Pension or overpay mortgage?

micflair_2

Just a quick one people!

Just need a bit of advice, Im 36 and like many a person out there have no pension currently going. In september my workplace is starting the new pension that the goverment have forced companies to enroll people into so my plan is to join that and pile money into it. In the meantime I am planning on overpaying my mortgage by approx £300 a month.

If I continiue to overpay my mortgage It will be paid off in 14years rather than 28 years, would it be more advisable to just continiue to overpay my mortgage rather than put into the pension? Im thinking the savings made on the mortgage would be better than the savings gained on the pension? But thats why Im here, to clarify these points! Or would it be better to split the money into both areas?

Thanks in advance!

jamesd

If the new pension is the one run by NEST, that has enough restrictions - like limited investment options and a ban on transferring money out to a better pension - that it's likely to be best to pay in only the minimum amount that it takes to get the maximum amount of employer matching. Any more pension contributions can wait until you're with an employer that offers something better.

Before September you might ask your employer why they aren't using the generally better alternative operated by NOW:Pensions. That has some extra features for employers and lets employees transfer out if they want more investment options. It also has a superb reputation internationally for what the owning company has done in its home scheme. The transfer capability also makes it a low risk option for both employer and employee because the money isn't locked up in the NEST pension if either decides that something else would be a better idea, it can just be moved to whatever else comes along.

The government isn't forcing employers to use the NEST scheme, just to have auto-enrolment into some pension set up. It can be NEST for employers who just don't care much about employee pensions or it can be something better.

For money beyond what you need to pay into the work pension the first choice is perhaps to use investments within a stocks and shares ISA. That allows all of the common investment options that a pension provides but also lets you get access to all of the capital if you need it.

It's very unlikely that you'll save more from making mortgage overpayments than from investing within either a S&S ISA or a pension. You'd need to be paying something like 7% plus inflation as your mortgage interest rate to beat even what you might cautiously anticipate from the main UK market and that's not likely to be the best market to be using for a large portion of the money you'd invest.

Even without using investments you can get 8% from a regular saver from First Direct for up to £300 a month for a year.

For pension money the rules currently allow access from age 55, 19 years away for you. That's enough to let you take a pension lump sum and use that to pay off some of the mortgage from money that's received tax relief. When you get closer to this age it's a good time to consider shifting money from ISA to pension to get the pension tax relief and increase the lump sum.

There's no one right answer about pension or S&S ISA or mortgage overpayment. It comes down to the risk tolerance of the individual and heir preferences. In general the investing options are expected to leave you better off financially but the mortgage overpayments have a certain result and many people like that certainty even though it'll probably leave them less well off than investing.

You're also young enough that it's worth considering whether it's worth locking you money up in the limited investments in NEST or whether it's worth opting out instead and either using a S&S ISA or a personal pension instead. You'll lose the initial employer matching but gain from the better investment range elsewhere if you know how to use that. If I was 36 it's likely that this is the option I'd choose, while complaining to my employer about offering such a restrictive pension when there are better options around. The older you are the less likely it is that this will be a good idea, because there's less time for the extra investment options to make money before retirement.

rachelonna

I think the advice by james D is very sound

I would say about pension or mortgage dilemna - join a personal pension plan if it's the NEST pension, then do the Martin Lewis rough guide - you need half your age as a percentage of your earnings until you retire in order to have a decent pension. So if you're 36, that's like 18% of your salary!!!!

If you're lucky enough to be up to that, then I would probably overpay my mortgage if I was you as it would mean that I'm repaying the higher interest debt even faster - allowing you more options for remortgage etc, then you can put the extra future savings towards your pension instead.

micflair_2

Cheers guys for the advice.

I work for a larger supermarket chain, so asking them why they are using the NEST pension really is not going to get me anywhere.. so not much point in going down that road! Thats indeed if they are using NEST, the full details have not come through yet for us.

Its a minefield of advice and information out there for people who are clueless in this area, thanks for your understandable advice! Ill read it another 30 times and then ask again.

Paying off the mortgage in half the time, then using most of my wages for mega savings seems the easiest option - but Ill dive deeper into it and have a good look at my options!

Regards and thanks.

jamesd

micflair wrote: »

Paying off the mortgage in half the time, then using most of my wages for mega savings seems the easiest option

It's also extravagantly wasteful. You lose many years of compound growth at the difference between the mortgage interest rate and the investment returns. It'll be very hard to catch up on all that lost growth.

Rob_192

This is always a difficult one to answer - I did a bit of both, but luckily for us, I had been paying into a pension from a relatively young age, albiet with fairly modest contributions. By the time we paid off our mortgage, 8 years ago, I was aged 40, and had already built up a pension pot of £68k. We were also paying a far higher mortgage rate than the current norm, so I felt comfortable doing what we did.

I am now throwing everything at retirement saving in the form of both pensions and S&S Isas, the problem is I want to retire early and wish I had invested more in pensions/Isas at an earlier age. That having been said, we've got that pot up to approx £300k in the last 8 years.

There is a fantastic feeling about paying off your mortgage early, one which is not to be underestimated in terms of the relief it brings, but given the current low mortgage rate, I would not pay off my mortgage if I had to make the same decision now. I would be looking to secure the best long term fix and plow everything into investments for retirement purposes. Of course, if interest rates return to those higher rates like we had a few years ago, then the ballance will have changed and it might be worth withdrawing some Isa money to pay of the mortgage.

R

micflair_2

Rob_192 wrote: »

This is always a difficult one to answer - I did a bit of both, but luckily for us, I had been paying into a pension from a relatively young age, albiet with fairly modest contributions. By the time we paid off our mortgage, 8 years ago, I was aged 40, and had already built up a pension pot of £68k. We were also paying a far higher mortgage rate than the current norm, so I felt comfortable doing what we did.

I am now throwing everything at retirement saving in the form of both pensions and S&S Isas, the problem is I want to retire early and wish I had invested more in pensions/Isas at an earlier age. That having been said, we've got that pot up to approx £300k in the last 8 years.

There is a fantastic feeling about paying off your mortgage early, one which is not to be underestimated in terms of the relief it brings, but given the current low mortgage rate, I would not pay off my mortgage if I had to make the same decision now. I would be looking to secure the best long term fix and plow everything into investments for retirement purposes. Of course, if interest rates return to those higher rates like we had a few years ago, then the ballance will have changed and it might be worth withdrawing some Isa money to pay of the mortgage.

R

Cheers mate for your input!

Another one I have to think about is this, at my workplace we do a sharesave option, we can put a max of 250quid a month in it, which is what I have done for the last 3 years. After investing 9k total over the 3 years I am looking at collecting about 14k in the coming months. My other option ontop of the mortgage and pensions is just plowing all my cash into these, surely a possible 5k profit on 9k investment every 3 years is better than any pension.

Decisions decisions.. argh!

jamesd

It is possible to do better than that Sharesave scheme in a S&S ISA or pension but I suggest that you use Sharesave as much as you can. The combination of protection for the capital and possibility of stock market gains is a good one.

I'm doing something a bit similar to what Rob 192 described as what he'd wished he'd done, except I'm doing it with an interest only offset mortgage. Not paying anything off the mortgage deliberately but for financial spread betting I need a capital reserve in case of margin calls and I keep that in my offset account. My mortgage repayment plan is to use the tax-advantaged pension lump sum and make no actual mortgage capital payments until then. that's a bit far for most people but I've a strong focus on being financially independent and able to live normally if I couldn't work. Got to the basic level of that target fairly recently, now building up to comfortable early retirement levels.

On the work pension side, don't give up on the company accepting feedback just because it's big. I asked my quite big employer to make a change to the work pension and they agreed. There's some advantage to them in making the pension as attractive as possible because they can save employer NI or part of the employer NI on any payments by employees above the minimum to get their matching amount. One frustration for many pension pros is that a lot of people just aren't interested in pensions and they may well welcome your questions and feedback if you let them know that you're interested.

micflair_2

jamesd wrote: »

It is possible to do better than that Sharesave scheme in a S&S ISA or pension but I suggest that you use Sharesave as much as you can. The combination of protection for the capital and possibility of stock market gains is a good one.

I'm doing something a bit similar to what Rob 192 described as what he'd wished he'd done, except I'm doing it with an interest only offset mortgage. Not paying anything off the mortgage deliberately but for financial spread betting I need a capital reserve in case of margin calls and I keep that in my offset account. My mortgage repayment plan is to use the tax-advantaged pension lump sum and make no actual mortgage capital payments until then. that's a bit far for most people but I've a strong focus on being financially independent and able to live normally if I couldn't work. Got to the basic level of that target fairly recently, now building up to comfortable early retirement levels.

On the work pension side, don't give up on the company accepting feedback just because it's big. I asked my quite big employer to make a change to the work pension and they agreed. There's some advantage to them in making the pension as attractive as possible because they can save employer NI or part of the employer NI on any payments by employees above the minimum to get their matching amount. One frustration for many pension pros is that a lot of people just aren't interested in pensions and they may well welcome your questions and feedback if you let them know that you're interested.

Thanks again for your feedback mate, but belive me - one of me asking them to change a pension for over 150000 employees.. cant see it happening

Time for a think me thinks! Cheers again