Overpay mortgage or buy more pension years?

Izz

Expecting payrise - should I overpay mortgage or buy extra pension?

I did post this question on the mortgage-free-wannabee forum, but was advised to put it here too...

The mortgage is huge (130k) and on a 9 year fix at 5.01%. I'm already overpaying by £50 per month, but the pay rise, plus the money released by no longer being in debt ( ) means I could start overpaying by a further £250 per month. This would mean no more mortgage in 12 1/2 years.

Or, should I put the extra into my occupational pension (teacher's pension scheme). I can buy 'extra years' to boost what will be a very meagre retirement income.

I have 21 years to go before retirement (if I retire at 65).

I have 6 years in the current pension scheme, plus a couple of (very) little personal pensions.

I don't know what to do, and would really welcome some advice.

Izz

EdInvestor

If you already have a lot of equity in the house, then I would go for the pension, as it's a quality scheme.

It's not the size of the mortgage that matters so much, more the proportion of the loan to the totsal value.

Equally, if the scheme wasn't the best one around and you were a basic rate taxpayer, building up a retirement pot through maxing out an investment ISA might be the way to go.

dunstonh

£130k mortgage isnt huge by todays standards. It is about average.

We have to budget for all sorts of things in life and if you focus on one thing only then the rest will suffer. You can afford to repay the mortgage within the agreed terms and have a shortfall in your retirement planning. Therefore it makes sense to focus on that and not the mortgage.

westy23

why not split it 50/50 between pension and mortgage,
and as you receive further pay rises up the amounts equally,
its what i do.
its very pleasing to have the mortgage going down and my pension (avc) fund going up.

sleepless_saver

If you're planning to work till 65 then you could pay off the mortgage first and then pay for the added years, though you would be paying a higher % of your pay towards the added years as it would be over less time.

Only problem with this is if something unexpected happens - you want to or have to retire or move job earlier, become ill and unable to work etc. My own choice has been to start buying the added years and deal with the mortgage later, but that may not be the best option:o

GardenMillie

I would pay off the mortgage first and then put money into the pension or look at other investment opportunities once the mortgage is paid off. I know it's a fixed rate for 9 years but it looks like the interest rate might rise so who knows what will happen mortgage-wise in the long term.

clairehi

Ummm.. dont you get tax relief on the pension contributions, so wouldnt the best plan be to buy the added years?

Personally, I wouldnt criticise the TPS, or other public sector FS schemes. 6% employee contributions for 40 years = 50% FS as pension sounds alright to me!

EdInvestor

Ideally you want to arrive at the age of 65 with

a) your mortgage paid off
b) a good basic index-linked pension income from state pensions and your teachers pension
c) An additional top up income from your investment ISA which is not taxable

Try to avoid getting all your income in retirement from taxable pensions and none from tax free ISAs. Many people haven't done this and find they lose their age allowance.

Don't forget that the ISA ( 7k a year) is use it or lose it every year, but you can max out your pension and get tax relief up to the full level of your salary right up until you retire.

Perhaps you can work back from age 65 to see what you should do now.Arguably a period of ISA and pension saving is required for a while.

jamesd

You need to avoid having your house as your main money reserve, so you might not be able to support it and may have to sell to live. The pension provides you that income you need to keep the house intact and live in it.

Mixing investment types is good. Your house is a substantial property investment and it's good to put other investments in other things... like that pension.

Your mortgage seems to be at a fairly low interest rate and it's likely that investing or even cash ISA accounts (which pay as much as 5.75% at present) will make you more money than you save in interest. Given this I suggest not paying 300 a month off the mortgage but instead putting that in the NS&I cash ISA at 5.3% then switching to the Ruffler Bank ISA once you have accumulated their minimum 3000.

How many extra years can you buy? You might consider buying that maximum total during your remaining working years and reduce your other savings to whatever level it takes to buy them, perhaps at one extra year purchased for every two or three years of work.

If your risk tolerance allows more risk, cash ISAs and mortgage overpayments are not ideal investment vehicles, since their returns are lower than expected for equities. A stocks and shares ISA is likely to leave you better off when you retire, though with more uncertainty. It's well worth investigating this to see how comfortable you are with the idea. 21 years is a long time until retirement and that strongly suggests equities - shares - as your best investment method after the teacher's pension. Since diversification is good, I'd probably go for at least 100 a month in a stocks and shares ISA just for that reason, if you can stand the ups and downs of the stock markets.

If you can buy extra years at any time, I think it's best to start accumulating a large independent shares ISA investment pot first, since time and compounding of returns is critical to achieving good results. Perhaps ten years of this would leave you with a fair investment pot and you could then start buying the extra years while compounding helps the money invested now to grow.

It's also worth reviewing your existing little personal pensions to see if there is benefit in consolidating them and perhaps getting better returns from them.

Izz

Lots of helpful ideas here!

The pay rise is about £300 per month (thank you!!!) and I'll be splitting it equally between extra pension years, mortgage overpayments and savings.

It has taken us about 18 months to get from (16k) big-debt/big-worry (caused by moving house 5 times in 6 years) to the happy position of being able to make these choices. It has been worth every forgone 'treat' paid for on credit. It meant lots of extra work, but that has been worth it too, because we have met new people and found potential new 'openings'.

The main thing we have learned is how little we actually need to live on - so our even pension savings are much healthier than we had first thought!

Izz

Sapphire

jamesd wrote:

Your house is a substantial property investment

Not so sure about this. If your house is for living in, then in can't really be regarded as an 'investment', surely? :cool: