overpay mortgage or increase pension?

birdiegirl

Is it better to overpay on the mortgage or to increase pension payments?

My husband is a higher rate tax-payer on a final salary scheme - the most recent stuff from them that I can find (2007) says that his company pension will be around £22k pa on retirement.

I am currently not working ( at home with small children for four years) but intend to return to work within a year, and will join the company pension scheme when I do. (the area I'm intending to work in isn't very well paid, at least initially, but does usually inculde a pension.) I will be a basic rate taxpayer. I was a member of the NHS superan. scheme for 20 years, but my last eight years of work were part-time, so although it is a very good scheme, I do not expect to get a huge pension from it (I am in the process of asking them what it will be, but my back-of-an-envelope calculations suggest it will be a little less than £3k pa ). There is almost no chance at all that I will re-join the NHS.

We have a £85k mortgage at 5.78%, with 17 years to run. No other debts. We can overpay without penalties up to £500/month - and, importantly, can also get overpayments back out if financial push comes to shove.

We will very shortly have cash ISAs and savings to cover 3-4 months income as a rainy day fund.

Before I return to work we will be able to spare a small amount - say £60 to £100/month - to either save ( in an ISA after April) overpay on the mortgage, or buy some sort of additional pension.

I have been reading on this forum about the pros/cons of ISAs v pensions - and am digesting all that - slowly. What I am much less clear on is my dilemma of clearing the mortage more quickly v *extra* pension contributions, as we are not totally pension-less. And if we should go the pension route - how? AVCs? More pension for my husband? More for me? AVCs would not attract any more employer contribution. Is £60-100/month so risibly small as to not be worth it in terms of extra pension contributions?

My head is spinning, and it is not an attractive look :rotfl:

If you are still reading - thank you for your time.

Day_Trader

On a simplistic basis I would suggest always repaying debt before investing/saving so I would be inclined to pay off the mortgage.
In terms of the pension options you are looking at it depends on what you want - AVCs won't necessarily have a great investment choice, aren't particularly portable but the costs should be footed by the employer.
If you want more choice & flexibility then a SIPP would be more appropriate, or even a stakeholder if you don't know anything about investments!
Have you explored the possibility of buying added years for the NHS scheme? You should speak to the admins of the scheme for more information on this.
£100 a month is worth £125 after grossing up (as pension contributions attract tax relief).
Not a particularly structured answer I admit but if you need any further help let me know!

EdInvestor

Suggest you check out both your state pension forecasts:

https://www.thepensionservice gov.uk

If you want to add pensions, it's probably best to focus on yours, so you end up using your full tax allowance of 10k income a year (incl state pension). You could however do this via a stocks and shares ISA, which is more flexible than a pension, but has the same investment options.

You both have a total ISA allowance of 7.2k a year . Money in ISAs can be transferred into pensions if the tax regime is favourable at a later stage, but you can't do it the other way round.

birdiegirl

Thank you both for your help - I do appreciate it.

I have looked into Added Years on the NHS pension - no can do, unfortunately, as Added Years are now replaced by Additional Pension for most members, and I would still have to be a contributing member, which I am not - I haven't worked for the NHS for very nearly four years.

I have checked my own state pension forecast - slightly miserable, as it is calculated on the basis that I never do a tap of paid work again which is (disaster notwithstanding) incorrect. It is very unlikely that I won't have the full number of qualifying years before retirement.

We haven't checked my husband's, but I can't see why he wouldn't qualify for the full state pension (never been unemployed, always paid NI, etc)

I didn't realise that I could transfer money from an ISA into a pension ( you mean as a lump sum?) Could I only do that with a private pension, or is it likely that I would be able to make a lump sum payment into my next company pension? Oh, dear, my ignorance is showing LOL. I'm slightly concerned that if I start a pension for me now, then I get a company pension from my next job, that I will end up with three fiddly little funds, so starting an ISA in the mean time and transferring it later if it seems like a good idea might be a plan.

Would £60 a month for 20 years make a worthwhile contribution to an extra pension - or would the pot be likely to be so small that the payout would be derisory, and an advisor would fall about laughing at my foolishness if I even suggested it?

Paying off the mortgage early is tempting - but of course, you can't eat a brick, and I realise that there are tax advantages (well, relief, at any rate) in paying into a pension.

Thanks again!

Day_Trader

I would again reiterate debt before savings but this is of course up to you.
ISA's aren't all that useful to non-taxpayers and money would be better off in a pension as you gain tax relief (ISA's are useful if you do become a taxpayer again though). The maximum you can contribute to a pension is £3600 or 100% of relevant UK earnings (both figures are gross). £60 a month for 20 years amounts to around £45k (assuming 7% growth and inflation of 4%). You could take 25% of that as a tax free lump sum at retirement and buy an annuity with the rest (£35k is too low for any other option). Don't know what annuity rates will be then but roughly this would be £1600 (if level) a year?
It may be better to wait until you're working and look at the employers scheme when you join. You could pay into the employers scheme from your ISA (lump sum if you wanted provided it did not exceed salary) although if you contributed through salary sacrifice you would also get a National Insurance rebate so the net cost to you would be more attractive.
Does this make sense?!

IPP-Believer

You can encash the money in an ISA whenever you want and use that to put in your pension and get the tax relief.

If you do use an ISA you can always use the money to pay off your mortgage at a later date.

That way you do not have to make a definate decision one way or the other for now.

jamesd

Your husband is a higher rate tax payer. Will you be content to pay off the mortgage when he's 55?

If yes, then you should consider using extra pension contributions to a personal pension for him up to the point where they use all of his higher rate income. He gets the 40% tax relief and then the 25% tax free sum from the pension can be used to reduce the mortgage. The remaining 75% is a nice boost to his pension pot.

That's considerably more efficient than using ISA investing or overpaying.

Once he's making contributions up to his higher rate income, the next most efficient pension option is contributions in your name, to the point where your pension income plus the state pensions are expected to produce 10,000 in income, which will be roughly the 65 and older tax free income level.

Planning for his eventual death, the personal pension he contributed to in order to pay the mortgage can be placed in to income drawdown and left invested to produce an income instead of buying an annuity. This pot is then more efficiently inherited by you than an annuity, so it's a more efficient way of providing you with ongoing income after his death.

You can do the same drawdown approach with our own pension if desired, to cover the case where you might die first.

His workplace pension and the state pensions for both of you seem on track to produce quite a good level of pension income, so you seem well able to take the extra income variability that income drawdown has.

Day_Trader

jamesd wrote: »

Your husband is a higher rate tax payer. Will you be content to pay off the mortgage when he's 55?

If yes, then you should consider using extra pension contributions to a personal pension for him up to the point where they use all of his higher rate income. He gets the 40% tax relief and then the 25% tax free sum from the pension can be used to reduce the mortgage. The remaining 75% is a nice boost to his pension pot.

That's considerably more efficient than using ISA investing or overpaying.

Once he's making contributions up to his higher rate income, the next most efficient pension option is contributions in your name, to the point where your pension income plus the state pensions are expected to produce 10,000 in income, which will be roughly the 65 and older tax free income level.

Planning for his eventual death, the personal pension he contributed to in order to pay the mortgage can be placed in to income drawdown and left invested to produce an income instead of buying an annuity. This pot is then more efficiently inherited by you than an annuity, so it's a more efficient way of providing you with ongoing income after his death.

You can do the same drawdown approach with our own pension if desired, to cover the case where you might die first.

His workplace pension and the state pensions for both of you seem on track to produce quite a good level of pension income, so you seem well able to take the extra income variability that income drawdown has.

I recommend you avoid this advice entirely as it makes lot of assumptions. Drawdown, for the record, is not suitable for everyone. Please stop pushing advice around. This is not the place.

EdInvestor

Day_Trader wrote: »

Drawdown, for the record, is not suitable for everyone.

You could say the same about annuities. Drawdown seems entirely suitable in this case used in the way mentioned by jamesd where guaranteed state and final salary pensions provide more than adequate basic income.Drawdown enables a cash fund to be left for a widow and need not be risky depending on the way it is invested and the amount of income taken.

Jamesd's thinking is quite clear, there are no questionable assumptions.
.

jamesd

birdiegirl, you may find this discussion of the tax merits of using the pension approach useful, since I calculate the effect of the tax breaks on how much money is needed to clear the mortgage, compared to the same investments in an ISA.

The investments can include lots of safe choices like UK government bonds, it doesn't have to be all shares, though for a long term like 18 years a lot of it probably should be investments that use shares. IFAs would generally be more than happy to assist with planning this if you're not comfortable with managing investments.

If that's not to your taste, or perhaps not for all of it, for a few years now it's been possible to get more interest from a cash ISA than the rate you're paying on your mortgage, so that's a pretty easy alternative choice to mortgage overpayments.

There's some general guidance on mortgage overpaying and investing on the main site, as part of the Should I pay off my mortgage? article.

Day_Trader wrote: »

I recommend you avoid this advice entirely as it makes lot of assumptions. Drawdown, for the record, is not suitable for everyone. Please stop pushing advice around. This is not the place.

Please see my reply to your similar comment elsewhere for some guidance on the expected conduct here. Giving information to consumers about the full range of options available to them is expected, trying to squelch discussion of them to drive business and constrain knowledge to only professionals in the field is not.

You seem very set on reducing debt by direct payments against it, regardless of whether saving and investing, perhaps in cash ISAs or very low risk mixtures of government and corporate bonds, can be used to reduce the debt more efficiently. Clearing mortgages can be done by ways other than just making overpayments on them.

You're entirely correct that drawdown is not appropriate for everyone, though saying that 35k is too little for drawdown isn't.