Pay off the Mortgage or top up my Pension pot?

You rmortgage is cheap and you seem to have a decent pension so I'll say it's stocks and shares ISA time. The advantage of the ISA is that you have access to the full lump sum at any time, so it's good as a complement to the pension income. If you become a higher rate tax payer that would be the time to look at putting more money into the pension.

If you're unfamiliar with stocks and shares ISAs take a look at these investments that can be held in one to give you some idea of the range available:

30% BlackRock UK Absolute Alpha
20% Cru Investment Portfolio
20% Invesco Perpetual Monthly Income Plus
20% Invesco Perpetual Income
10% Neptune Global Equity

The first three are quite stable and invest in different ways while the last two are one of the most popular UK funds and a fairly aggressive global fund. The proportions are selected so that it's unlikely you'd lose capital over a year or more, but at the expense of substantially reduced long term growth potential. Still likely to be more than 9% a year though.

And that expectation of more than 9% a year is why it's likely to beat overpaying the mortgage.

This is just a place to get started - it's not really adequate long term, just something that's a fairly safe way to start out and show the benefit of combining different types of investment with different properties.

cash traditionally only just about keeps pace with inflation. So, it is fair to assume that you are not seeing any real growth with that money. Retirement provision is typically long term and using cash for long term planning can be quite wasteful.

Cash is great for the short term, emergency fund and a bit of suprlus and the years you get closer to retirement but for 20-30 or 40 years it can actually become a greater risk than using a balanced spread of investments.

jamesd wrote: »

You rmortgage is cheap and you seem to have a decent pension so I'll say it's stocks and shares ISA time. The advantage of the ISA is that you have access to the full lump sum at any time, so it's good as a complement to the pension income. If you become a higher rate tax payer that would be the time to look at putting more money into the pension.

If you're unfamiliar with stocks and shares ISAs take a look at these investments that can be held in one to give you some idea of the range available:

30% BlackRock UK Absolute Alpha
20% Cru Investment Portfolio
20% Invesco Perpetual Monthly Income Plus
20% Invesco Perpetual Income
10% Neptune Global Equity

The first three are quite stable and invest in different ways while the last two are one of the most popular UK funds and a fairly aggressive global fund. The proportions are selected so that it's unlikely you'd lose capital over a year or more, but at the expense of substantially reduced long term growth potential. Still likely to be more than 9% a year though.

And that expectation of more than 9% a year is why it's likely to beat overpaying the mortgage.

I don't think you should assume 9% at all. Blackrock UK Absolute Alpha has outperformed that over 1 year, but with all the extra money this is bringing it seems unlikely to do so over 5-10 years. The CF fund is returning a far more plausible 7.61%, but again, only over 1 year.

In theory the other funds should do better (higher risk means higher return), so you could perhaps assume 8% (though I doubt the FSA would accept this) per annum.

That said, the base + 0.23% is a pretty low rate to be borrowing money. 5.23%. You have to gross that up (add on tax at 20%), which gives 6.54%.

Although I would be very cautious about assuming a 9% return, my conclusion is the same - at 6.54% secured over 25 years, it is a no-brainer to, in effect, borrow to invest (given that your repayments are affordable, and you're never going to get any margin calls or anything unpleasant like that on the money you're borrowing).

You should of course consider adjust your investment return for risk, i.e. an 8% return with 10% standard deviation is not as good as 8% with zero standard deviation. But I reckon you can beat your 6.54% risk-free rate of return.

And as noted, the annual ISA allowance is lose-it-or-lose-it. So it is something for nothing in a way, because it provides you with lifetime return. Even though a cash ISA at 6.5% very slightly underperforms your effective mortgage rate of 6.54%, it is a better destination for your money, because the mortgage can be paid off at any time whereas the tax saving on the ISA (about £50/year forever) goes after the end of the year.

There is an obvious problem with the cash ISA of course, in that even though the life-time tax shelter offsets the interest differential, it is still not going to outperform in the way that a share/fund ISA would. As Jimmy says, you do need to keep some cash. But there is a problem with cash ISAs - the money is very 'sticky' - withdrawing it is really reserved for situations of real financial trouble, because you can never put it back - you lose the tax relief.

So there is little difference in terms of 'rainy day money' between either cash or share ISA (incidentally, half of the money that james mentions is in effect tax-free for someone in your situation for the forseeable future, because the gains come in the form of capital, which is tax-free up to £10k/year; even so, since you don't have enough spare cash to utilise anything outside the ISA, you are well advised to safeguard your ISA allowance by putting all of your investments inside it).

Finally, one thing that has been rather shamefully overlooked in the replies so far is that you have a final salary pension!!! My father has one of these. He joined at the age of 43. He is putting in I think 15% of his salary (the maximum). By the time he retires he will have a pension worth about £1m, should you have to buy it on the open market. There is no way he could have achieved this through an ISA or private pension investment.

You have to look at your pension scheme's rules and find out about the effect of making additional contributions. It's quite possibly the best place for your money - but in likelihood you won't be allowed to contribute that much money, so you would still have money left over for your ISA.

Whatever you do, DON'T pay off your mortgage, as it's very cheap debt.

I find this a very interesting debate with very good pros and cons.
Excuse me if this seems a daft question but:-

Do you have to declare income from ISA investments be it Cash Isas' or SAS Isas' when you actually retire???
The reason I am asking this question is that does the above income form part of your personal allowance for the purpose of income tax.
Also does Isa income have to be declared if applying for any pension credit, or top-up payments or any other means tested benefit.
I happen to believe that in future the basic state pension will be of little value (even compaired to today) and the majority of state pension will be means tested.
So therefore do you consider ISAs' a better way of subsidising your lower pensionable income in retirement rather than having a larger private pension without any other additional income other than state pension????

Based on the tax system being similar as todays in future!!

sorry if I am confusing you!!!!!!!