I'm not sure if I should up my pension contributions, start saving into an ISA or up my mortgage contributions?
07 July 2021
Question by Louis
I have about £30,000 in savings and can save £500 -1000 a month. Currently it's just sitting in my current account and a low earning normal ISA. I'm not sure if I should up by pension contributions, start saving into a stocks and shares isa through Nutmeg or someone or up my mortgage contributions (or all three) I have some short term financial commitments, wedding mostly paid/5K set aside and we're in the process of doing up our house we bought in 2019 so think it makes sense to have 5k set aside for that In the mid term I would like to consider moving up the property ladder say in 5 years. So my worry is if my money is S&S ISA and its a bad year it wont be sensible to draw out similarly if I pay more in pension/mortgage payments then I will have less cash for our new house.
Answered by Rachel Efetha
Thanks for your question. There are pro's and con's for all three of the options as you can imagine. Firstly, I'd like to address your cash reserve. You've said that you've got £5k set aside for your wedding and it makes sense to set aside a further £5k for home improvements, but what about an emergency fund? We would always recommend 3-6 months expenditure set aside in cash or premium bonds in case you're made redundant/ your own business has a slow period/ are seriously ill and unable to work.
You say you would like to move up the property ladder in five years. I would say that you would be ok investing in a stocks and shares ISA as history shows us that over a five year period you can ride out the peaks and troughs. However, you should ask yourself the question of 'what if' you have lost some money at the end of the five years? Would you be prepared to wait it out for another year or so until markets went up again, would you be prepared to borrow more or perhaps take a short term loan from family to get your next property? If you've answered no to all these questions then it is a good indication that you should just park the money in cash and accept that it won't grow (and will actually lose value due to inflation) but at least you're not risking a big fall.
In terms of overpaying on the mortgage, this won't mean that you have less cash for the new house because you'll have more equity in your current property. Repayment of debt doesn't carry a risk like investments do so if you want to be sure that you won't lose money over the next five years then this is the best option. However, watch out for penalties - if you're on a fixed rate then you're likely to be only able to overpay by 10% of the original loan amount each year.
It would be good if you could allocate at least part of your lump sum or excess income to pension payments. it not only reduces your tax burden in the current year but also can help fund early retirement or the luxuries on top.
I think you would really benefit from some Cashflow Planning with an Independent Financial Adviser like me, or anyone else on the Boring Money Advice Panel. I/They will be able to sit down with you and get some actual facts and figures and produce different scenarios to see what the best outcome would be for you both in the medium term with your next house purchase and in the long term for your retirement.
Chartered Financial Designer
Rachel has nearly 30 years’ experience in Financial Services, with the last 21 years advising clients. She advises on a holistic basis but particularly enjoys Cashflow Planning to see when her clients can afford to retire, and has reduced grown men to tears twice by telling them they could afford to resign right now. As a divorcee herself, Rachel loves coaching women going through divorce to take financial control, and has successfully argued with solicitors to gain her clients a much bigger slice of the pension pie.