Bonus into pension or mortgage ?

con_carne

Good afternoon everyone

I'm in the rather fortunate position to be receiving a bonus from work soon (the amount is likely to be about 7 - 8 k pre-tax), and we have been told that we can have this bonus paid into our pension plan before tax and NI are paid.

Luckily I have been saving recently and so don't need the cash - if I don't put it into the pension I will use it to pay off some of my mortgage.

So I was just generally wondering what people think is the best avenue to go down - pay the whole thing into a pension tax free, or pay off some of the mortgage with the bonus after tax (higher rate) is taken off. Or even a mix of both ?

cheers

Innys

Hi

You need to take into account other factors e.g. your age, the type of mortgage you are on (fixed vs variable rate), whether you feel a pension is a worthwhile investment, the target date you have set yourself for paying off your mortgage, whether you are happy paying interest on your mortgage while your pension pot grows and so on and so on.

Only you will know the answers to these questions and most are highly subjective. There is no right or wrong approach, it depends on what you are comfortable with.

As for me, I abhor paying GB any more tax than I have to so I'd pay it into my pension, which is what I did with my bonus a couple of months ago. On the other hand, my mortgage is failry manageable so I was able to make that choice failry easily.

Next year's bonus has already been set aside to help with my house extension so I'll be taking the cash.

Hope this helps

kennyboy66_2

I'd agree with Innys - don't forget though, that you are only deferring the tax when you pay into a pension - although you may only end up paying basic rate tax when you take your pension, rather than paying some at a higher rate now.

I would never make an investment decision purely on the basis of saving tax.

plonkee

Personally I would put it into my pension.

I'm reasonably confident of getting a higher rate or return from my pension fund selections than my mortgage interest rate over the next 30 years (length of time left on my mortgage).

I'm also reasonably confident that I could live with this decision and not use hindsight to say it was a bad choice if in fact it turns out to be not as beneficial as paying the mortgage off early.

The tax thing is probably not that important, in my case I reckon I'll be paying tax at about the same rate I am now.

brasso

A nice problem to have.

I'm a great believer in tackling debts if possible, so I would probably pay off some of the mortgage.

I've stopped paying into my pension, and am saving in Maxi-ISAs instead. That would be another route to take if you've not used up your £7K annual allowance for this year.