How to spit savings: lowering mortgage term or saving for DC

[Heart90s]

I'm looking for some advice on how best to split our savings. We have a set amount available each month (due to recent pay rises and introduction of free childcare hours) and want to split it into the following:

• Overpaying our mortgage to reduce the term
• Savings for our only child to have when she is 18 for uni or a car
• General savings for holidays/bits we need done to the house etc.

We are early 30's and our only DC is 2. We aren't having any more children.

We already have a savings pot of 6 months expenses which we don't touch which is for emergencies. We also have life and critical illness insurance and good pensions.

When we moved we did the longest term possible on the mortgage to have the payments as low as possible as we weren't anticipating the financial changes. We don't want to lower the term of the mortgage just yet as like the flexibility of only overpaying if we are able but overpaying will reduce the term significantly. If we overpay £500 a month it could cut as much as 17 years off the term.

I have health issues and like the idea of being able to retire from my profession and get a more relaxed job around 45/50 and overpaying the mortgage would contribute to that goal.

I got grants and reasonable student loans when I went to uni but I know that isn't the case now and don't want my DC's prospects to be hampered when we could have saved to support her.

We've had contradictory advice on ether to save more for our DC or pay off the mortgage.

The amount we have to save monthly is £1250. How would you split it and why?

Note: I am extremely grateful and fortunate to be in this position and haven't felt confident asking friends and family due to not wanting to seem ungrateful/ first world problems. I just want to make the most of the funds we have now to plan for the future as know that we may not be in this position forever.

Thanks in advance!

I would personally do something along the lines of

1. £250 a month into holiday fund so you can have one nice or a couple of smaller holidays.

1. Set up a regular saver for child at c. £100 but maybe set up another saver account for grandparents to send money or add anything additional.

1. Save up a pot for when you DC goes to uni as they expect you to pay accommodation etc. Maybe another £100 a month. I wouldn't save up for the fees though personally.

1. £500 for mortgage as suggested but check you can overpay by that on your mortgage terms. Mine will only allow me 10% overpayment a year.

1. Savings account for general spends or house improvement with the rest.

As you have mentioned health issues, I would focus on two things:

1.Paying down your mortgage as quickly as possible.

2.Building up your own Cash ISA and/or S&S savings as a replacement income, in case you want/need to retire earlier than anticipated and before your current pension scheme allows.

I would not put any significant savings in your daughter's name. You have no idea how responsible or otherwise she might be with money matters at 18. If she chose to donate it all to a charity for endangered snails on her 18th birthday, there would be nothing you could do if it's in her name.

If your ISA savings were not needed for a replacement income when your daughter reached 18, it can be utilised to support your daughter at uni or buy a car for her.

Spending for holidays and extras I would just make part of your regular monthly budgeting by adding to easy access savings as and when needed.

We significantly overpay and significantly save for our kids but NOT in their names.

Have you looked at an offset mortgage where the savings count towards the balance so reduce your interest paid?

We took 8 years off our mortgage this way but the money is still there if we need it

@seekingasimplelife This is really helpful, thanks.

I have a chronic illness and although I've enjoyed 7 years of remission now, when i wasn't in remission, it was not good. I work 4 days a week since having our DC and this has really helped with managing stress as to not get ill but I'm unsure on how long I can do it once she's in school. I work as an assistant head in a special school so it very taxing and I don't think I could do it as long as some of my colleagues.

I never considered about the factors having it in her name to be honest. That's a really good point, the snails can wait! 😅

Im thinking a bigger percentage off the mortgage, rest in an ISA or high interest account with the smallest sum in regular savings for bits and bobs.

DC does have a savings account which has birthday and Christmas money she's been given in it which I think we could maybe add £30- £50 a month to go build her up a small pot.

@jackstini I haven't! I will take a look, I don't feel very educated on money/loans etc so just went for the standard repayment.

@Combusting do you not put it in their names so you can decide how/when and why they use it etc? Hair interested. She's 2, so I'm quite naive when it comes to the later years of parenting.

Any debts that are accruing interest of greater than 5% (that includes mortgage) should be the priority. If less than that then I'd go for 1) 40% mortgage 2) 60% ISA (but ear marking 20% of that for child!)
The reasons for 2 are; no separate management fee and if in childs name, there's nothing to stop them blowing the lot on wine amd horses when they turn 18!!

We overpay the mortgage so it'll be paid off by the time my oldest is 12. We can then divert the 2k we're spending per month on the mortgage into savings for the kids for awhile.

@shivawn That's interesting. Suppose it all doesn't have to be done now. If we overpay Mortgage- earlier we will have spare funds to contribute to uni costs anyway. Sounds like overpaying on the mortgage should take priority as creates spare income in the long run.

Not in their names because I don’t want any money to go into their control directly at 18. So the accounts are in my name but specific designated ones I know have money not be touched and specifically for them.

@Heart90s Your update is significant in terms of financial planning, I think. Your role sounds an extremely demanding one.
I hope you won't mind if I veer off in a bit of a tangent....?

If you are in the TP scheme - it is a very good pension, but not very flexible, and it's linked to the state retirement age. Claiming early incurs a considerable reduction, and claiming an enhanced award due to medical is not an easy route.

In addition to Cash/S&S ISA savings, I would look into investing regularly into a small, low cost personal pension. Although it will not be a DB scheme, it will provide some of the benefits of a pension such as the tax relief top up, and a tax free lump sum, as well as much greater flexibility than the TP scheme.
You could build up a few years worth of income and take it at any time past the minimum age (currently 57, I think) or supplement a more part-time or supply role if you wanted to cut back further. You could drawdown as little as you need and keep it below your tax threshold. You could start and stop income to suit your health and circumstances.
This would allow you to stall claiming your TP early on if your condition worsens and preserve more of the benefits of a guaranteed income later in life.

Incidentally, I would recommend taking free sessions from NASUWT pension advice provider Wesleyan. They have excellent knowledge of the TP scheme, and the advice is well worth the membership fee. They don't push products onto you to give the hard sell.

(I'm not a financial adviser so please do your own research).

I think the advice about the personal pension is very good. some of the argument re overpaying mortgage depends on its interest rate vs. what you can get in savings. For uni we are currently having to find approx £500 per child per month for the parental contribution (they have/will take the maximum loans available but it is assessed on parental income) so I would set some initial targets and do something like:

1. £200 per month SIPP £50 pm tax relief added automatically ) - aiming for about £250000 pot by 2050 assuming 7% returns - this gives about 25K per year for 10 years until state pension age if needed - if not needed can take a lump sum out tax free when your daughter is mid twenties and may need help with house deposit or to pay off own mortgage
2. £100 per month Cash ISA for your uni contribution if needed - aiming for £30000 pot by 2040 at 3% - can adjust nearer the time when you know likely costs and course length - save in your name
3. £450 mortgage overpayment (unless you have a very low interest rate) - this is very safe as an investment but also not very flexible
4. £100 per month in S&S ISA - more flexible than pension - could be for you or daughter depending on what happens but I would keep in your name
5. £300 per month holidays/house
6. £100 per month for a big holiday every 4-5 years or so - have really lovely shared memories of doing active things as a family while we were all young and fit- ish so pleased we prioritised that

@CuttingAllTheFlowersStill the info about how much you're needing to provide for uni has been helpful. I was fully supported through uni with a grant and loan and small p/t job. It seems this won't be the case for DC in the current climate and with our earnings. I don't like the idea of her having to work TOO much to make ends meet and ruin the experience. Thanks for the advice.

@seekingasimplelife VERY helpful thank you. You've prompted me to look into my pension value and it drops about £5000 per year for every 5 years earlier I'd retire. So definitely a personal pension pot would be helpful.

My husband has looked into some of his work benefits and found he has a one off appointment with a financial advisor to look at his pension too.

You hair never get taught this stuff do you. Making decisions that could impact your quality of life in the future is really scary!

Accommodation costs for uni can vary wildly depending upon where you go. I have heard of some places at around £5k per year (assuming self-catered), some at around £9k (catered), and I’ve heard from a friend that halls in London can be about £15k per year (I suspect that may not be catered, as well). For my eldest, it is around £10.5k including catered accommodation in halls and spending money (for everything else, including some meals, and any course expenses, laundry, clothes etc). Some uni courses can be very full-on, with very high workloads, so part-time work may not be possible.
I agree with putting savings for DC not in their names - I have heard too many accounts of how the whole junior isa / child trust fund has been blown within a year!

I would set up a junior pension for your child - you can pay in £2880 a year and the government top this up with another £720 so you’d be saving £3600 a year for your child’s retirement. May seem a long way off but a good way of saving for your child and avoids the worry of them blowing ‘their’ savings on a two week jaunt to Lanzarote.

Thanks for starting this thread OP, I was going to post an identical one this week but wasn't sure how to word it! Loads of helpful info in here! Could someone explain for the SIPPs/Junior SIPPs, how do the charges add up in practice? Because they all look like they take a lot in fees and charges, so what are the advantages vs a S+S ISA that could be invested in a similar spread of funds (e.g. the Halifax S+S ISA costs £36 a year flat fee)?

I would personally prioritise paying off the mortgage, on the grounds that a mortgage is something you have to pay for (if you want to remain in the house, anyway), whereas savings for your child, while certainly great if they're possible, are more a choice.

Once you're shot of the mortgage you can then divert lots more into saving, but if for any reason your circumstances changed over the intervening time (for instance, if your health worsened), being free of the mortgage would put you in a much more secure position.

I completely agree with this

I would personally prioritise paying off the mortgage, on the grounds that a mortgage is something you haveto pay for (if you want to remain in the house, anyway), whereas savings for your child, while certainly great if they're possible, are more a choice.

My eldest is at uni so I can tell you some current figures. This is for living away from home and not London. Full maintenance loan is £9,978 and they only get that if the household income is less than £25k.

If your household income is above £62,343 then they only qualify for the minimum maintenance loan which for this year is £4,651. The first year halls accommodation was just over £6k for self catered, it was £8k for catered. Depending on where they go there can be a vast difference between campus accommodation costs. We top our child up to maximum loan amounts so our contribution is just over £5k per year, but we saved for it. That is absolutely plenty and DC has diverted some of the money they don't spend into savings.

We did not save in our child's name, luckily they are smart, money savvy, they already have a LISA for building a house deposit. They have friends who blow money, work, don't pay rent as they live at home, take home £1500 a month with no bills and blow every single penny month after month.

For us we had a general savings account, yes we transferred £40k to a specific uni account just before our eldest started uni but we built general savings in one pot because if we needed it for anything then we didn't feel like we were taking something specifically saved for the children. It paid for holidays, a new kitchen etc. We are savers, then spenders.

The hardest thing a child will face is getting onto the property ladder. Uni is "only" costing is £16k ish per child but if you can save for their house deposit then I would look into thinking about that.

£500 pension - tax relief makes this a no brainer although there is no access until 55/later.
£500 Stock & Shares ISA in your name. Any gains are tax free and fairly immediate access should you require the funds although imo, you should treat this as a long term investment.
£250 Instant Access Regular Savings Ac for holidays, etc.

There is no reason why you can't open a JISA or a JSIPP for your 2 yr old where you can deposit any cash birthday/xmas gifts from family members. It all adds up.

I'm in a similar position but with two KS1 kids.
•I save £25 a month for them into a stocks and shares isa, they'll get this when they're 18 so it's for their first year of uni if they want to go
•They have birthday money paid into premium bonds or their current account which will also be theirs at 18, the latter is for a first car.
•I'm saving £50 a month into their SIPPs, I equalised it by paying £50x 20 months age difference into eldest's so she has caught up albeit with no market growth.
•We save £1k into our own S&S ISAs for future uni costs/house deposits/our retirement to supplement pensions
•We overpay c.£250 a month on our mortgage as we have a ten year fix, we may pay it in full at the end of the term but saving it in ISAs gives us more options