Suspend pension to overpay mortgage?

RandomHandle

Hello, in 2011 I restarted my pension as a mixed stocks/shares SIPP pension following IFA advice.

I am 40. Current valuation is approx 26.5k, contributing approx £350/month. I think I qualifiy for some tax relief.

I don't have a clear idea of recent performance, as I stopped payments for a while in Q1/Q2 2013.

It's for a good reason though - boost cashflow for a property purchase! I now have an approx. 130k 25-year mortgage, 4yr fixed 2.99%, payments approx. £620/month. I have no other debts or investment outgoings, and have protection insurance in place.

I re-started pension payments but am now wondering, now that 'my circumstances have changed', as the saying goes.

Given the ongoing signals by the BoE etc. favouring debt/savings reduction (i.e. "don't bother saving, we're out-inflating debt instead"), I'm asking if I should overpay the mortgage instread of building up my pension - especially if loan rates do increase.

But on the other hand, I'm aware that in the medium-to-long term, investing may well out-perform the rates on the debt, so it's worth building up?

I suspect asking (another) IFA may just result in them trying to switch me to their pension plan instead. Can anyone advise?? Thanks.

fiesta04

I would personally ask existing IFA this question, as they gave advice on your original proposition.

F4

Annisele

I wouldn't stop pension contributions. Once you've stopped, it's far too easy not to start again.

If anything, I'd consider increasing the pension contributions if at all possible. Have a play with something like Hargreaves Lansdown's pension calculator. At 40, an existing pension of £26.5k with £350 a month of contributions won't give you a huge pension anyway. The calculator will give you a guesstimate of how much it might cost you to delay contributions by five years.

But I'm not an IFA, and I don't know your personal circumstances. I'm telling you what I would do, but that doesn't mean it's right for you.

dunstonh

Despite the last decade being really poor in investment terms (on one of the worst for a generation), even the bog standard insurance company pension funds (e..g balanced managed) have brought in over 5% a year average.

Debt clearing is a priority when it is short term expensive debt but not when it is long term cheap debt. Plus, debt clearing doesnt mean you stop everything to clear it. It is easy to look for excuses not to pay into a pension. However, there is all they are; excuses.

You are behind on your retirement provision (taking the old saying to aim for £35k by age 35 - crude and not personalised but a good guide to get you thinking). So, stopping it would be a bad thing to do.

Thrugelmir

Does your lender allow you to overpay your mortgage, if so by how much?

jamesd

RandomHandle wrote: »

It's for a good reason though - boost cashflow for a property purchase! I now have an approx. 130k 25-year mortgage, 4yr fixed 2.99%, payments approx. £620/month. I have no other debts or investment outgoings, and have protection insurance in place.

That was a good reason for deferring pension contributions for a while.

awz1 wrote: »

Given the ongoing signals by the BoE etc. favouring debt/savings reduction (i.e. "don't bother saving, we're out-inflating debt instead")

When the BoE is in the business of inflating debt away, why are you considering paying it off now before inflation has done its job of reducing the real value of the debt? Now is the most expensive possible time to be paying it off because inflation has so far done almost no work to reduce the debt.

You should learn from the BoE and let inflation do its work.

awz1 wrote: »

I'm asking if I should overpay the mortgage instread of building up my pension

Only if you want to make yourself poorer than you need to be.

If you really want to use pension money to help clear a mortgage, use the pension commencement lump sum. That way you effectively get tax relief on your mortgage capital payment. You can do this at any age from 55, though as late as possible is best, to allow more time for growth of investments and value reduction of debt by inflation to happen.

The average long term return of investments in the main UK stock market over the last hundred plus years was about 5.2% plus inflation. You're not likely to be paying a mortgage rate of 5.2% plus inflation plus the tax relief on the way in to the pension any time soon.

Overpaying on a mortgage is a good option for those with extremely low risk tolerance, who just can't stomach investing and who are willing to accept being a lot worse off long term as a result of not investing.

SG27

I think you need a balance between the too.

Thrugelmir

jamesd wrote: »

When the BoE is in the business of inflating debt away,

Arguably the BOE is trying to avoid deflation taking hold.

jamesd

That too, but since there is inflation and it's reducing the real value of a mortgage by perhaps 3% a year, that's not to be sniffed at.

Southend1

However by the time the inflation has done its work, interest rates could be 10-12% and the mortgage payments unaffordable. So I would argue that if you can afford to you should overpay while rates are abnormally low. But not at the expense of your pension. And as pointed out earlier in the thread by someone else, OP is behind on pension provision and heading for a fairly tight retirement, so cutting back on the pension now is likely to be a mistake.

jamesd

To get to 10-12% interest rates would imply high inflation also because high interest rates are something that would be used to try to counter that. Or perhaps another attempt at fixing the Pound's exchange rate, which was a big factor in the last time they were at that sort of range.

Best way to deal with rates that high is to have sufficient money around to handle the higher payments for a while because it's not really viable to clear enough of the mortgage balance to make enough difference compared to putting the money into a S&S ISA to draw on in that case.