Reply to: Question regarding investing in an ISA

[NickNick]

Please, I hardly know you!

[SueEllen]

If I might add one thing. This has possibly been the most informative and interesting thread on here.

[NickNick]

If I might add one thing. This has possibly been the most informative and interesting thread on here.

[chris79]

I think I've come to an easy decision on the ISA front.

I've got quite a flexible mortgage and have the ability to borrow back as well as repay huge sums with no penalty (largely thanks to the fact I was lucky enough to get on the property ladder before the 2001 boom so have equity).

On this basis for now I might as well just max out my ISA every year, should there come a point where the interest rates mis-match and I'm losing money having it in the ISA I'll just withdraw it and pay off a chunk of the mortgage, if this doesn't happen then I've managed to utilise my ISA allowance every year so by the time my mortgage IS paid off I've got a nice tax free pot. It just means my mortgage will take longer to pay off, but every year through cost of living rises the overhead of a mortgage becomes less and less significant as it stays the same (providing the interest element is paid).

This thread has certainly given me some new things to consider though, personally I don't think the pension route is the one I want for several reasons, despite in theory being the most profitable/lucrative option.

Thanks again for all the replies.

[lukemg]

Get It In Stocks

My 2p
Depends on the amount of spare cash you have but I would seriously consider stocks ISA NOT cash.
I have been bunging money in PEP's and ISA's (in times of plenty) since 97 and they are averaging out at 11% per annum return which I am very happy with. The markets are down (which is the RIGHT time to get in) and Asia was going great last year (My Fidelity South East Asia fund was up 35% last year, although it lost some of these gains in the last month)
Key elements are:
1. YOU MUST leave the money in for 5-10 years MINIMUM, if you bottle it during any downturn or are likely to need the cash sooner, this is not for you. I use this as a kind of pension which sets it up as long term, although I am also setting up a SIPP.
2. Make sure you have 6 months expenses in cash to cover spells out of work, unexpected stuff etc.
Have a look at H-L.co.uk - they can get good discounts for initial investment and annual fees, you can split across funds also. They have 150 funds across all sectors that they recommend (without looking at your personal finances). Personally I am looking at South-East Asia and BRIC funds (Brazil, Russia, India, China) BUT I have a number of safer UK and European funds which mean I can take a punt with a small percentage, would advise general UK fund for initial fund, Europe is bad currently due to exchange rate and USA still flaky I believe.
These funds will see me able to retire at 55 if needed, they are my plan B and very low maintenance. Yes I should have bought property but I didn't so this will have to do !
Get some in the market and working for you, cash ISA's are for the ultra cautious if you are 30-40 it's a no-brainer !

[SueEllen]

I have a slightly different outlook on it, what if you don't live past 65? All that money you have ploughed into your pension will disappear and you won't have got anything out of it, also you cannot pass it on to your wife/children.

Statistically if you are born after the war you are likely to live past 65 which is why life insurance is cheap. Even if you don't like IR35 Avoider stated your wife and children get it.

Where is the guarantee that El Gordo will not come up with an interesting new way to plunder pension funds and make all that saving worthless?

Since there are lots of people not saving and lots who don't have a pension especially the self-employed, until the rate of savings whether in pensions or not goes up no chancellor will bother plundering them.

They are more likely to think of a tax (well there is already one -council tax) which screws you once you receive your pension.

I fully intend to work all my life, and when I'm older and unable to work own a business that will still be turning over enough profit to keep me in vodka and incontinence pants until my dying day.

No one knows what lies ahead in the future.

I still make sure I get my state pension and will pay into a pension like mad if I ever have a permie job (They normally match pension payments so you double your money) but I don't bother with private ones.

The majority of people in permanent employment in the private sector have employers who are doing all they can to avoid contributing to their employees pensions. This is why the government is thinking of yet another scheme to raise contributions.

[IR35 Avoider]

Wow thanks for that, I think it's worth me spending a half day this weekend tapping some figures into Excel and working out different scenarios then.

One of the big negatives for me personally is having to wait until 55 if I go the pension route, I don't like the idea of having a big pot of money locked out my grasp, as if that pot of money is sitting readily available it offers so many life options/choices BEFORE I'm 55..

I'm kind of working on the basis that I can pay my mortgage off fast, then build up a pot in an accessible savings/investment to take semi-retirement from my mid 40s (if all goes to plan and I play my cards right), then when this eventually runs out 20 odd years later I can sell my house to release all the equity and rent a small property until I die (or have my kids look after me, or state pension ho ho!).. With medical advances etc, perhaps I could live to 90 or 100, that's like half your life on a pension with the freedom to wake each day and choose exactly what you want to do.

I just fail to see the point of spending your entire life (like most people do) working to build up equity in property and material items only to then die and leave it to others and some of it to the tax man. That money could be used instead spread throughout the course of your life enjoying things??

Alternatively save up £300k or similar then when I'm 45 just walk into a casino and put it all on red. If I win I retire happy, if I lose I just carry on working... (joke!)

A plan to consider: set a target date (say age 45) and schedule payments on your mortgage calculated to pay it off by that date. Set a target for pension income, then work backwords to work out how much you need to save each year until 45 to achieve it. Then put any extra money you want to save into your ISA. If you use up your ISA allowances, split any extra savings into increased payment to your mortgage and pension to bring forward the target retirement date. (The ISA savings might be to cover the years before the pension kicks in at age 55, and possibly other purposes for which you need to save. You should also quantify these goals and work out how much you need to save towards them from now until 45.)

By spreading you investing over more years, compared to the pay-off-mortgage-then-invest approach, you reduce the risk of putting all your money into shares at a bad time.

[IR35 Avoider]

I have a slightly different outlook on it, what if you don't live past 65? All that money you have ploughed into your pension will disappear and you won't have got anything out of it, also you cannot pass it on to your wife/children.

Not sure what you meant by the money disappearing. If you die before you buy an annuity, the money by default goes to your estate, but you should fill in a nomimation form which means it can go directly to your wife (or anyone else you nominate) and is treated as not being part of your estate for inheritance tax purposes.

When you buy an annuity, you are translating your capital into an income for life, so strictly speaking the capital is "spent" at the time the annuity is bought. You can buy an annuity which will allow your wife to continue receiving income for the rest of her life, if she survives you. As you have spent all the money (when you bought the annuity) you will have got full use out of it at that point.

[Ardesco]

I have a slightly different outlook on it, what if you don't live past 65? All that money you have ploughed into your pension will disappear and you won't have got anything out of it, also you cannot pass it on to your wife/children.

Where is the guarantee that El Gordo will not come up with an interesting new way to plunder pension funds and make all that saving worthless?

I fully intend to work all my life, and when I'm older and unable to work own a business that will still be turning over enough profit to keep me in vodka and incontinence pants until my dying day.

I still make sure I get my state pension and will pay into a pension like mad if I ever have a permie job (They normally match pension payments so you double your money) but I don't bother with private ones.

[Lewis]

I had a recent conversation about this on another thread, but it was offset mortgage vs ISA. An offset mortgage is effectively the same as tax free savings. With a 5% mortgage interest rate you are effectively getting 7% on your savings (if you are a 40% tax payer, 6% if not).

At the moment I reckon most stock ISAs are just going to lose value, I can't see the stock market rising in the current financial climate, impending recession etc..

However you can get some cash ISAs paying up to 6.5% so I would agree it is possibly worth maxing out one of those each year and using the rest on the mortgage. If mortgage rates go up it would be worth putting it all into the mortgage.

You should have a pension, even just a tiny one. Eggs in many baskets and all that. Plus remember you get tax relief and so you are getting money for nothing from the government. Even if you just put in £100 a month you will get around £20 or £40 extra put in from the government (depending on your tax bracket).

Pensions seem to be very emotive on here but personally I think you'd be a little bonkers not to have something even if you do plan on getting property etc.. to live off.

[GreenerGrass]

I'm kind of working on the basis that I can pay my mortgage off fast, then build up a pot in an accessible savings/investment to take semi-retirement from my mid 40sworking... (joke!)

I am aiming for something similar, at your age it should be well achievable if you can keep contracting. At the moment I have a foot in all camps (pension, ISAs, mortgage overpayments) but if I remortgage over a shorter term I might cut out the ISA contributions.

Its certainly worthwhile building up at least 12 months living expenses in savings (if you haven't already) and then concentrate on the mortgage.
When you have cleared your mortgage you could "catch up" on the tax-free saving you have "missed" by using something like NS&I index linked certs - you can stick up to £15k per year in each of the 3 and 5 year ones.

The tax advantage of a pension is clear if you are a higher rate taxpayer.
But what people haven't mentioned is if you want to stop working fulltime in your 40s then you need to eliminate the drain of a mortgage sooner than if you just cared about having a million pound pension pot.
There is stuff I would like to do in my 40s that I couldn't do in my 60s.

The other reason not to stuff everything into a pension is if you want to be able to invest in something in the future (property, business etc) outside of what a SIPP will allow.

[SueEllen]

Wow thanks for that, I think it's worth me spending a half day this weekend tapping some figures into Excel and working out different scenarios then.

One of the big negatives for me personally is having to wait until 55 if I go the pension route, I don't like the idea of having a big pot of money locked out my grasp, as if that pot of money is sitting readily available it offers so many life options/choices BEFORE I'm 55..

That's the entire point of a pension.

If you had easy access to savings then you would probably end up spending it on your kids if you have/had some. The majority of parents want the best for there kids so will spend as much money as they have available on them.

If you end up having an accident which means you can't work (it does happen) the state can't refuse to help you as savings in pensions don't count towards any means tested benefits.

Also if you live until you are 90+ an annuity is a good thing as you win in the pooling of money stakes.

I'm kind of working on the basis that I can pay my mortgage off fast, then build up a pot in an accessible savings/investment to take semi-retirement from my mid 40s (if all goes to plan and I play my cards right), then when this eventually runs out 20 odd years later I can sell my house to release all the equity and rent a small property until I die (or have my kids look after me, or state pension ho ho!).. With medical advances etc, perhaps I could live to 90 or 100, that's like half your life on a pension with the freedom to wake each day and choose exactly what you want to do.

I just fail to see the point of spending your entire life (like most people do) working to build up equity in property and material items only to then die and leave it to others and some of it to the tax man. That money could be used instead spread throughout the course of your life enjoying things??

Alternatively save up £300k or similar then when I'm 45 just walk into a casino and put it all on red. If I win I retire happy, if I lose I just carry on working... (joke!)

Your plan relies on house prices rising or staying static, and your life events going as planned.

Older people who brought houses brought houses for stability not because it would be a raising asset - well my parents and their friends' did. Then again they were/are the people who got the generous pension provision...........

No one has a crystal ball which is why I've always been told by my accountant friends' and family to diversify investments.

[chris79]

Wow thanks for that, I think it's worth me spending a half day this weekend tapping some figures into Excel and working out different scenarios then.

One of the big negatives for me personally is having to wait until 55 if I go the pension route, I don't like the idea of having a big pot of money locked out my grasp, as if that pot of money is sitting readily available it offers so many life options/choices BEFORE I'm 55..

I'm kind of working on the basis that I can pay my mortgage off fast, then build up a pot in an accessible savings/investment to take semi-retirement from my mid 40s (if all goes to plan and I play my cards right), then when this eventually runs out 20 odd years later I can sell my house to release all the equity and rent a small property until I die (or have my kids look after me, or state pension ho ho!).. With medical advances etc, perhaps I could live to 90 or 100, that's like half your life on a pension with the freedom to wake each day and choose exactly what you want to do.

I just fail to see the point of spending your entire life (like most people do) working to build up equity in property and material items only to then die and leave it to others and some of it to the tax man. That money could be used instead spread throughout the course of your life enjoying things??

Alternatively save up £300k or similar then when I'm 45 just walk into a casino and put it all on red. If I win I retire happy, if I lose I just carry on working... (joke!)

[minstrel]

It's worth doing the sums.

I definitely agree with SueEllen about spreading risk by investing in pensions, ISAs and paying off the mortgage, but from a pure theoretical point of view the pension route wins hands down.

I ran some figures a year or so ago based on having £5k net spare cash available each year and comparing what would happen if I used it to pay off mortgage or invest in a pension. I assumed a mortgage interest rate of 5% and pension growth of 7% over 25 years.

Putting it in a pension you end up with a pension pot of around £572k.

Paying off mortgage you reduce mortgage by around £239k.

Then if you assume you can take 25% of your pension as tax free cash, you can take £143k from your pension to pay off your mortgage. This gives you a pension pot of £429k with £95k additional to pay into your mortgage to get you in the same position as if you had paid off your mortgage early.

Or put another way you make £334k more by investing in pension than paying off mortgage.

Even if you assume mortgage rates and pension rates to both be 7%, the pension route still leaves you £256k better off.

Just to dampen that a little, you will have to pay some tax when you draw from the pension pot and your money is locked in to the pension which will probably force you to buy an annuity at some point.

I tend to invest equally in pensions and ISAs, and then start paying off mortgage capital. Always good to diversify investments and spread risk.

[chris79]

Thanks for the replies here, they have been very informative and useful! I'm cautious to make the right decisions now, because of the snowball effect implications it can have by the time I get older!