Not sure what's best - savings, mortgage, pension?

[Dadadaa]

I'm 40 next year and have been pretty terrible with money up until this year. Now I really want to get sorted financially and have started saving and want to make a plan for 2024 but not sure where to put my money and need some advice please.

I currently work part time as we have a toddler, he's in nursery 2 days and luckily have parental help for 2 days but I only work 10-2 on those days plus WFH overtime where possible. My husband earns £42000 plus good on call pay & overtime. He can save a lot more than me per month.

We currently have about £12000 savings (my part of those savings is almost £4000)

Mortgage has £140000 left at 3.8% for 10 years. No other debt.

I've got a almost non existent pension - I think it's about £7000 from a previous job and paying the bare minimum through my job atm.

My plan was to get to £20000 savings before anything. We are putting the maximum into accounts with interest rates of 6.25% (£400 per month) and 8% (£200 per month) each, and the rest in a 5% (we both have these accounts each and save separately). These are all easy access for emergencies. I probably can't save more than this but my husband can save about £1000 per month now, maybe more after April when we get nursery funding (about a £300 per month saving).

Once we've reached £20000 (between both of us) I was planning on overpaying our mortgage (within the amount allowed before charges), but should I put my money into a pension instead?

Would appreciate any advice on the best place to put our/my money, thanks!

I would pay into my pension before I overpaid my mortgage . The later you leave saving into a pension the more difficult it is. You need money to live off in your retirement . I would also check that your NI contributions are up to date and top them up as a priority if not.

Where has the 20k come from? If it's because it's a nice number, I would look at what 6 months living, plus any known big expenses, would come to.
When you have that, I think I'd split the savings, and keep adding to the savings, plus put some into a pension for you.

BUT, how long will the mortgage have to run when the 10 year deal stops? Or will it be paid off? You might want to be putting money into that too, so that's a three way split once you have sufficient savings.

Mortgage free in mentally nice, but not necessarily financially the best decision.

Thank you @Wolfpa and @SnowsFalling
Very useful advice. My NI contributions are up to date.

Yes the £20000 is just a nice sounding figure so I will work out our outgoings. We live pretty frugally generally but I assume will have more expenditure as our son gets older.

Our mortgage is £680 per month and we will still have 17 years left after the 10 years! So a long way to go, hence wanting to pay off a bit more and lower it more quickly. We may get some inheritance but don't want to rely on that in our figures.

I do wish I'd been better with money when I was younger but hoping I can make a start now and will earn more as my son goes to school etc

Why are your savings less than your husbands? You are married, have a child together, everything should be shared, whoever earns the most.

Even if you have separate accounts, you should have the same/similar amount in each. I am guessing that he also has much better pension provision than you?

That would be my first priority, then my pension - money contributed now will grow more than money contributed in 10yrs time. If you can’t increase the contributions to your work pension, then start a personal pension as well.

I'd definitely prioritise pension.
Your mortgage gets eaten into by inflation. The longer you take to pay it off the less it's worth in real terms. Obviously having no mortgage is wonderful, but imagine you pay it off 10 years faster than planned, so in 17 years not 27 years (if I've read your posts correctly). What will you do then with the extra money you've got each month? Presumably pay into your pension. But the money you pay into your pension now is worth a lot more than the money you pay into your pension in 17 years' time, because it will have more time to grow.

Therefore, I'd prioritise pension now. The Hargreaves Landsdown pension calculator is very useful - plug the figures in there and see what it says you need to be saving, then get as close to it as you can. Anything left over, sure, use to overpay the mortgage.

Given the rate on your mortgage, I’d prioritise pension over all else.

Make sure you’ve got 6m of costs saved (which may be more or less then £20k) and then pay as much as you can into pension. I still leave a small amount for more liquid savings, so if £20k is your goal for that then you can still do that, but maybe slower than if you throw everything at that first.

Savings rates are higher than your mortgage rate so save anything you would over pay your mortgage with into a high interest savings account. You’ll have a double benefit of higher returns and also it being available in case of emergency.

With a small kid I'd make sure you have access to money before the next 25 years.
Make sure all savings are in ISAs - as the tax free allowance is nearly gone
(both of you)

£12k is a good amount of savings, you need to sort your pension. You will get to a point it's to late to improve it. Start ASAP.

Thanks for all your advice! I've looked into some pension options but would it be better to add to my existing pensions or to start a new one, or should I start a lifetime ISA? I don't have a huge amount to save and am quite risk averse!

Normal ISA will give you tax free savings
PLEASE be aware of the new limit
pension funds are locked away until you are 68

I am 58 and am very happy that most of my funds are NOT in pensions

The minimum age to access pensions is 55 for defined contributions pensions although I think this will rise in the future so will be 58 for OP (public sector pensions are different).

Given your mortgage and your DHs salary I would put money into your pension as your household savings are already pretty decent. Does your employer match your contributions if you pay more in (that would be more free money)?

Also, with a Lisa you will need to open one ASAP because 40 is the cut off. However, as you own a property you won't be able to access the money until your 60. General view is that paying into a pension will be more lucrative (Mse website has some comparisons on it site re this which may be worth reading).

Thank you! I work for a very small family business and I imagine that they only pay the bare minimum necessary. I will only earn just over the tax threshold this year.

Each month I can usually save an average of £500 (although this could go up once the nursery funding comes in in Apri) - would you put all of that into one pot? I have a Nest pension through work and my previous one is with Scottish Widows. Should I open a LISA before I'm 40 just in case for later? Appreciate your thoughts!

I would go for pension because you’ll get 20% added tax relief. I’m a sahp so will be only be putting £2880 into mine but the gov will add 20% making it £3500. You also might find if you increase your contribution your employer would.

in terms of the £20k you want to have you should probably do a budget to work out how long you could survive if sick / made redundant etc and / or you had a disaster like car dying/ boiler being replaced. I would work out how long that £12k could last if you needed to dip into it. Or see if your employers give you critical illness insurance. My h (we’re actually separated but still married and have joint finances) got life insurance when I was pregnant to pay our mortgage should the worse happen to him as he was the higher earner but luckily we didn’t need to claim.

The meaningful money podcasts and YouTube channels are great at giving advice on this sort of thing.

Have just skimmed but initial thought was that savings should be split. It's not fair that your DH is building up savings whilst you're not able to build up a pension due to childcare commitments

Roughly, advice is, you should split:
1/3 mortgage, 1/3 shares (this includes most pensions), 1/3 savings

This is because it is very unlikely that all three areas: property, cash, shares will collapse at once. So it is a crude way of spreading risk.

That said, at different stages in life you have more or less need to call on money easily so should be careful how locked away your money is.

Additionally, you need to understand what tax breaks or employer contributions you and your husband might get. If the employer contributions are significant, for example, this should factor into your decisions.

You also need to understand how your bank treats overpayments on the mortgage. Ours keeps that money separate and it means we can stop paying at any time until that amount runs down to zero. That is quite reassuring if either of us lost our job, for example, it is worth understanding how yours works.

Most pension savings are not locked away until you are 68, at the moment you can access many private/workplace DC pensions 10 years ahead of the state pension age.

If you are only 40 then you have about 20 years for that pension investment to grow. If you are overly risk adverse then don't expect much in terms of growth in that time. You have some time on your side, use it! A global index tracker paying consistently monthly is likely a decent option for you whether its within a pension or a S&S ISA (there are pros and cons of both )