Overpay on Mortgage or continue paying into pension?

EdInvestor

DD4 wrote: »

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 ISA vs Pension debate started by Martin can be viewed here:

http://forums.moneysavingexpert.com/showthread.html?t=375217

My view is not uniquely held. :rolleyes:

marklv

Rich1976 wrote: »

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.

I think you must be careful not to try to fight too many battles at once. I believe that pension is the highest priority for you at this stage of your life (I assume you were born in 1976 as your handle implies). Once you get past 45 you may wish to change your focus to clearing the mortgage, but the younger you are the more you should focus on pension and investments.

DD4

EdInvestor wrote: »

The ISA vs Pension debate started by Martin can be viewed here:

http://forums.moneysavingexpert.com/showthread.html?t=375217

My view is not uniquely held. :rolleyes:

I didn't say that it was uniquely held, I pointed out that it was a view that you held but that some others, including myself, felt differently. I guess my main point is that we already have discussion threads on these sorts of topics so I don't understand why you have to get on your soapbox on every individual post.

I know from personal experience that when people start pushing their personal 'hobby horses' on threads where people have asked for direct advice, it simply further confuses already confused people, many of whom will walk away shaking their heads, never to return.

dunstonh

Ed has views that are black and white. No allowance for shades of grey.

DD4

dunstonh wrote: »

Ed has views that are black and white. No allowance for shades of grey.

Yet she posted this on the ISA v Pensions thread she linked above:

http://forums.moneysavingexpert.com/showpost.html?p=4312115&postcount=18

"[Retirement] Income made up as follows:

1.The two state pensions, both index-linked, let's say 6-6.5k average (part of this might include income from a small contracted out "protected rights" pension).

2. Company or private pension income, either final salary (index linked)or money purchase,or a mixture of the two: 3.5-4k. This would involve a money purchase fund of approx 75-100k to provide for inflation, depending on whether it was annuitised or in income drawdown.

The income above should be pretty well tax-free as it's within the age allowance and 10% band. "

To summarise, the OP has told us he currently has a pension fund of £22k, has no employer contributions and is currently saving £120 (gross) per month into his pension plan. Unless he invests in an amazing fund it's unlikely his pension plan will attain much more than the £75k to £100k range Ed states above, even with the additional tax rebate, especially if the OP removes 25% tax free and includes a spouse's pension.

I simply don't understand how Ed can advise the OP to throw away the 20% tax rebate, when she knows the OP's probably not going to have a pension pot larger than £100k and when she is also going against the advise she gave in the ISA v Pension thread.

Thrugelmir

Keep an eye on the interest rate on your mortgage. At the moment rates are historically low. So currently the pension may be the better option. As rates rise in the future you may well need to direct more money into your mortgage in any event.

Also worth remembering that your PP pot is paid out on death before retirement ( not that I'm suggesting anything). So there is a secondary attraction to investing in a PP rather than an ISA in my view.

dunstonh

...plus pension contributions can increase working/childrens tax credits as they lower your income resulting in greater tax credits. The theoretical maximum benefit of tax relief and tax credits can add up to effect tax relief of 72%. Ignoring growth, if you took back 25% at the end, then the income has only cost you 3%. Most people are not going to be able to get 72% (as that needs the care element of tax credits) but the lower income will benefit many.

EdInvestor

There is no reason why the OP has to take irrevocable decisions to lock away money into pensions forever right now.He can put in an amount equivalent to his annual salary any year - so th/ere's every reason to stay flexible, save in other ways and pick up the tax relief later - perhaps he would even then by paying high rate and get a 40% freebie instead of 20%.

The tax rebate is actually deferred tax - apart from the 25% included in the lump sum, because the pension income is taxed in retirement.

Thus is it worth paying into pensions if you are on 40% tax and expect to pay 20% in retirement.But the single digit gain for those on basic rate does not IMHO compensate for the loss of control of both the capital and the payment of the income forever whih is the big downside of the pension.Free money from an employer is the other thing that can compensate for this.

But if on basic rate tax and no free money from an employer?I'd give the pension a miss and use the stocks and shares ISA instead.Why lose all your savings to an insurance company?

dunstonh

Why lose all your savings to an insurance company?

because the pension will pay a higher income in retirement than an ISA for most people.

EdInvestor

dunstonh wrote: »

because the pension will pay a higher income in retirement than an ISA for most people.

How much bigger? Would a return of 7% (taxable) be worth losing all your capital for, if the ISA paid a return of 5% tax free?