At what point will paying into a mortage be a waste of time

jimnew

It seems that if you paying tax at 20% you are better off paying into a isa than a pension and the opposite applies if you pay tax at 40%

With all the changes to how much you actual get when you take your pension how soon before we are all better paying into a product like an isa?

dunstonh

It seems that if you paying tax at 20% you are better off paying into a isa than a pension and the opposite applies if you pay tax at 40%

No. It depends on your objectives. A basic rate taxpayer will still see the pension beat ISA for income provision in retirement on a like for like basis. Its just not by as much as a higher rate taxpayer and for some people they do not think of the difference as being enough.

hugheskevi

In the last couple of days, I've got a lots of mail-shots from the various professional press speculating about the various ways the Govt. is musing about changing pensions again. A few examples from a quick Google:

Article in Telegraph musing about reducing Annual Allowance.

Article in Telegraph about abolishing higher rate tax relief

Article about reducing/capping tax free cash.

At least that is about future accrual (hopefully!).

But in recent years there has been the change to the minimum age someone can take a pension, and the change from RPI-CPI showed that accrued benefits can be reduced. And the change to drawdown (from 120% to 100%) is also a change to the existing system affecting accrued pension.

Then there were the Labour changes to high earners, promptly followed by the Conservative changes reducing lifetime allowance and annual allowance.

I don't mind investment risk - I can handle that myself through my investments. But personally I require a lot more than basic rate tax relief to compensate me for bearing this level of legislative risk which is completely out of my control.

Even the quite significant incentives offered from higher rate relief is about the minimum I want to persuade me to make pension contributions and expose myself to this legislative risk - I don't like a product that is political football, as no long-term saving system should be kicked about like this every year.

I think if any reduction in tax free lump sum was passed which affected accrued rights, that would be enough to convince me that I cannot trust my counter-party and re-consider pension saving regardless of the incentives.

property.advert

jimnew wrote: »

It seems that if you paying tax at 20% you are better off paying into a isa than a pension and the opposite applies if you pay tax at 40%

With all the changes to how much you actual get when you take your pension how soon before we are all better paying into a product like an isa?

You are right to look at the big picture.

Mortgage repayments are made out of taxed income. Thus repaying £60 of your mortgage costs you £100 of income (for 40% taxpayers) whereas you can get £100 into your pension.

The argument is further compounded if investment returns are greater than the mortgage interest (another reason why interest only mortgages must remain).

Then you have 25% of the pension lump sum tax free.

So you can pay £100 for £60 of mortgage or you can pay £100 into a pension and later get your £100 back with compounded growth all tax free.

More complexities in life than this I know but if you weren't going to move for a while it may be good to fill up on pension first and then pay off the mortgage when you can no longer benefit from tax relief on pension contributions.

property.advert

hugheskevi wrote: »

I think if any reduction in tax free lump sum was passed which affected accrued rights, that would be enough to convince me that I cannot trust my counter-party and re-consider pension saving regardless of the incentives.

I agree.

A few years ago the goalposts were getting my hands on pension money at age 50. Now that has been pushed back to 55. By the time I get near to 55 I suspect they will shift it again, perhaps to 60 but who knows ? All of a sudden the plans you have spent decades putting in place are unravelled by the government.

Now it gets more complicated than that because if you were relying on your 25% to pay off your mortgage as part of prudent financial planning, some twit in the Treasury changing the rules might mean you don't have a wedge of cash when you need it.

They have to set the rules and leave them or at least allow people to run their plans under the rule sin place at the time they set their provisions up.

atush

jimnew wrote: »

It seems that if you paying tax at 20% you are better off paying into a isa than a pension and the opposite applies if you pay tax at 40%

With all the changes to how much you actual get when you take your pension how soon before we are all better paying into a product like an isa?

You can invest in the same funds inside a pension as inside an ISA. So, with an isa a basic rate taxpayer would be 20% worse off as they would not get an uplift in their contributions of that amt. Which would then have time to grow and you get compound investment returns which would magnify this effect.

But I willnever understand the 'one of the other' brigade. The most sensible option is to invest in both, as they each have different timeframes which will be useful over a lifetime.