pay off mortgage or put in pension?

waynedance

Hi I am 36 and have a mortgage of 47k on a tracker for life at 2.19% approx 16 years to run.

Now my pension fund is only about 22,000k and not being paid into. Should I over pay my mortgage by £150pm to pay off in about 10 years and save approx 3k in interest or pay into pension fund?

Thank you in advance for advice.

Thrugelmir

Personally I would split the £150, 50/50.

waynedance

Not a bad idea so a pension is a good idea to be paying in to.

Froggitt

It depends.

Are you basic or higher rate taxpayer? If higher, then defo stuff it all in a pension. With 40% tax rebate, and 25% of the pension tax free lump sum when you retire, you could pay off the mortgage with the lump sum.

However, once the tracker rates starts going up, depending on how quickly and how high, I may suggest then paying more off the mortgage eg at interest rates of say 10%, you want to pay off the mortgage quicker......EXCEPT if your making 10% p.a. on your pension fund, in which case the 40% and the 25% extras start looking attractive again.

jamesd

Easy one to start with: the 8% regular saver account from First Direct for up to £300 a month. You have to open a current account with them to get it, don't have to transfer your banking to them. 8% even after tax is much more than your mortgage interest rate so it's a clear win for you.

Anything that gets you more than 2.19% after tax is better than mortgage overpayments at the moment and this is likely to continue to last for at least a couple of years at current low interest rates.

For longer term planning it's expected that in general investments within a stocks and shares ISA or a pension will return about 7%, more or less depending on where and how you invest. This is usually more than enough to make investing better than making mortgage overpayments if investments are appropriate for you.

Without investment risk you'll have no difficulty at all finding cash ISA accounts that are paying more than your mortgage interest rate.

I like paying off a mortgage with the pension lump sum but your mortgage will end before you reach 55 and that becomes possible. Since you're on a lifetime tracker it's probably not a good idea to change that at the moment.

If you think that you'll change job sometime it's better to defer the pension contributions in case you end up with a job where the employer offers some help with the pension payments, or at least until the legal requirement to offer you a pension affects your current employer. What matters most is that you're investing, that can be in either a pension or a S&S ISA. It can't be in a cash ISA or savings account long term because those barely match inflation and you need better than that for long term retirement planning.

opinions4u

Given the low mortgage rate and the benefit of tax relief, pension.

As base rates rise, review this.

waynedance

So pension is better option than paying off the mortgage. My company does not at the minute pay in to the pension and I have no plans of changing job.

Just looked at the first direct savings, so £150pm would make £77.08.

I am basic rate tax payer.

Thank you for taking the time to answer this question.

jamesd

Then wait until pension auto-enrollment hits your employer, as it will do in the next few years. At that point the mandatory contributions from them will increase the benefit of the pension.

waynedance

jamesd wrote: »

Then wait until pension auto-enrollment hits your employer, as it will do in the next few years. At that point the mandatory contributions from them will increase the benefit of the pension.

So best to stick in savings account until the company has to pay into pension.

When is best to do with the savings after a few years?

jamesd

I wouldn't normally say savings for long term money. Investments within a stocks and shares ISA are comparable to those available within a pension and would normally be a better choice than savings. But since the amount you're considering is well within the 8% First Direct account's limit that looks like the best option initially. If you can't get a comparable deal next year then it'd be S&S ISA time if you don't have a work pension with decent deal available.

hcb42

I like the sound of 8% savings myself...is that a one year special rate?