Should I increase pension conts or overpay my mortgage?

trippy

I'm in a CARE scheme at work with a choice in contribution rates. I'm paying 8.5% for a 1/60 accrual.

I'll be due a pay rise on 1 April and I can't decide whether to increase my contribution to a 1/55 accrual rate or overpay on the mortgage.

I'm 40 with a pretty poor pension provision and intend to really concentrate on building up a decent pension over the next 25 years as I'd like to retire at 65. So this is where my focus is lying at the moment.

But I've still got 20 years to go on the mortgage and I'm wondering if maybe my focus is misplaced and I should be concentrating on paying that off earlier.

Any help would be appreciated. Thanks.

jamesd

The change to 1/55 accrual rate is likely to make you better off than overpaying on a mortgage.

In general, overpaying on a mortgage makes people worse off long term compared to investing and increasing the pension accrual rate is a form of investing. There are a few exceptions for either extremely high mortgage interest rates - say 8% and higher - or for people who are completely risk-averse and who can't handle the ups and downs of investing.

Another thing to consider is whether you want to retire earlier than your work pension permits. If you want this there are two other tools available. One is the use of a personal pension, all of which permit taking a lump sum of up to 25% at age 55 and income from then or later if desired. The other is the stocks and shares ISA. The ISA has the advantage that there is no cap on how quickly the money can be withdrawn, which makes it a good tool to cover a few years of spending because you can draw as much as needed. The pension combined with an ISA is better for longer periods.

Provided you can handle the capital value variations of investments, another option to consider is extending the mortgage term and using a pension lump sum to clear some or all of the capital when you reach 55. In effect you end up clearing the mortgage with the tax relief, leaving you getting the ongoing pension income. The monthly payments needed to do this are two to three times just doing a repayment mortgage for a basic rate tax payer, the advantage is that three quarters of the money - and effectively all that the individual paid out of pocket - remains in the pension for ongoing income, so it's a good way to be better off long term if you can afford the short term extra cost. This combination can work extremely well for people who want early retirement or a higher retirement income and who also have a mortgage to clear.