Mortgage or Pension

michael1983l

Robert_Sterling wrote: »

In my opinion this is the worst advice I have ever seen given on MSE

Whats the point in having a pension if you don't have a house to spend it in?


Property over a period of time will always increase in value, index related investments do not always increase in value, in fact some shrink.

During this period he will have to pay interest on the full remaining balance of his mortgage, if he starts to pay this off the interest will slowly reduce saving him money.

He has stated he can only afford one or the other.

If at a later stage his circumstances change he can always start the pension, say when the interest saved on his mortgage starts to free up some cash.


In my opinion your opinion means nothing, as anybody with anything decent to say would have explained their point of view and not bothered with the childish big red lettering.

A_Nice_Englishman

dunstonh wrote: »

That is very wrong. The OP has an 60ths scheme. There is no investment growth involved. However, even if there were the typical balanced managed fund (the most used type) has fallen by less than property over the last few years.


Employers contribution doesnt matter in this case being a final salary scheme. In a money purchase scheme it would though of course.

Financially, the pension is an absolute no brainer. However, that still doesnt solve the problem that the OP is on interest only basis and has a budget problem.

I beg to differ. If the OP doesn't join the pension scheme he may 'save' 10% of his wages (less tax/NI) but will forgo the employers contribution which as previously mentioned is likely to be at least as much.

How does the projected cash as retirement compare with the mortage, OP?

jamesd

michael1983l wrote: »

Whats the point in having a pension if you don't have a house to spend it in?

That undoubtedly wasn't why you got the red text. It was because you made a completely bogus argument that suggested you didn't understand what you were writing about.

michael1983l wrote: »

If you own your property outright, it is bound to grow in value during the coming years

Lets assume that it's true that it will grow in value. How does paying any money of the mortgage capital make the value grow faster? Answer is that it doesn't. You get that growth in value regardless of whether you pay off the mortgage or not.

All the capital repayments do is take money that could have been used for one thing and use it for another. The question then is whether the mortgage capital repayments or the alternatives will produce the best result.

Now, if we were writing to someone who didn't own a property, then discussing whether buying property or making pension contributions is better would be worth doing. Here we have someone who already has the property.

michael1983l wrote: »

dare I guess at a rate higher then a pension.

You guessed wrong. In the past it has been the case that other investments do better, notably equity funds.

But you're repeating your original mistake: repayments don't make the property value grow more quickly. Rather the choice is repayments that save mortgage interest at whatever the mortgage interest rate or something else.

Investments inside a pension or stocks and shares ISA are likely over the long term to grow at a faster rate than the interest saved from repaying mortgage capital.

michael1983l wrote: »

During this period he will have to pay interest on the full remaining balance of his mortgage, if he starts to pay this off the interest will slowly reduce saving him money.

You're forgetting an important part of the problem: inflation. Inflation over time reduces the value of debts, so the longer you have the debt, the cheaper it becomes in real after-inflation terms to repay the debt. While for investments, the opposite holds and the sooner the start, the greater your gain.

Inflation and the inevitability of inflation-related salary increases (on average about 1% over inflation) is why it's possible to defer paying off mortgage capital, knowing that later it'll be possible to take care of it.

The big worry here is that there seems to be so little safety margin in the budget.

dunstonh

I beg to differ. If the OP doesn't join the pension scheme he may 'save' 10% of his wages (less tax/NI) but will forgo the employers contribution which as previously mentioned is likely to be at least as much.

Final salary schemes are not based on the contributions you or your employer pay. The benefit is defined based on years of service and your final pensionable salary. So, whether you pay 1% or 10% and/or the employer is funding the pot or not by x%, it doesnt matter. The benefit is defined. Hence they they are often called defined benefit schemes. In this case it is a 60th defined benefit scheme. I would have some of that if I could.

Money purchase schemes on the other hand are totally dependent on what is paid in by both you and the employer.

Property over a period of time will always increase in value, index related investments do not always increase in value, in fact some shrink.

Historical data does not back that up.

If at a later stage his circumstances change he can always start the pension, say when the interest saved on his mortgage starts to free up some cash.

What happens if the employer withdraws the final salary scheme to new members (as so many companies have done)? He wont be able to join then and will be left with a money purchase scheme.

A_Nice_Englishman

dunstonh wrote: »

Final salary schemes are not based on the contributions you or your employer pay. The benefit is defined based on years of service and your final pensionable salary. So, whether you pay 1% or 10% and/or the employer is funding the pot or not by x%, it doesnt matter. The benefit is defined. Hence they they are often called defined benefit schemes. In this case it is a 60th defined benefit scheme. I would have some of that if I could.

Money purchase schemes on the other hand are totally dependent on what is paid in by both you and the employer.

Historical data does not back that up.

What happens if the employer withdraws the final salary scheme to new members (as so many companies have done)? He wont be able to join then and will be left with a money purchase scheme.

I know the difference between defined benefit and money purchase schemes - I spent 15 years administering both types. I was trying to illustrate what a mistake not joining a defined benefit scheme could be (but obviously failing :rotfl:).

I'm lucky enough to be in a public sector defined benefit scheme, which was a major attraction when deciding to take the job.

Robert_Sterling_3

michael1983l wrote: »

In my opinion your opinion means nothing, as anybody with anything decent to say would have explained their point of view and not bothered with the childish big red lettering.

I have now edited the font size and colour of my earlier post.
I can see where you are coming from in your observation above and what you say is ok by me.

I thought that what I said would result in other posters either agreeing with you or agreeing with me and putting our respective cases forward.

I am satisfied with the posts that have followed.

Robert_Sterling_3

A_Nice_Englishman wrote: »

II'm lucky enough to be in a public sector defined benefit scheme, which was a major attraction when deciding to take the job.

Me too. In my case I was on 1/80 ths system.
I now get 31/80 ths for doing 31 years plus 9/80 ths for volunteering to retire 9 years early.

Robert_Sterling_3

jamesd wrote: »

You're forgetting an important part of the problem: inflation. Inflation over time reduces the value of debts, so the longer you have the debt, the cheaper it becomes in real after-inflation terms to repay the debt. While for investments, the opposite holds and the sooner the start, the greater your gain.

Inflation and the inevitability of inflation-related salary increases (on average about 1% over inflation) is why it's possible to defer paying off mortgage capital, knowing that later it'll be possible to take care of it.

The big worry here is that there seems to be so little safety margin in the budget.

Yes indeed. .........................

dunstonh

I'm lucky enough to be in a public sector defined benefit scheme, which was a major attraction when deciding to take the job.

Swap you my money purchase scheme

A_Nice_Englishman

dunstonh wrote: »

Swap you my money purchase scheme

Ask me again on the day I retire and I'll see if your fund will buy a better pension than I'd get from my scheme