Seeking advice from UK Mustachians please!

[MostlyBearded]

Hi all,

I am starting from scratch here. 30 y/o having spent my way through my twenties and finally seen the light. OH, although prone to splurging now and again is generally quite frugal anyway and she is embracing the changes we are making in our lives.

What I need to decide upon is which vehicle to get my savings into. I thought about increasing my auto-enrol pension contributions which are through Royal London, but their fees of 1% minimum management don't look attractive. Also I'm not crazy about the pension idea even if I transfer to a SIPP as I can't access my money before age 55 and I expect to FIRE potentially 10 years or so earlier.

So unless I'm missing an obvious trick (feel free to step in and smash my face in) ISA is the route I am planning on taking. I will still continue to contribute my minimum to the pension as I get 4% employer match. I just need to decide which ISA to go for, any recommendations?

Can provide more details if needed.

Thanks,

[EsioTrot]

Hi Nameshack,

If you're starting from scratch or a low baseline, I'd check out what incentives are on offer via topcashback or quidco. Time it right and You can pull £50 or £100 reward if you pick an ISA through them, which will outdo most savings rates for your first year-depending on how much you're depositing. 

You might want to check out the peer to peer lending sites like zopa or ratesetter-they can pull in 5-6% interest (at some risk) and should be offering ISA's later on this year. Again, check the reward sites and see if there's an offer on.

Some of the current accounts can also get you 3 or 4% interest, better than most cash ISA's.

[Butterfingers]

Three questions to better answer your query:

1. Which income tax band are you in?
2. Is your company pension done via salary sacrifice?
3. How much money are you looking to put away each month?

[MostlyBearded]

Three questions to better answer your query:

1. Which income tax band are you in?
2. Is your company pension done via salary sacrifice?
3. How much money are you looking to put away each month?

Thanks for the reply Butterfingers.

1. Basic rate, my salary is £37k although my annual bonus (£5k-10k estimate) could potentially tip me into 40%
2. Company pension is salary sacrifice. It's current 2% my side and 4% employer. Within the next year it will auto increase my contribution to 4%.
3. I am currently paying off my debt emergency, but looking to start within 6 months. Based on what I have been contributing towards my debts it will be approx. £1,000 a month

Just to clarify, I am looking for an account that will give me access to low cost funds - Thanks to EsioTrot for the suggestions anyway.

[Butterfingers]

Thanks Nameswhack.

I presume 4% is the maximum company match? Salary sacrifice is often more powerful than paying into an ISA, even with the higher fees on your pension. You'll save 20% tax plus 12% NI contributions on anything you contribute via salary sacrifice. I am in a similar situation regarding FIRE date and need for bridging funds, but I'm concerned about how long salary sacrifice will be around (I think a future government will shut it down), so I am front-loading my pension while I can (exceeding the company match).

Even if you don't fancy pushing more cash into your pension at the basic rate, it becomes a no-brainer once you cross the higher-rate threshold (40% tax + 12% NI versus 20% tax free for the ISA on withdrawal).

For S&S ISAs, I use Fidelity to buy Vanguard Lifestrategy 100. Total expenses of 0.49% for self-rebalancing, diversified portfolio.

[MostlyBearded]

Yep, 4% is the maximum they will match. I think if/when I hit 40% tax bracket, I will definitely load that up into the pension pot because it's a huge boost.

I'm still on the fence when paying basic rate. I figure that regardless of what I invest elsewhere I will continue to chuck in the monthly minimum to my pension with the employer match since that's basically free money!

However, if I invest it in the ISA I guess I will be losing 20% on the way in and gaining it on the way out (tax wise at least) The 12% NI may be negligible as year by year the pension fees eat into my earnings. Assuming modest growth from a the same monthly deposit over long term - the fees seem to outweigh the employer contribution.

4% Employers Contribution x 15 years = ballpark £21,000 but my back of an envelope calculations bring the Royal London fees out as a lot higher over the 25 years until the money is available to draw.

Thanks very much for the tip on Fidelity / VG tip, I will look into that for sure!

Does my theory make sense? I am quite new to all of this but have given it some thought!

[Butterfingers]

The pension/ISA conundrum depends on the gap between the expense ratios on each option and the timespan.

Option A: Contribute £1,000 post-tax into S&S ISA, 0.5% TER (total expense ratio)
Option B: Contribute £1,320 pre-tax into pension, 1% TER

If both options are generating a 5% real return before fees and your contributions remain the same, then let's say you pay in until you FIRE at 45, and they both carry on compounding until you reach 55. In that case by my calculations you're looking at £394,833.91 (A) versus £474,327.69 (B). On face value that looks pretty much even (factoring in 20% income tax on withdrawals from option B), but remember you can now take a 25% lump sum of your pension tax free. So if you did that, and salted the tax-free lump into your ISA over a few years, option B would be a clear winner.

Of course if the gap in TER is higher, or the pension fund underperforms your ISA, or you retire at 55 rather than 45, or you move into the 40% bracket, then the results change. The rules around pensions and ISAs can and probably will change over that time period.

Don't trust my numbers, but do run your own. I was, like you, initially all gung ho for ISAs over pensions (lower expenses, not locked until a certain age), but in my case contributing more to my pension makes sense, and it might do for you too.

[MostlyBearded]

The pension/ISA conundrum depends on the gap between the expense ratios on each option and the timespan.

Option A: Contribute £1,000 post-tax into S&S ISA, 0.5% TER (total expense ratio)
Option B: Contribute £1,320 pre-tax into pension, 1% TER

If both options are generating a 5% real return before fees and your contributions remain the same, then let's say you pay in until you FIRE at 45, and they both carry on compounding until you reach 55. In that case by my calculations you're looking at £394,833.91 (A) versus £474,327.69 (B). On face value that looks pretty much even (factoring in 20% income tax on withdrawals from option B), but remember you can now take a 25% lump sum of your pension tax free. So if you did that, and salted the tax-free lump into your ISA over a few years, option B would be a clear winner.

Of course if the gap in TER is higher, or the pension fund underperforms your ISA, or you retire at 55 rather than 45, or you move into the 40% bracket, then the results change. The rules around pensions and ISAs can and probably will change over that time period.

Don't trust my numbers, but do run your own. I was, like you, initially all gung ho for ISAs over pensions (lower expenses, not locked until a certain age), but in my case contributing more to my pension makes sense, and it might do for you too.

Thanks very much for that. It simplifies the jumble of figures in my head putting it like that!

[MostlyBearded]

Actually, one thing I hadn't considered is the personal allowance on retirement income. Am I right in assuming under the current system, if I wanted an income of say, £15,000 in retirement - I would only pay 20% on the last £4,000?

[Butterfingers]

That's right, plus there are other allowances – £5k tax-free for dividends, £1k for interest earnings, £1k side income allowance, £7.5k for renting out a spare room. If you had a paid-off house and the right mix of assets you could easily get to a decent standard of living in retirement without paying any tax at all.

[Exenos]

Remember the 55 age will be rising so it's 10 years behind the state pension age, so this will be around 58.

If you're looking at retiring 10-15 years before, look to split it so that by the time you retire you have enough to cover expenses in your ISA until you're eligible to use your pension? That's the way I figured would be the best if utilising both.

Excel is the easiest way to figure it all out. I'm putting everything into ISAs, as will be about 25-30 years before I can access pensions so I'd be hitting 4% SWR in my ISAs anyway.

[Butterfingers]

Remember the 55 age will be rising so it's 10 years behind the state pension age, so this will be around 58.

Isn't that just for SIPPs? I thought company pension schemes could still set their own dates.

[MostlyBearded]

Just been reading your journal BF... some striking similarities in our situations! :)

I will write mine up when I get the chance!

[Butterfingers]

Will look forward to seeing your journal – please post here when it's up. I haven't updated my journal in a while – we bought a house and things got complicated. Waiting for the post-purchase financial situation to stabilise before posting an update.

[cerat0n1a]

Remember the 55 age will be rising so it's 10 years behind the state pension age, so this will be around 58.

Isn't that just for SIPPs? I thought company pension schemes could still set their own dates.

Think that's changed and it's now 10 years behind state pension, so 57/58 as Exenos said. Even if you plan to retire at say 45, you should still take advantage of the pension system as much as possible. Just have to think in terms of money to last from 45-58 & then pension - the 4% rule still applies (broadly) provided you have enough non-pension capital to get through the first period.

Nameswhack, do you own a house? You might want to look at Lifetime ISA if not. Starts in 2017 and the govt will add 25% in, under certain conditions.

Also, do you have any debt or student loans?

[MostlyBearded]

Hi cerat0n1a,

We are due to complete on our first house on 24th June so unfortunately we missed that boat!

Debts are as follows...

£216,000 mortgage over 35 years fixed at 2.6% for 2 years- this should really have been better but my OH has been living in the UK less than 3 years which meant we narrowly missed the lending criteria for lower rate deals. Hence 2 years and we  will remortgage hopefully to a better deal.

£7,000 interest free to my father who has kindly helped us with the stamp duty and carpets. I hate the fact I owe him and will prioritise this debt above the rest.

£2,500 on credit cards at 35% (ouch!) - words fail me that I was this stupid a year or so ago to run this up. I was between jobs for a couple of months and paid my living costs for a couple of months on it. This will be getting refinanced to a 0% card as soon as the mortgage is live and paid off way before the interest kicks in.

£5,000 on a 2006 BMW 320D Which I bought in November last year. £196 p/m at approx 9%. I will be overpaying this as much as possible as soon as my Dad is repaid then selling it and replacing with a more economical runaround for about £1500 and paying cash.

Student loan was fully settled a few months ago. I am also expecting an insurance settlement of approx £3500 and a rebate for overpaid student loan of around £800 all of which will be getting thrown straight over the debt fire.

Not a pretty picture overall, but I am so happy to see all the numbers moving in the right direction. The last 6 months we have cut our spending from 100%+ income to around 50% and stashing the rest for thw house. We suddenly noticed that we still enjoyed life just as much without going to dinner 3 times a week... who knew?!

[Butterfingers]

Well done, that's a pretty dramatic shift. If you can get the LTV down below the next threshold before you remortgage that will also help with the rate. 2.6% is not horrendous, and hopefully the historic lows are still there when you remortgage. With those non-mortgage debts and your savings rate that looks to be about ten months' worth of repayment to clear. Well done too for paying your da back first – it'll cost you a bit more in interest, but it'll be worth it.

Think that's changed and it's now 10 years behind state pension, so 57/58 as Exenos said. Even if you plan to retire at say 45, you should still take advantage of the pension system as much as possible. Just have to think in terms of money to last from 45-58 & then pension - the 4% rule still applies (broadly) provided you have enough non-pension capital to get through the first period.

Thank you, that's what I'm planning. Essentially using the ISA as a bridge to the pension, though I might need a bit more in the ISA than I had thought.

[MostlyBearded]

Thanks, yep fingers crossed for cheap mortgages sticking around for a while!

[cerat0n1a]

Seems like your immediate priority should be paying off credit card & car loan rather than putting money into an ISA then.

I'd also say that moving into your first house can be an expensive time - you typically have to buy stuff you might not have previously needed (lawnmower, as a random example) and tools to do every little job round the house. So having some contingency for that is probably sensible.

[MostlyBearded]

Yep we are going to deal with those first. I just want to have a plan ready for what to do with our extra cash once the debt's crushed which shouldn't be too long :)

House wise, we are quite lucky in that we already have pretty much all possible furniture we need. Maybe a few bits but shouldn't be more than £500. It's a brand new house, so the builders will do all of the snags for us and I can build up my collection of manly tools gradually!

[Exenos]

I believe company pensions rise as well, so your ISAs would have to last until 58.

So if you were shooting for retiring at 40 with a 4% SWR, you'd want 25x your spending across both. But the ISA would have to last 18 years.

That might mean 18x in ISA, and 7x in Pension, or 12x in ISA (Counting on that 5% expected return to carry you) and 13% in Pension. The latter would mean retiring earlier but more risk of running out before being able to access your pension.

[MostlyBearded]

Whenever I run my projected savings rate based on current income vs expenses through my spreadsheets, along with getting the mortgage fully cleared before FIRE it always equates to late 40's or so.

However, in reality we should both be looking at steadily increasing salaries over the next decade or so and once I reach FI, I will probably still continue to work in some capacity - albeit a much more relaxed approach to it. That kind of thinking always puts my mind at ease that I could "retire" earlier but still bring in some money, just with no pressure and it reduces the worry of running out!