Decisions … Decisions

Atlanta USA 145 - Version 2When I first embarked on this FI project I felt like a kid in a candy store with very little money: want everything can afford next to nothing. I wanted to pay off that ridiculously large mortgage asap, use all my annual ISA allowance, stash away more moolah for the rainy day, and contribute more than the bare minimum into a workplace pension. But I also wanted a (very expensive and completely unnecessary) basement conversion because, y’know, nowadays basement conversions are all the rage in London, and alcove shelving, and a drip irrigation system for the patio, just a regular one, not a green wall or anything, no need to be extravagant, and a new kitesurf board since mine is rather old… soon it became apparent that I needed to prioritise.

I zeroed in on overpaying the mortgage; there’s a consensus on the FI blogosphere that debt repayment comes before investing, and I didn’t have any non-mortgage debt. It turned out to be an ok decision, albeit ridiculously tax inefficient. My marginal tax rate is such that I can’t even think of it without swearing [1]. So overpaying the mortgage was not a completely shite move, however, now that its balance has reduced and a mere sight the annual mortgage statement no longer brings on a tachycardic attack, I’ve decided to give it a rest and focus on the pension.

In the UK at least, a pension, be it a workplace pension or a SIPP, is the most tax efficient FI vehicle on offer. The only downside is having to wait until you are  56  58 before you’re allowed to get your mitts on the loot. But given how low interest rates are at the moment it makes no sense paying 40%-60% income tax and then overpaying the mortgage from after-tax income. I’m timing my Mortgage Free Day to coincide with my FI Day. Virtually all my savings are going into the pension so as to reduce income tax. I have enough carried over pension allowance to last me until 2018. When that runs out pension contributions will be limited to £40k p.a., and I’ll have to decide on what to do with any additional savings. I suspect that it’ll be a tossup between mortgage overpayments and ISA contributions. I also suspect that I’ll choose to fatten up my emergency stash in the form of a cash ISA first and put the rest into S&S ISA. I’ll need a freedom fund to live on between early retirement and the ripe old age of 58.

Some might say that investing in S&S ISA with an outstanding mortgage is a somewhat risky proposition. Perhaps it is, but then again, that’s what an emergency fund is for. I’ll go out on a limb here and say that I don’t think interest rates will rise from where they are now in foreseeable future. First world economies are creaking under a mountain of cheap debt; they’d outright collapse if that debt became expensive. The more cheap debt gets accumulated in the system, the less possible it will be for those in charge to ever raise the rates back to normal levels where markets can function as mechanisms for moving savings into productive investments. Everyone knows it, but events (dear boy) keep rolling in. The GFC ended, but then Brexit happened, and when that shitshow gets sorted out [2] then China’s bubble will pop with a bang [3]… China will have to lift capital controls at some point. Hence given a mortgage rate of c.1.3% vs a tax rate of 40%-60%, it’s a no brainer. Maybe.

Notes:

  1. I can swear in 6 languages, and when you do it quietly in your head there are no forbidden words. It is Known.
  2. Don’t start on it and I promise to do my utmost to not disintegrate into a rant about the stupid, xenophobic, irresponsible, stupid, economically illiterate, intellectually dishonest, stupid brexiteer twits, to whom I usually refer as ze clusterfuck implementation committee, ya?
  3. China is a qualitative constraint on my early retirement plan. The current goalpost is c.£1m (depending on  the rate of inflation between now and 10-or-so years from now), but only if the Chinese bubble has burst in the interim. Otherwise I’ll consider carrying on at the salt mines until it does, because when it does I might just get a redundancy payout.

2 thoughts on “Decisions … Decisions”

  1. “I have enough carried over pension allowance to last me until 2018. When that runs out pension contributions will be limited to £40k p.a.” How bracing it is to read one’s own hopes from just a few years ago.

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    1. Indeed. The carried forward allowance has run out (albeit I have made some hay in that sunshine) and now my pension contributions are limited to c.£36k p.a. thanks to George’s pension allowance taper. S&S ISA has taken precedence as far as excess cash goes, now that my emergency fund is where I want it to be…. So I wasn’t too far off the mark 😉

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