund costs you money - it loses to inflation.

I agree that once you have a plan, set it up on automatic as much as possible and track it once a month - I track my net worth in the middle of each month. You can then review it every year, couple of years, 5 years whatever.

@FollowYourOwnNorthStar that is such a great idea, I think an end game is exactly what I need in order to sort my circular thinking. So I could, say, aim to be mortgage free and retired by 65 on x pension and then work back?

@nannynick sorry to hear about your redundancy, hope you get the right next job soon. Very good point on emergency funds.

If you're on a fixed rate mortgage, you're limited as to how much you can overpay anyway, usually 10% of the outstanding amount each year.

You could do a third to each of pensions, mortgage and fun money. Maybe put your mortgage overpayments in premium bonds to hopefully cover most of the interest until you can overpay.

Put the fun money in a savings account if you don't know yet what you might want to spend it on. You might decide you want more elaborate holidays or take up an expensive hobby, etc so if the desire arises, you'll have a pot of money you can spend guilt free.

You say you like your jobs now, but you might not feel the same way in 10 years time. You also don't know if you'll continue to be able to work in well paid jobs, you might get hit by redundancy or illness that might force you to take a step back.

I'm cautious with money and it helped us having an offset mortgage. It meant I knew that my savings were readily available should I need them. And as most mortgage interest, especially if you fix for 5 years are definitely higher than any savings interest, we knew the savings weren't just sitting there doing nothing.
Like a previous poster, I also took comfort in paying our mortgage off quicker and therefore saving thousands in interest payment.
We paid off our mortgage just as our eldest started university which meant supporting her financially isn't a burden.

@alittlefishy yes, I felt a bit paralysed with decision making, until I decided it was because ‘retirement’ seemed so vague (both date and amount required for it), and it was difficult to justify ‘fun money’ or one thing over another.

Everyone’s goals are different, but as I mentioned above, I thought about it and read abit, and then decided that my (adjustable) goals for retirement would be:

1. aim to (have the option to) retire at 60
2. go into retirement with no debts/expensive projects pending, so house, car etc repaid, and a spare fund to buy another car. All renovations done on this house (or different one, depending on where I retire). A fund for general house maintenance/upkeep.
3. have my current after-tax income paid to me via pensions. As above, this is probably more than I need, but I know I can live on this amount, and once I no longer pay my mortgage it will be even higher (hopefully accounting for inflation between now and then)
4. have an Emergency Fund of 3-6 months of my current after tax income, for emergencies, or to supplement retirement income in bad years etc.
5. have a second source of income from the share market or a second home, in order to not rely on Emergency Fund. I have a figure in mind of what I want this to provide.

I set this, and then I check on the 1st of every month as to how I am going in each category. My mortgage is on track to pay off in time, and now that rates are low I occasionally put more money towards it, knowing it will cut down payment time and give me some months/year prior to retirement with a full salary and no mortgage payments.

My retirement and share market accounts are set at the right amount to achieve my goals. This one is always tricky as it depends on the share market returns, but I am conservative in calculations and check each month, so I think I have the balance right.

The other funds are in cash accounts where I again just check I am on track each month.

If I ever feel concerned looking back over the past year or 2 of monthly updates figures makes me feel good that small savings do add up. It also means I can enjoy the other money I have without guilt, as I know my future is taken care of - well, as best as anyone can hope to do so far out.

Good luck!

There is already lots of very good advice, but with interest rates so low, have you considered keeping your emergency and cash savings in Premium Bonds?

We find it gives us a little bit of fun each month.