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Hi all, I come seeking your advice on what to do with my money. After years of being completely irresponsible and spending money I didn't really have on crap I didn't need, I've finally turned it round and am looking to save some money and plan my future a bit better. I can't believe how much happier and content I have become since taking control of my finances. Currently I have a healthy enough balance in my current account to cover day to day expenses and a decent emergency buffer, and £15,000 savings. No debt apart from the mortgage on my house. As far as regular provisioning for the future goes am doing this: 1: Overpay my mortgage by £400 /month - at the current rate of interest and outstanding balance I should have the house paid off in ~12 years instead of the 23 years it would have taken. God knows how much interest this will save, a lot though. 2: Pay £367 /month into a pension. My employer tops this up by £330 /month so the total is £697 /month. I have thought about moving the £15,000 savings money from the Premium Bond account it is currently held in into a high interest (ha!) savings account, but would lose 40% of the interest earned in tax as I am a higher rate tax payer. Should I split this money into an ISA? I was thinking of opening one now, putting the maximum £5640 in before April, and then another £5760 in April when the new financial year starts, then do the same again next year with the remaining money. Does that sound reasonable? It would save me from paying tax on the interest. I have run the numbers on my budget and can afford to save £1000/month on top of this. I have no real idea of what to do with it though and would welcome any advice. I would love to be mortgage-free as early as possible but is having a lot of money tied up in a house a good idea when it could be "out there" working for me?
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| # ? Jan 18, 2013 16:32 |
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| # ? May 24, 2013 00:12 |
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First up, whatever you do I'd definitely get out of the Premium Bonds -- their expected return is 1.5% tax-free (and even lower if you factor out the high prizes you're unlikely to win) which pretty much any other option should beat. Even shifting the money into normal savings and buying lotto tickets with the interest would probably have a higher expected return than holding PBs. Depending on your mortgage interest rate, overpayments will probably give a better return than even ISA savings (as long as your mortgage rate is higher than the after-tax interest you could get on savings). The obvious downside being that you have less cash available, so it depends on what events you think might come up -- you might decide it's worthwhile to keep the £15k to hand in case your car breaks down/you decide to elope/you get seriously ill and decide to go private for healthcare etc etc. ISAs are definitely the way to go for cash savings. Like you say the best move would be to fill your allowance now and then again after April -- the best deals tend to come out around the start of the new tax year, so if you open an easy-access ISA now you'd be able to transfer in to a better one once April rolls around. Alternatively you might want to think about using a Stocks & Shares ISA -- it's more for longer-term investments but it gives you a chance to sock away another £5.6k/year tax free, and the returns should significantly outpace both cash savings and mortgage overpayments in the long run. Depending on your age and how much you already have saved up, you might want to consider more retirement savings -- if you're still fairly young chances are you won't get a state pension until 70+, and if you want to retire before then having plenty saved in your pension or a S&S ISA is pretty important. As a higher-rate taxpayer the pension is probably your best bet, since it lets you avoid tax (and possibly NI, depending on how your employer's scheme is set up) on contributions. Your pension provider should be able to provide you a quote of what kind of pension you'll get at retirement with your current level of savings (or you could make one yourself using something like this) which should give you some idea of whether or not you need to start saving more. Again, an S&S ISA can be used for retirement planning as well, since it allows tax-free growth and allows you to hold shares that should give a good long-term return -- as well as letting you take the money out whenever you want.
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| # ? Jan 18, 2013 17:32 |
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Hey thanks for the reply. My reasoning for the bonds was rather than pay 40% tax on the interest in a ~2% easy access savings account, take the lower probable return but with the chance to win a million £ every month  Will definitely look into the ISAs - splitting the total allowance each year between cash and S&S seems reasonable, and would fit in nicely with my £1k /month budget.
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| # ? Jan 18, 2013 18:45 |
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plecostomus posted:lose 40% of the interest earned in tax as I am a higher rate tax payer. If you're a higher rate tax payer, the most efficient method of saving is to ask your employer if you can do salary sacrifice on your pension. That way you take a voluntary pay cut, but the money you've 'lost' goes directly into your pension - but the kicker is, you pay no income tax on that money going into your pension, no National Insurance, and no Student Loan (assuming you're paying that still). So you pay 0% effective tax on that money as opposed to the 42% (or 51% with loan repayments) effective rate. A slightly less effective way of doing this is to put the money into your pension without salary sacrifice. Most (all?) pension providers will quickly refund the basic rate of 20% on any money deposited (mine takes 6-7 weeks to do this), and furthermore you can claim the remaining 20% back from HMRC via your tax return, which means you'll pay less income tax the next financial years via a revised tax code. You can't reclaim any National Insurance or student loan this way. Of course, the downsides of pensions over ISAs are that you cannot get to the money before you turn 55 except in extreme cases of disability that preclude you working, and that you have to pay income tax on the money coming out of your pension when you retire. However, if you can organise your affairs so that you avoid the 40% bracket whilst employed, but only end up in the 20% bracket whilst retired, you've effectively dodged quite a hefty amount of tax. My pension account is a SIPP (Self Invested Personal Pension) which is basically identical to a S&S ISA except for the way that the income tax is handled - it can invest in exactly the same range of vehicles. Also seconding getting out of the Premium Bonds, they lag inflation so badly that unless you fluke one of the bigger prizes you're better off with a high-interest savings account or a Cash ISA. Mr Crucial fucked around with this message at Jan 20, 2013 around 14:09 |
| # ? Jan 20, 2013 14:03 |
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Mr Crucial posted:If you're a higher rate tax payer, the most efficient method of saving is to ask your employer if you can do salary sacrifice on your pension. That way you take a voluntary pay cut, but the money you've 'lost' goes directly into your pension - but the kicker is, you pay no income tax on that money going into your pension, no National Insurance, and no Student Loan (assuming you're paying that still). So you pay 0% effective tax on that money as opposed to the 42% (or 51% with loan repayments) effective rate. Thanks, I just converted over to a "smart" pension as of next month which promises to do a salary sacrifice and avoid the extra tax burden. HR say this is a popular choice among my peers. I'm going to pull the £15k from bonds and put it in a savings account for my son (ISA and long term savings bonds? I think these are tax free) for future university fees or house deposit, build up my ISA allowances each year, and any spare money will go into my emergency fund. At some point I will need to buy a new car / roof the house / replace the boiler so keeping some money readily available is a good idea, even if it isn't attracting a decent interest rate. I guess the question is whether it's worth hammering down my mortgage term by extra overpayments and hoping that my future earnings will be able to cover extra pension / savings contributions, or keeping the status quo.
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| # ? Jan 22, 2013 18:11 |
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| # ? May 24, 2013 00:12 |
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plecostomus posted:I guess the question is whether it's worth hammering down my mortgage term by extra overpayments and hoping that my future earnings will be able to cover extra pension / savings contributions, or keeping the status quo. It really depends how much flexibility you need. If you overpay your mortgage you can't get that money back out again unless you sell your house or re-mortgage, but money in savings accounts is much more readily accessible. If you're going to need the money for a car or boiler or whatever, it makes the most sense to me to keep the cash. After you've made those purchases you can always put anything left over into your mortgage or pension if you want.
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| # ? Jan 26, 2013 21:31 |
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