Mortgage free 1st,Pension later?

Leokiss

Hi all,ok since becoming focused on sorting my finance my head eventually turned to retirement.
I read a fair bit on pensions n mortgages on this site and a question arose in my head which i haven't seen asked yet.
Maybe its a stupid question but im still a beginner at this and all avenues have to be explored.
What im tryin to ask is rather than pay into a pension use that money to overpay on your mortgage and would the money you save in interest on the mortgage work out better than what u would recieve on the pension.
I realise there is a lot of variables to this calculation,but when you look at the overpayment calculators it certainly seems like a decent idea(in my head anyway!)If this has been disscussed before can someone point me in the right direction pls.
Any thought n ideas welcome

angelavdavis

Personally, I did put my pension on hold to overpay my mortgage.

I am now using my spare cash that would have gone on my mortgage to put bulk sums into the pension and into tax free savings (isa and bonds). However, I did have pensions set up with some funds in them already - I just stopped contributing to them during the 3 years I overpaid the mortgage.

However, I guess it depends on your age, responsibilities, current pension situation, income, likely overpayment period, money you can put into pension once mortgage is paid off, etc.

In my case, I can put fairly hefty sums into my pension, and as I am now self-employed, it has tax benefits for me too.

MoneySavingNovice

I am going to be very interested in the comments from other on this question........ it's such a difficult subject it really does depend on personal circumstances, but here is my view, for whats it worth.

Try to look at your finances as a whole. The question is what gives you the best return.

Hence you could decide to pay off all expensive credit card bills expensive loans etc first. They tend to cost the most - a mortgage is less expensive and the return from a pension is most likely going to be less.

Once done compare the return from a long-term pension (taking into account that you will not be able to access the money until you retire) compared to the return of paying off the mortgauge and the return from savings (ISA etc).

It may seem strange talking about a return from a mortgauge - most see it as a cost, but I look at it this way - say it costs 5% per year in interest but you pension returns 10% in interest (after tax) in effect your investment would return to you 5%. If you don't have the mortgauge you can't make the investment - so not having the mortgauge means that you lose 5% per year.

One further thing to consider is the tax thresholds. Investing in a pension is a tax deferment (i.e. you don't pay the tax now you pay it when you draw on you pension) the exception is if you earn over the 40% tax rate now - hence for every £1 you put in your pension you will only reduce you current salary by 60p. But when you come to retire you only have a pension under at the 25% tax rate. In effect the tax man has subsidized you pension by 15p in the pound - That is a great risk free return.

I look forward to other comments on this subject!

getmore4less

Pensions,

Depends on what sort it is and how your company contributes.

ISA, these are tax free for longer than a mortgage


both need to be considered as part of the long term plan.

ailuro2

Pensions will give you a better return over a longer period, so the sooner you start them the less %age you need to pay in.

We have a company scheme we pay 5.25% into and company adds to it, which is good, but we are also paying off our mortgage early.

sdooley

If your company contributes to your pension it is a no-brainer to pay in enough to have them match your contributions.

If not, then making mortgage overpayments will be likely to be (roughly) as good but no better than a pension. But you still need the pension at some stage. If you are in your twenties, early thirties might be ok to put off for a little but if you are in your forties you will have to do both to avoid the baked bean retirement - pension and overpayments.

maryjane01

I am 30 years old and going for paying off the mortgage. To me a roof over my head is the most important thing. My partner and I don’t have any critical illness insurance, there are so many exceptions on critical illness cover and my partner is self employed so it would cost an extreme amount for a decent policy. To be honest, I don’t know what we would do if one of us needed long term care. What we do do is overpay on the mortgage! I hope we can get our £220,000 mortgage paid off in no more than 15 years (10 would be ideal), and cross our fingers we stay fit and well during that time. Beyond that if something happened as long as we had a roof over our head I think we could just struggle to live off incapacity benefits if we lived old style. Also, with 35 years till retirement I don’t like the idea of money being locked away with government legislation likely to change many times. I have a feeling pension schemes may be the next miss selling scandal as there is a chance they will be worth nothing. After we have paid off our mortgage and have spare money to invest I would like to have more control over our investments. I will put money into a pension where there are really obvious benefits eg. At the moment my employer contributes 10% and will match 1% if I contribute 1%, so I do contribute 1% (Actually I contribute 2% so 13% of my salary is going to a pension, I doubt if I could retire well on that though!)

Also, we live in London so we could always move to a cheaper part of the country!

dunstonh

I am 30 years old and going for paying off the mortgage. To me a roof over my head is the most important thing.

And when you get to 67 (your state retirement age) and earn £4700 a year from the state pension you will have to sell the house to fund your retirement.

My partner and I don’t have any critical illness insurance, there are so many exceptions on critical illness cover and my partner is self employed so it would cost an extreme amount for a decent policy.

CI doesnt have many exceptions at all. It has a defined list of coverage and the claims stats are excellent if you get a listed critical illness. However, you wouldnt prioritise CI above permanent health insurance.

Beyond that if something happened as long as we had a roof over our head I think we could just struggle to live off incapacity benefits if we lived old style.

That assumes you would qualify for incapacity benefits.

Also, with 35 years till retirement I don’t like the idea of money being locked away with government legislation likely to change many times

That is a negative with pensions for sure but the pay off is that pensions will provide the highest income in retirement of all the conventional options available. If you were to use ISAs, for example, you would need to pay more into them to get the same income.

I have a feeling pension schemes may be the next miss selling scandal as there is a chance they will be worth nothing.

On what grounds? There is no hint of any pension mis-selling going on at this time.

After we have paid off our mortgage and have spare money to invest I would like to have more control over our investments.

You have total control over investments in your pension in the same way you have control of investments within other tax wrappers (or unwrapped).

Asking whether you should pay overpay the mortgage and not do retirement provision is a bit like asking whether you should pay the gas bill or the electric bill.

In todays terms, you will need a pot of around £400,000 to provide £20,000 of income. The longer you leave it, the harder it becomes to get that pot.

The self employed have it harder as they get lower state pensions than the employed.

annam0787

Hi,

I have a query about pensions too - I don't know if anyone is able to help...
(I would've started a new thread but it won't let me - hope you don't mind me attaching this to your thread!)

I've been paying into my Teacher's Pension for about a year now and I'm also on a DMP, which will be paid off in 18 months at the rate I'm paying it now. Questino is, should I carry on with the teacher's pension (which is pretty good) or should I come out of it and pay off my debts. If I came out of the pension scheme now I'd get the £1200 that I've paid in and I'd have an extra £135 a month to pay towards my debts.

What do you think?

Thanks!
Anna

dunstonh

Questino is, should I carry on with the teacher's pension (which is pretty good) or should I come out of it and pay off my debts.

The teachers pension is not pretty good. Its very good.

I'd have an extra £135 a month to pay towards my debts.

I'm assuming you are looking at the gross payment. In which case you would not have £135 extra. You have tax and NI to take into account. It would be closer to around £108. Your contributions paid to date would also have a penalty applied to them to recover the tax.

What do you think?

Losing two years of service to repay a debt that will be gone in 18 months would be very short sighted.

uncommonadvice

I would absolutely go for the American Snowbird method. Pay down your mortgage now. As well as paying off the mortgage send 10% of everything you earn into an ISA. When you reach retirment age sell up and downsize - perhaps even move into a park home. You'll get a cash lump sum from your downshift and a residual income from the ISA.

I feel that pensions are just a euphemism for stock market investment. Look at the FTSE - it's in the same place it was 12 years ago! The obvious exception is if you still have a "gold-dust" final salary pension or something of that ilk.