Overpay on mortgage or contribute to pension

Israfel

Just wondering peoples opinions on this, currently I pay a couple of hundred a month into a pension plan. However I am allowed overpayments on my mortgage and seeing as interest rates are low at the moment would it be a better investment of the money to pay off more of the mortgage for the next year or two and put the pension on hold?

Cannon_Fodder

Mortgage overpayments - depends on your mortgage rate. If you can get more through Cash ISAs etc than the % you pay for the mortgage then don't overpay, save. Until the rate goes up, then throw a lump of savings at the mortgage.

If your rate isn't actually very low, just 'lower' than before, but still more than ISAs etc, then overpaying is not a bad idea.

Pensions - depends partly if you get any employer contributions. If you do, then take the maximum amount of free money you can get from your employer.

Pensions don't earn interest, they are invested in funds. So with the Stock Market being low-ish historically, there is a fair chance when the recession ends that the Markets will continue in a positive direction. Might be blips along the way, but as individual companies report positive results (hopefully) next year, the markets should approve/improve. Hence the partial recovery of last years falls, so far this year, as Bank results turned around.


As a general rule, I would never advocate stopping a Pension altogether. You might shift the balance of your disposable income towards the mortgage more, if it was horrendously expensive perhaps, but the point of a Pension is the long-term cumulative gains - buying into some funds cheaply today could in 20 years make a substantial difference.

Conrad

Pensions for me are not a good place to store wealth as they die with you in retirement. I prefer ISA's and property - which will generate an income for me in retirment and that can be passed on in tact to my children.

Batchy

Conrad wrote: »

Pensions for me are not a good place to store wealth as they die with you in retirement. I prefer ISA's and property - which will generate an income for me in retirment and that can be passed on in tact to my children.

Good point, but will your relationship with your children be as amicable when your 80 and they are triying to offload you into a home as it is today?

the fact a pension will have significant tax breaks now to grow in the future, and the fact you can do income drawdown till your 75ish and if you die before, there is then a transferable fund available to your estate as you have not yet brought an annuity with it.

I think a good balance of all investments gives you the best of both worlds in reality.

some ISA, some Shares (even via ISA), some bank funds savings, some premium bonds (as you never know) and a solid pension, with loads of free money. My employer pays 15% into a private fund at the moment. Good times, while im working here. But not a lot of choice with what to do with it in a pension fund. it has to go in there at the end of the day I just monitor its performance now and again!

Israfel

Thanks guys, great advice, I am leaning towards Conrads advice right now as I'm 29 years old so theres still a lot of time to pay into a pension pot and given my interest rate is quite low on a standard variable it's probably a good time to get as much equity in the property as possible. My employers contribution to the pension is quite high but based on me making a quite high minimum contribution. I will look into this more but I am leaning more towards putting the money towards to house in the short term.

dimbo61

IF your employer is paying into your pension and you also get tax breaks I would keep the normal pension payments and overpay a little on the mortgage.
Even on a 25 year mortgage you would be mortgage free by 54!
just my opinion

Yorkie1

I recall being told that the earlier you invest in a pension, the greater the rewards will be for the same investment. I.e. £100 per month from age 30 will get you far more income upon retirement than the same from age 40 or 50 etc.

Not saying a mixed set of investments isn't a good idea, but making up any reduction in pension contributions will cost you disproportionately more in future than you save now.

Yorkie1

I recall being told that the earlier you invest in a pension, the greater the rewards will be for the same investment. I.e. £100 per month from age 30 will get you far more income upon retirement than the same from age 40 or 50 etc.

Not saying a mixed set of investments isn't a good idea, but making up any reduction in pension contributions will cost you disproportionately more in future than you save now.

Israfel

It's a good point Dimbo and yorkie but my mortgage is quite low, less than 60k and while the rates are low (4.12) getting as much of the equity in the house as possible would see the term of the mortgage lowered and the amount I pay back in interest over time substantially lowered so I could be mortgage free in a far shorter time. I'm still not sure what to do really. I can't deny I have a good pension deal but I can't imagine my interest rate will be any lower in years to come considering the BOE base rate so I feel it may be a good time to build up the equity in the house.

dunstonh

If you die before retirement, the full fund value (inc tax relief and any employer contribution) is paid to your beneficiaries outside of the estate (not charged IHT).

If you die after retirement how it pays out will depend on the guarantees you buy. For example, if you buy value protect the full value will be paid out minus any pension payments already made minus 35% tax (lower than inheritance tax and you did get tax relief to begin with and took out 25% on retirement as well).

Paying your mortgage and paying a pension (or doing retirement planning) should not be a choice of one or the other. You should do both.

If you fail to plan for retirement you will probably end up having to do equity release on your property which will end up costing more than paying into the pension.

With interest rates so low and equity prices being back at 2007 levels, it would look more attractive potentially paying into that.

Personally, I am doing both. Overpaying and upping my monthly regular contribution to my investments.

Israfel

Cheers Dunstonh, it was never my intention to stop the pension full stop but simply to put it on hold for year or two, putting the excess money into the mortgage instead to lower the term while interest rates are low. When the BOE rate starts to increase I'll lower the overpayments and restart paying into the pension so it would only be short term. Do you think that would be worth the effort?