Personal Pension, High Interest Savings or Mortgage Overpayments?

ForestSDMC

Hi,

I've got a new job and starting in a few weeks however the new place does not have a company contributory pension. I'm currently giving ~3% with my current employer matching that into a personal pension. My options now are...

• Continue to fund the personal pension myself with no company contribution
• Save that monthly fund amount into a high-interest savings account or ISA
• Overpay my mortgage each month with the equivalent of this monthly pension contribution

I'm just not sure which is best as they all have their positive/negative aspects. I'm leaning towards the 3rd option personally to get the mortgage debt down quicker and also help to get a bigger house in the next few years easier.


Any helpful advice gratefully appreciated.


Thanks,
ForestSDMC

Linton

It should not be a matter of either/or. You need retirement provision, you need cash available for emergencies, and of course you need to pay off your mortgage at some stage - not to get a bigger house but simply to pay off a debt.

So I suggest you plan each aspect separately. Have you worked out how much you need to save now to finance a secure retirement? 3% of income is IMHO unlikely to be enough, depending on your age think 10%+. Have you 6 months living expenses in cash accounts available for emergencies?

Having got those aspects sorted, do you have money to overpay the mortgage or perhaps set up extra long term saving or preferably investment? Which one you chose to do depends on mortgage rates and your assessment of the return available should you put your money elsewhere.

Loughton_Monkey

With today's low mortgage rates, paying off the mortgage often doesn't add up. Best to let the mortgage 'inflate away'.

A matched pension scheme (3%) is a no-brainer to keep in place. With tax relief, it means that every £2.40 you pay in instantly becomes £6.00 invested [hopefully] in funds that will do very well in the long run. Put the £2.40 into a cash ISA (or even worse, a taxable savings account) at today's rates of about 3%, and it would take precisely 31 years to grow to £6!

The only other comment I would make is that a total of 6% into a pension is better than nothing, but sadly short of the [roughly] 20% or more needed for a 'decent' retirement.

Paul_Herring

Loughton_Monkey wrote: »

A matched pension scheme (3%) is a no-brainer to keep in place.

I think you missed the bit where they said that their current employer gives the match, but their next doesn't.

CLAPTON

what interest rate are you paying on your mortgage?

ForestSDMC

Thanks folks....but as Paul reminded I'd not even have a query if my new job was a contributory scheme. I just think continuing to fund a scheme privately after tax to the same level as I was getting with the contribution would be better utilized elsewhere. It seems a high yield savings account would be better use of this money - assuming mortgage rates aren't going to rocket up and savings interests are going to remain competitive.

Thanks and any further advice or examples are welcome.

ForestSDMC

CLAPTON wrote: »

what interest rate are you paying on your mortgage?

My rate is 3.99% at the moment for another 22yrs.

xylophone

http://www.hmrc.gov.uk/incometax/relief-pension.htm
You would get tax relief on your contributions to the private pension.

atush

first of all, your new company may not now, but soon WILL have to give you a contribution (by 2016). So keep up the 3% until they do.

And yes, I agree with Linton. It is not either or, but as well as. You should pay into a pension, hve cash savings, and pay off your mtg (on time or sooner if finances allow). 6% into a pension is better than nothging but not great. 3% is even more so. But you really do need to provide now for your future then.

kidmugsy

1) Try to accumulate something like 3 to 6 months worth of outgoings in a Cash ISA, in case of emergency. Now is a good time to do it, in the window between your old pension and the forthcoming NEST pension that your employer will have to offer you.
2) Avoiding interest on your mortgage is the equivalent of a risk-free savings account offering 4% per annum: pretty good.
3) But long term you need to save far more than 6% of income for your old age. If you are/become a higher rate taxpayer, pensions may be a good route to do it - if not, they are less compelling.

jamesd

Keep the money until you get some employer matching.

Invest the money within a stocks and shares ISA until you're using the full allowance each year. This way you'll still get pension-level investment growth.

The expected return long term from investments is greater than the mortgage interest rate so you lose out on compound growth with any money you use to reduce the mortgage balance.

If you need money to move later, you can sell investments to fund any additional equity you need. Since you'll probably plan that in advance you can adjust to lower volatility investments gradually before you do it so you'll be more sure to have the money you need when you need it.

Paying off a mortgage is popular for those with a very low risk tolerance, in part because it has a completely predictable result. It's just not very efficient money management if you do have the risk tolerance to use investments. The fairly low expected return makes it a bad choice for long term retirement income investing. It can still be appropriate as part of a mixture.