The Daily Telegraph - Saturday - Money
Can we spend £7k on yearly holidays and save to retire?
This is the dilemma facing one couple who want to travel while still building up a decent pension pot. By Fran Ivens
Clint Davies and Lizzie Batchelor had an epiphany last month while visiting a friend in Folkestone – it is time to move to the coast. “We visited in January and even though it was freezing and windy as hell, it was still lovely. We thought, why not?” said Mr Davies.
The couple, who own a flat in Bromley, south-east London, run their own mobile catering company called Knowing Meat, Knowing You that earns them an annual income of roughly £30,000 each. It also has the benefit of enabling them to work from anywhere, and the seasonal nature of events means they can take long holidays in the off-season.
On average they spend about £ 7,000 a year on holidays, visiting bucket list locations including Sri Lanka and Thailand, and have their sights set on Canada for a future trip.
They have also been able to save £120,000 which they intend to use to buy a £400,000 property on the coast. However, by their own admission, they have not thought much about pensions and have £ 30,000 and £10,000 in private pots.
They have built up £ 150,000 in equity in their flat, with an outstanding mortgage of £195,000. Their twoyear fixed rate mortgage at 1.54pc costs them £859 a month and ends in May. At current rates, a remortgage deal will likely increase the monthly payments to £1,150. Mr Davies, 41, and Ms Batchelor, 35, say they would rather spend money now that they can enjoy it rather than squirrelling it away in a pension, but would still like a comfortable retirement and know they need to start thinking about it.
Luke Ashton Private client director at Brooks Macdonald
Mr Davies and Ms Batchelor have done really well to build up equity in property and substantial levels of savings. First things first, as basic rate taxpayers, they can earn up to £1,000 of interest tax free with the Personal Savings allowance. But since they have a lot of savings, they might be earning more than that and paying tax on their savings. A simple way to avoid this is to move their savings into cash Isas, each using their annual £20,000 allowance; interest earned in an Isa is tax free.
They should also remember that while interest rates are likely to drop from current levels no one is predicting them to fall as low as they were from late 2008 to autumn 2022. So, they should plan based on interest rates being higher than in the last 16 years.
One option could be to keep their current property and use it as a buy-tolet to build up a pension, and put their savings towards a new home. This tactic would essentially attempt to use a property as a vehicle for funding retirement, which poses some challenges. Void periods or issues such as tenant non-payment of rent or works required to maintain the property could seriously impact your cash flow.
For retirement, it is good to have flexibility in how and when you draw income. Other investments, pensions and Isas can offer this, but a property can’t. A property is a specific asset class from an investment perspective, while a pension or Isa lets you choose the risk level, and access a much broader range of investment opportunities.
If they plan to sell the flat and move they could either put the equity from the property straight into a high interest savings account. Or they could use it to reduce the mortgage on the new home, and put the savings from a lower mortgage into a private pension.
One thing we need to consider is the power of investment growth and compounding. Given their ages they still have time to feel its benefits if they start making pension contributions now. As limited company owners they have the opportunity to make contributions via their limited company to their pensions. However, a big drawback of pensions is that you can’t access them until you are 57. So if you have other plans, like travelling, it may be wise not to put all your money into pensions.
They need to balance the here and now and the long term with cash flow planning. This could help them decide how much to put into their pension to make sure they have the retirement they are hoping for but also the confidence to spend money on travel and doing the things they want to do now.
Jack Munday Chartered financial planner at Saltus
One option would be keeping their flat on as a buy-to-let pension investment and buying a new property. However, that comes with a lot of potential drawbacks as property can be as much a liability as it is an asset. Future repair and maintenance costs are unknown, and if the flat is vacant they will be left to pay two mortgages.
All of these aspects eat into profit and even if they had years where they break even on the property, this could result in a strain on their finances when there is no cash to cover these costs. Also, mortgage rates are unpredictable; a slight movement could drastically move the net yield on property long term.
They could sell their flat in Bromley and move to the coast, using the equity as an additional deposit to considerably reduce the new mortgage. This option allows them to focus more on their quality of life. At the same time they can use Isas to make their savings more tax- efficient. By even just using cash
Isas, they can access their savings flexibly if they need and also improve options for later life. Or they could sell up, move to the coast, transfer the equity to a high interest savings account and use their limited company for pension funding. They can make use of employer pension contributions which are a cost saving against corporation tax. These go to the pension scheme directly and mean the income is tax free.
This is a tax- efficient way to move assets from the company into their personal names. However, due to their age, a delicate assessment needs to be done as to when they may need access. They cannot access these pension funds until age 57 at the earliest. Balancing the tax efficiency of funding their short and medium-term needs is key and needs more detailed analysis.
While they could sign up for another two- year mortgage which would help them to save more, it would just be a pause on objectives. However, if there was certainty that this would better their financial position and work towards their desired move, then it may be worthwhile.
If they did go down this route there would be a lot of work to be done about managing their tax position on savings. Again, by utilising Isa allowances in cash, they can move £20,000 of this cash each per year into a wrapper that benefits from tax free growth.
A final option may be to extend their mortgage term for as long as possible. This will reduce their interest payments on a monthly basis but it’s vital that they look to start a regular overpayment of the mortgage each month.
Any overpayment will be deducted from the capital owed as opposed to servicing interest. This would have the benefit of building more equity in the property as well which may, in turn, help with the eventual move and meeting of their objectives.