Overpay on Mortgage or continue paying into pension?

Rich1976

At the moment, I have approximately £450pm left after paying my half of the household bills, and my car insurance, petrol etc as well as free time money.

I would love to start overpaying on the mortgage in order to reduce how many years we have left. At present we have 16 years left to run and owe approx 80k. Our Mortgage lender will let us over pay 20% each month which equals £120.

This is the Gross figure which I currently pay into a personal pension. I also pay £100 pm into a HL ISA. My employer doesn't have a scheme which they contribute too. my pension fund is now worth approx 22k and has been built up over the last 12 years.

Of the £450 I have spare each month, a minimum of £250 needs to go into savings to pay for holidays, a new car in 3 years and house decorating etc, therefore as I can't afford to pay into a pension and overpay the mortgage, would I be better to direct the £120 from the pension contributions to the mortgage? I have been looking at various calculators and assuming I overpaid by £120 each month, the mortgage would be reduced down to about 12 years. Once the mortgage is paid off ( when i'll be 44), I can then pay the amount I currently pay into the mortgage into the pension ( which then should be about £520 + tax relief) and then according to a pension calculator I ahve been looking at should produce an income of around 10k in todays money at 65.

Unfortunately my OH isn't on a very good salary and cannot afford to pay anything into a pension at the moment let alone overpay on the mortgage.

Your views on this would be a great help.

EdInvestor

A pension is not usually deemed the best tax wrapper for a basic rate taxpayer with no employer's contribution.You might be better to deploy the money elsewhere until either you start paying higher rate tax, or (from 2012) your employer starts paying money into the pension via the new personal accounts system.


You may also wish to check out the forecast of how much you (and OH) have clocked up in the 2 state pensions:

https://www.thepensionservice.gov.uk

DD4

EdInvestor wrote: »

A pension is not usually deemed the best tax wrapper for a basic rate taxpayer with no employer's contribution.

Not deemed by you ED :rolleyes:, however some of us believe that for people who can't build up a huge pot, it's one of the best ways to save for retirement. The OP can't put a lot away due to other financial commitments and it's unlikely that he will have a large enough pot to take him above the age related allowance of £10k, especially if he takes the 25% tax free sum and if he arranges a 50% spouse pension for his partner (who doesn't have a pension). If he contributes to a traditional pension he will gain from 20% tax relief on the way in and tax free income on the way out.

OP, get a state pension forecast as Ed advised to see how much state basic and second pension you will be entitled to, you then need to look at making up the difference between your state pensions and the age related allowance of £10k.

As far as the mortgage overpayments are concerned (and this coming from the founder member of the Mortgage Free in Three group), if you can't make contributions to both your pension and your mortgage then save for your retirement as a priority. As long as you're on a repayment mortgage, your house will be paid eventually, whereas if you don't pay into a pension then you'll never have a pension pot.

My missus couldn't afford her own pension, so I paid into a stakeholder for her. It's now just passed the £11k mark and so I have just moved it to a SIPP to obtain better growth. I'd suggest you start a pension plan for your OH as well, that way you'll be able to have a joint income of £20k tax free (i.e. you'll use both your age related allowances, rather than just yours).

Good luck.

dunstonh

If you focus on your property and dont do any retirement provision, then you will ultimately have to sell your property in retirement or do equity release (which basically means you end up borrowing on it again).

If you are making the mortgage payments and with mortgage interest rates being historically low, then it makes sense to keep paying into a pension. Dont compromise your later life by doing nothing now.

whiteflag_3

DD4 wrote: »

My missus couldn't afford her own pension, so I paid into a stakeholder for her. It's now just passed the £11k mark and so I have just moved it to a SIPP to obtain better growth. /QUOTE]

Why a SIPP to get better growth?

BTW Dithering Dad did you know your being missed on the savings thread?http://forums.moneysavingexpert.com/showpost.html?p=25253479&postcount=984

marklv

Rich1976 wrote: »

At the moment, I have approximately £450pm left after paying my half of the household bills, and my car insurance, petrol etc as well as free time money.

I would love to start overpaying on the mortgage in order to reduce how many years we have left. At present we have 16 years left to run and owe approx 80k. Our Mortgage lender will let us over pay 20% each month which equals £120.

This is the Gross figure which I currently pay into a personal pension. I also pay £100 pm into a HL ISA. My employer doesn't have a scheme which they contribute too. my pension fund is now worth approx 22k and has been built up over the last 12 years.

Of the £450 I have spare each month, a minimum of £250 needs to go into savings to pay for holidays, a new car in 3 years and house decorating etc, therefore as I can't afford to pay into a pension and overpay the mortgage, would I be better to direct the £120 from the pension contributions to the mortgage? I have been looking at various calculators and assuming I overpaid by £120 each month, the mortgage would be reduced down to about 12 years. Once the mortgage is paid off ( when i'll be 44), I can then pay the amount I currently pay into the mortgage into the pension ( which then should be about £520 + tax relief) and then according to a pension calculator I ahve been looking at should produce an income of around 10k in todays money at 65.

Unfortunately my OH isn't on a very good salary and cannot afford to pay anything into a pension at the moment let alone overpay on the mortgage.

Your views on this would be a great help.

I don't know why you are in such a hurry to pay off your mortgage. A mortgage is not a a debt like a personal loan etc - it's a lifetime commitment. You should look upon it as a kind of tax rather than as a loan.

My suggestion is that you invest any spare cash - in either a pension or an ISA - and let the mortagage take its course.

DD4

whiteflag wrote: »

DD4 wrote: »

My missus couldn't afford her own pension, so I paid into a stakeholder for her. It's now just passed the £11k mark and so I have just moved it to a SIPP to obtain better growth. /QUOTE]

Why a SIPP to get better growth?

BTW Dithering Dad did you know your being missed on the savings thread?http://forums.moneysavingexpert.com/showpost.html?p=25253479&postcount=984

I originally set up a stakeholder pension for her, years ago when they first came out but we only put £20 pm into it because she was a teacher and was in the TPS. Once she had to give up work to take care of our daughter, we cranked up the payments in to £300pm. It soon mounted up and I felt it had outgrown the stakeholder (i.e. the funds she had access to were very limited and not that great, especially compared to my SIPP). I therefore decided to move her to the same SIPP as myself, with access to a much wider range of funds. The other option would be to set up a personal pension but they seem to be a lot more restrictive than a SIPP, especially in regard to starting & stopping payments and making one-off payments (though this may have changed since I last checked them out).

It's nice to be missed, thanks for the link. I'll pop onto that thread and say hi.

whiteflag_3

DD4 wrote: »

whiteflag wrote: »

The other option would be to set up a personal pension but they seem to be a lot more restrictive than a SIPP, especially in regard to starting & stopping payments and making one-off payments (though this may have changed since I last checked them out).

/QUOTE]

Fair comment, but most PPs are now totally flexible and offer more than enough fund choice for the average investor- with greater protection and often less cost than a SIPP.

DD4

whiteflag wrote: »

DD4 wrote: »

whiteflag wrote: »

The other option would be to set up a personal pension but they seem to be a lot more restrictive than a SIPP, especially in regard to starting & stopping payments and making one-off payments (though this may have changed since I last checked them out).

Fair comment, but most PPs are now totally flexible and offer more than enough fund choice for the average investor- with greater protection and often less cost than a SIPP.

Thanks for the info WF. Do they also allow you to buy individual shares? A lot of the gains I have made in my pension have been via day (or weekly) trading of shares. I made a killing with SQS, RBS and Lloyds for instance.

p.s. I have stopped actually contributing to my SIPP now since I joined a company that has a Final Salary Scheme. Instead I'm concentrating on my missus' pension and my S&S ISA. Once my wife's pension hits £50k I'll shift from contributing to that and move instead to a S&S ISA for her. My aim is to spread the wealth across the pair of us and to limit taxation in retirement as much as possible.

Any other ideas on how to do this would be greatly appreciated. (I'm currently researching EIS and VCT's).

whiteflag_3

DD4 wrote: »

whiteflag wrote: »

Thanks for the info WF. Do they also allow you to buy individual shares? A lot of the gains I have made in my pension have been via day (or weekly) trading of shares. I made a killing with SQS, RBS and Lloyds for instance.

No - it would appear you are one of the few that are actually using a SIPP for the right reasons. ie Self Invested. As long as you know the risks then a SIPP makes sense for you.

Rich1976

marklv wrote: »

I don't know why you are in such a hurry to pay off your mortgage. A mortgage is not a a debt like a personal loan etc - it's a lifetime commitment. You should look upon it as a kind of tax rather than as a loan.

My suggestion is that you invest any spare cash - in either a pension or an ISA - and let the mortagage take its course.

Thanks for all the responses, it is appreciated. The reason why we wanted to reduce the mortgage as much as possible is because like for many people it hangs over us like some dark cloud, and everything we do in life seems to take second priority to it. So we thought if we paid it off quicker, it will give us a few more years to enjoy life without worrying so much.

It would obviously though be unwise to favour mortgage overpayments over retirement planning so I shall continue with my pension and ISA contributions.