25 years old, join a pension scheme or pay off mortgage?

MGAstra

Should I be making over payments to get rid of the mortgage first or start up with the company’s stakeholder pension scheme?

I know it all depends on what the mortgage interest rate is and what type of pension fund I choose, but is there a general consensus that the mortgage should be paid off as quickly as possible first?

(£80,000 mortgage, 1year paid off at 4.85% fixed for five years. Pension is run by the company. I would pay from my gross salary, then the company put in a bit extra for their share of my NI. Pension charges are 1% PA for admin, then will depend on what type of fund I choose)

dunstonh

I know it all depends on what the mortgage interest rate is and what type of pension fund I choose, but is there a general consensus that the mortgage should be paid off as quickly as possible first?

No.

Lets say you never did any retirement planning because you concentrated solely on clearing debts. You then get to retirement with nothing but state pension but with no liabilities. You could then find yourself not being able to afford the property you live in and having to sell it or borrow against it in the form of equity release. Not exactly desirable.

Retirement planning should be just like any other bill you pay. You shouldnt avoid it because you can. Unlike the gas or electric!

You have a company stakeholder pension which the company pays into. That is free money.

Pension charges are 1% PA for admin, then will depend on what type of fund I choose)

you mean type of funds. You shouldnt put all your eggs into one fund (with the exception of fund of funds perhaps. Although they are not common on stakeholder pensions).

I would get the free money and sign up to the pension. Remember though, just because you are paying into a pension, it doesnt mean the amount will be enough to retire on. Often you need to make further provision at some point.

EdInvestor

How much is the free money exactly?

You then get to retirement with nothing but state pension but with no liabilities.

First of all there are two state pensions that you get if you have a full record of NI contributions ( so what is this the OP is saying about NI?) Currently these two pensions pay out c. 160 pounds a week index-linked for someone with a full record. You would need a private pension fund of around 180-200k to buy this income on the market. :eek: It's not peanuts.

You could then find yourself not being able to afford the property you live in and having to sell it or borrow against it in the form of equity release. Not exactly desirable.

What exactly is so undesirable about trading down from a family home to a smaller place or moving to another cheaper area when you retire ( many people do this anyway, it's quite normal).

And what on earth in undesirable about using equity release to raise money for a retirment income? An insurance company or bank pays you this income, which you don't have to pay back in your lifetime, guaranteed. The interest rolls up against the value of your home and if there is money left over when you die, it goes to your heirs.

These days you can have two bites at the cherry with equity release - go back for more money if the value of your property goes up.

Isn't this a lot better value than an annuity, which you buy with your pension fund, handing over all the money to the insurance company upfront so there is noting ever left over for anyone? And it's irrevocable, you can never go back for more?

dunstonh

First of all there are two state pensions that you get if you have a full record of NI contributions ( so what is this the OP is saying about NI?) Currently these two pensions pay out c. 160 pounds a week index-linked for someone with a full record. You would need a private pension fund of around 180-200k to buy this income on the market. :eek: It's not peanuts.

There are currently two pensions but not everyone is eligible for the second state pension. Plus there are suggestions being made to remove it and have a single state pension with less benefits.

Do you really want to plan to live only on a state pension?

A fund of £180-£200 is easily achievable for anyone putting a sensible amount into a pension each year.

What exactly is so undesirable about trading down from a family home to a smaller place or moving to another cheaper area when you retire ( many people do this anyway, it's quite normal).

You may not wish to give up the family home. Or you may not be in a position where you can trade down as the cost to do so would wipe out any gains you would have. What if you are already in cheaper areas? What if a property price drop occurs?

And what on earth in undesirable about using equity release to raise money for a retirment income? An insurance company or bank pays you this income, which you don't have to pay back in your lifetime, guaranteed. The interest rolls up against the value of your home and if there is money left over when you die, it goes to your heirs.

You spend 25-40 years paying for the house only having to give it up again at the end. Equity release is not something that people will usually want to do byu choice. It is usually something they have to do.

Isn't this a lot better value than an annuity, which you buy with your pension fund, handing over all the money to the insurance company upfront so there is noting ever left over for anyone? And it's irrevocable, you can never go back for more?

Acutally its no different. You are giving up one asset in exchange for an income.

The difference is that with a pension, you get tax relief for doing so and you dont lose your house in the process.

EdInvestor

lose your house in the process.

You have said this before and it's completely wrong.

You do not "lose your house" if you take equity release.You can sell it any time and redeem the mortgage if you want to. But the main point is that you don't have to pay back the mortgage in your lifetime. It is paid back after you die, when the house is sold.

Unlike a pension, where once you put your money in, you can never get 75% of it out ever again.It is trapped inside the pension. You certainly do lose your capital in this case :mad: And the tax is only deferred, the contributions are tax relieved, but the pension itself is taxed, so they take the money back.

There are currently two pensions but not everyone is eligible for the second state pension.

The self employed and people not working don't get S2P credits.THey may not get basic state pension credits either.

Plus there are suggestions being made to remove it and have a single state pension with less benefits.

Quite so.People should oppose this.

dunstonh

You have said this before and it's completely wrong.

No its not. You are getting a company to put a charge on your property. In effect, they own a chunk of it.

If someone does equity release, then its usually because they havent got enough money so the chances of them being able to raise the capital to buy it out later is remote.

Also remember that with a £200k house, a mortgage would have cost them around £500k over the 25 years. So, you cannot compare costs with a pension as if you put £500k into a pension you would have £641k due to basic tax relief. 641k with 25% tax free lump sum is £160,250 (not far off the cost of the house) and an annually increasing pension of around £20k p.a. The more expensive option is the house.

Ed, I don't know why whenever this subject is mentioned, that you want people to look at equity release or trading down as an option they should be planning for. Regardless of what you say, I find those that have done equity release only do so because they have to and it is something they really do not want to do.

Quite so.People should oppose this.

I wont be opposing it. The current position is wrong. Moving to a single state pension stops the bias between employed and self employed and would help remove the reliance on state benefits. It also makes it a lot easier for individuals to understand.

EdInvestor

Ed, I don't know why whenever this subject is mentioned, that you want people to look at equity release or trading down as an option they should be planning for. Regardless of what you say, I find those that have done equity release only do so because they have to and it is something they really do not want to do.

Very possibly this is because these unfortunate clients of yours have put a large chunk of assets into pensions and endowments which have not done the job So they have to do equity release to make up the difference.

I'm talking to much younger people who are looking at the best way to build up long term assets for retirement starting now.

The OP already has a home, he is asking is it better to pay off his mortgage faster or pay into a pension? This IMHO depends entirely on how much free money is going into the pension from the company. If only a teeny amount, he would be better to either pay off the mortgage faster, or possibly use up his ISA allowance with spare money, as this is an annual one which is "use it or lose it" and the investment options are the same as with a pension.

These days you can throw large chunks of money into a pension and still get tax relief when you're 50 or 60.So why lock away money now where you can't ever access it when you don't have to and can save tax free in other ways?

Only if there is substantial free money or you are a high rate taxpayer is this worthwhile IMHO.

caveat_emptor

Having once been in the same situation as the OP, many years ago, I chose to pay off my mortgage as quickly as possible. When this was done I then concentrated on building up my pension. One benefit of doing it this way is that in later years when earnings are higher you could qualify for a higher rate tax contribution to pension and contributions limit is now higher.
If OP does it the other way round and it all goes pear shaped he's got no home or pension.

MGAstra

The money that the company would be putting in is only small. I dont know exactly how much this would be, but it is only the NI that they would useually pay anyway on the part of my gross salary that I will be putting into a pension. (if that makes sense?)

So, I think the way foward is continue over payments on mortgage (as much as possible), some money into ISA (for a rainy day), and start the pension thing going with just say £50 per month (then this could be increased in 20 years time if the rules for pensions improve).

Thanks for the above discussion, some interesting points made by both sides!

EdInvestor

MG Astra

It would be worth checking on whether this is a salary sacrifice scheme as there can be certain downsides to them which might affect your decision.

Note in particular the potential effect on your S2P entitlement by the reduction oin your earnings.Would you in effect just be swapping a pension you get as part of your existing NI contribution for one which you have to pay for yourself?

I don't know the answer to this question, so if you find out, please let us know.

dunstonh

Very possibly this is because these unfortunate clients of yours have put a large chunk of assets into pensions and endowments which have not done the job So they have to do equity release to make up the difference.

If people had put large chunks into the pension then they wouldnt need to equity release.

I'm talking to much younger people who are looking at the best way to build up long term assets for retirement starting now.

And you are suggesting to them that they should plan to fail.

The OP already has a home, he is asking is it better to pay off his mortgage faster or pay into a pension? This IMHO depends entirely on how much free money is going into the pension from the company. If only a teeny amount, he would be better to either pay off the mortgage faster, or possibly use up his ISA allowance with spare money, as this is an annual one which is "use it or lose it" and the investment options are the same as with a pension.

Using an ISA is quite possibly an option but so is using the pension from the employer, even though the amount of "free" money is small. Retirement planning means saving for retirement. It doenst necessarily mean paying into a pension. That is another thread though and not applicable here.

Having once been in the same situation as the OP, many years ago, I chose to pay off my mortgage as quickly as possible. When this was done I then concentrated on building up my pension. One benefit of doing it this way is that in later years when earnings are higher you could qualify for a higher rate tax contribution to pension and contributions limit is now higher.
If OP does it the other way round and it all goes pear shaped he's got no home or pension.

Whilst you feel that suited you. That method would be a disaster for many people. Not everyone has the inclination to plan things like that and follow them through. Many need the struture of planning as they go. Many need the imposted structure of pensions to ensure that they dont go dipping into it at various points.

So, I think the way foward is continue over payments on mortgage (as much as possible), some money into ISA (for a rainy day), and start the pension thing going with just say £50 per month (then this could be increased in 20 years time if the rules for pensions improve).

That seems a sensible start. Although make sure the £50pm into the pension is index linked so it increases annually by RPI or NAEI. Otherwise £50 in 20 years time would buy you a Mars Bar and the contribution itself is worth nothing.