Mortgage or Pension? Where should I make additional payments?

StrawberryJam_2 · 24 March 2008 at 1:09AM

Hi

I am in the process of remortgage (£45K), and moved to a tracker. My initial plan was to pay additional sums per month to reduce the term and not pay a few thousand pounds of interest.

However I have a friend who says that a better plan would be to put 'that given money' into my current defined contribution pension . (I am 29)

What would be the better aim (return)? I guess I could balance the contributions, but interested in some thoughts from yourself. Has this been discussed before?

dunstonh · 24 March 2008 at 3:41AM

What would be the better aim (return)?

A pension is just a tax wrapper. It doesnt make or lose money. The investments you place inside the pension do that and you can place tens of thousands of different investments inside a pension.

Obviously, you need to be making some retirement provision. Otherwise you will have to sell the house or equity release on it when you get to retirement. Not many can live on the basic state pension of £4500 a year.

So, if you have no funding for retirement at this time, it is something you should look at.

StrawberryJam_2 · 24 March 2008 at 11:33AM

I was not clear, I do indeed have a pension with 7 years contribution. I am in a position that I have money for:
a) additional payment to mortgage
b) additional voluntary contribution to pension
c) mini cash ISA account(s)
d) beer money
I am not particulary sure?

fraser · 24 March 2008 at 12:35PM

I would suggest looking at the existing value of your pension, use some of the pension calculators to help you judge what retirement income you want, top up pension if you need to, split the monies to the overpayment and isa's. This would give you a balanced spread of the money you have to tuck away.

If you have differing priorities you will need to factor those in also (kids in a few years time, new car etc)

Dick_here · 24 March 2008 at 4:46PM

The AVC option is the only one which you won't pay income tax on. If you put £100pm into it, you don't pay tax on that £100. The other options would all only give you £100 - income tax to invest.

dunstonh · 24 March 2008 at 8:01PM

AVCs are largely obsolete today with only a small minority worth using. ISAs and personal pensions (including stakeholder and SIPP) are usually better options. Indeed, many companies have already withdrawn their AVC for new applicants.

The op needs to look at his requirements and decide what is best. In post #1 it appeared there was no retirement provision. In post #3 there is. However, we dont know amounts it will be, if it is current, if it will be enough, if it will be under or over age allowance reduction, if there is a spouse, if there are working/childrens tax credits which can increase if pension is used etc etc.

Dick_here · 24 March 2008 at 10:47PM

dunstonh wrote: »

AVCs are largely obsolete today with only a small minority worth using.

This is news to me dunston ! As well as my company pension, I pay £30pm AVC to Standard Life (also through my company, so directly taken from my salary). Is this not worth doing ? I thought AVCs were a good top-up

dunstonh · 24 March 2008 at 10:57PM

Any top up is good from the point of view that you are putting more aside for retirement.

Going back many years, in-house AVCs were typically a very cheap way to invest your money. However, over the years there have been a number of changes which has changed all that.

We had pensions "A" day in 2006 which abolised FSAVCs and made them personal pensions. This allowed 25% tax free cash on them automatically. However, in house AVCs do not have to allow that option and many still do not. The rules were also changed to allow employers/trustees to close the in house AVC for new applicants.

We have also seen charges on retail pensions come down massively and you can now buy pensions which are cheaper than AVCs. Many of which also offer better fund ranges. Those that are not cheaper can offer very large fund ranges or a wider variety of fund choices.

When you look at the restrictions that in house AVCs can have compared to alternatives, there is little reason to have one nowadays unless you get some enhancement from the employer or you are in a minority of schemes that can use the AVC to enhance the scheme benefits with regards to TFC.

Its funny how things change but years ago FSAVCs were seen as weaker than in house AVCs but now its the other way round.

StrawberryJam_2 · 24 March 2008 at 11:09PM

I have wrongly thought that there may of been a straight forward recommendation. However can appreciate the need for specific circumstances. Please accept any my use of wrong terms (AVC is not applicable) Im seeking advice and trying to learn the financial game, as never had any education on this front. (a national problem)

The FACTS:
I have had an employer Standard Life Defined Contributions Pension and can increase the % of salary paid (currently 4.5%) (employer contributes 6.5%) I have been contributing for 2 of my 7 years to this said pension. (the other 5 years were too a defined benefit which was wrapped up) I have just allowed this to tickaway in the background. I will begin to look at pension calculators etc to see how my current fund value is on course.

I have no dependants and single, and thought the best way to manage my money would be to pay my mortgage off as soon as possible. There are merits to this as can save interest charged. I do not see any big spends coming in the next few years, ie car, refurb, children.

So options 1) pay of my £45K mortgage asap with increasing monthly payment or
2) invest equivalent monthly payment to pension fund (increase my % salary sacrifice) and allow the mortgage to remain for the term.

Thanks for posts to date.

Gorgeous_George · 24 March 2008 at 11:16PM

IMHO, any tax benefits are often swallowed up by the 'management' charges.

Put £1,000 into a tax-efficient pension fund at 29 and by the time you see any benefit from your £1,000 (at 60?) it will be worth just £732 (assuming zero growth) and that is if you get away with a 1% management fee. Obviously, there is likely to be some growth - probably in-line with the stock market but you can do that yourself.

I don't like pension funds. I prefer to make my own decisions with money. I'd save using cash ISAs and pay my mortgage off once the ISA allowance was used.

GG

dunstonh · 25 March 2008 at 1:24AM

I'd save using cash ISAs

What about the charges on your cash ISA? Savings accounts are currently running at around 0.9% but are historically closer to 1.2%p.a. The difference is tha the net interest charge is implicit (you dont see it) whereas the charges with investments is explicit and you do.

Is it better to ge 10% a year after charges or 5% a year with no disclosed charges?

Mortgage or Pension? Where should I make additional payments?

Comments

Confirm your email address to Create Threads and Reply

🚀 Getting Started

Categories

Is this how you want to be seen?

Get our FREE Weekly email full of deals & guides - and it’s spam-free