Pay pension for 12 months or overpay mortgage

juliettet

I have started a new job but cannot join the employers scheme for 12 months. What would be best: paying contributions to my last employers scheme or overpaying my mortgage? I started my pension at 30 and am now 51. Would a year out make much difference?
Many thanks.

Bigmoney2

Wouldn't have thought you wold be able to pay into a previous employers scheme, unless you have AVC set up.
It's probably good to put the money aside now, either via the mortgage or into a saving/ISA account.
Does the new scheme allow AVC's , if so you could then transfer the savings in later

Smoked_Haddock

If you are a higher rate taxpayer and you may want to look at setting up a new SIPP

You could pay up to £50k per year into a SIPP, and because of tax relief it will cost you as little as £30K (depending on your income)

Do that for 4 years, and you are looking at a SIPP pot of say £220k which has cost you as little as £120K.

At age 55 you can take 25% of that pot - £55k- as a tax free lump sum. You can use that to pay off some of your mortgage.

You can then draw down the remaining £165K at a rate of £8k PA to supplement your income / pay off the rest of your mortgage until you retire, and then to supplement your previous pension in retirement.

At least I think that's right, maybe someone more knowledgeable will confirm this or correct me if I've got it wrong.

juliettet

I am not a higher rate tax payer, but Legal & General (last pension administrator) sent me a DD form. I think I will phone them. I wish to do the best I can with this money.

Many thanks both of you.

Loughton_Monkey

Personally, unless my mortgage interest rate was unusually high, I would choose pension every time. Not only for the tax relief, but because 'early' investment is always better than 'later' because it has extra time to grow. I hold no brief to say whether you should do this via your old scheme or in other ways, but I would go the pension route.

These days, a mortgage is 'cheap'. I view a mortgage as something best left to 'inflate away' as much as you can. For fourty years, regularly moving up the housing ladder, I always had "Interest Only" mortgages. These were always fully backed by 'payment vehicles', but I'm proud of the fact that I have matured all the endowment policies - at very good returns as it happens - and spent them all on other things - mainly house improvement, and a couple of new cars. I would have paid it off 'out of petty cash' by now if it wasn't for the fact that I only pay 1½% interest, and I can get 3.2% after tax in 2-year bonds.

jamesd

You're 51. Just four years and you can take a lump sum out of your pension and use that to reduce the mortgage if you really want to do that. Lets look at the numbers, ignoring investment returns and interest cost:

Basic rate pay 1000 net get 25% added so 1250 in pension pot.
Take out 25% tax free lump sum in 4 years gives 312.50 off the mortgage and 937.50 left in the pension pot.

So if you were to use a personal pension and take the lump sum part in four years you'd effectively have the money in the pension and 250 or so of free mortgage payoff courtesy of the tax relief.

So if you want to reduce the mortgage, a pension offers an efficient way to do it.

If you didn't use a personal pension (SIPP or just normal personal pension) dedicated to this you'd need to check that it's OK to transfer money from the work scheme to a personal pension so you can take the lump sum and leave the rest invested. Your old and/or new schemes may already allow this, the old one probably does.

Legal and General are prohibited by regulations from offering you advice. They can tell you about administrative things but no more. To the extent that they can say anything it'll undoubtedly be about encouraging the use of pension contributions with them.