Pension or overpay?

Twiddy

Hi all, there's bound to be somebody in this section that can help with this one. Because of a change in ownership in an old pension pot, I've been asked if I want to take what's there as a lump sum now (circa £7,500) or leave it where it is and let it be managed by the new pension company.

We're currently chipping away at our mortgage with over-payments and this would be a very welcome injection of cash and would also help to speed up the process. It equates to another year off the mortgage in one fell swoop!!

I could:

1. Leave it where it is to be managed by the new company.
2. Obtain a transfer value and transfer to my current Pensions provider.
3. If more than point 2, take the lump sum and pay that into my Pension.
4. Take the lump sum and overpay a good chunk off the mortgage (which will also, may I add, reduce my mortgage to 5 figures by £11 so there is also a psychological "thing" going on!).

Appreciate your help folks.

Best regards
Twiddy

megan01

Twiddy wrote: »

Hi all, there's bound to be somebody in this section that can help with this one. Because of a change in ownership in an old pension pot, I've been asked if I want to take what's there as a lump sum now (circa £7,500) or leave it where it is and let it be managed by the new pension company.

We're currently chipping away at our mortgage with over-payments and this would be a very welcome injection of cash and would also help to speed up the process. It equates to another year off the mortgage in one fell swoop!!

I could:

1. Leave it where it is to be managed by the new company.
2. Obtain a transfer value and transfer to my current Pensions provider.
3. If more than point 2, take the lump sum and pay that into my Pension.
4. Take the lump sum and overpay a good chunk off the mortgage (which will also, may I add, reduce my mortgage to 5 figures by £11 so there is also a psychological "thing" going on!).

Appreciate your help folks.

Best regards
Twiddy

It sounds as if paying off your mortgage will make you psychologically better off, making you happier, so I would pay off the mortgage, and once you have paid the mortgage off you won't be worrying as much and you can focus on building up your pension

edinburgher

How is your pension provision with your new provider and how old are you?

I'd be inclined to go for option 2., much as it might incur the wrath of the board.

To me, pensions are sacrosanct, even over my MFW ambitions. Paying off debt (mortgage) is one thing, but ensuring a future income (pensions and investments) are equally important (if not more so).

I would pay off the mortgage, and once you have paid the mortgage off you won't be worrying as much and you can focus on building up your pension

I'm not sure that I agree. While how we feel about MFW is one factor, there's a massive impact arising from saving late(r) in life for a pension. If OP has say, 10 years left on the mortgage and uses this money now, they lose 10 years of investment gains before mortgage is gone and they can focus on the pension. That could be a lot of money, it's unlikely the saving from paying off mortgage debt will match it unless they have a high mortgage rate.

resilie

What about tax? Would you have to pay that on your lump sum if you take it out now? The answer might change your approach

Tilly_MFW_in_6_YRS

Hi Twiddy, I'd be inclined to agree with Edinburger. He's a very savvy guy and protecting your future self in terms of pension seems sensible to me.

I do understand why you'd like to reduce your mortgage to 5 figs, but if you imagine yourself in retirement what would make sense then. Would the transfer value be a good boost to your pension savings pot?

Good luck with your decision.

Best wishes Tilly

ultrarunner

Option 2 - transfer to current pension provider.

Keep up the overpaying as well from your income.

Let compound interest work for you for both pension and mortgage!

Twiddy

Thanks for the replies all:

Megan, yes there is a psychological impact in reducing my mortgage to 5 figures and it would make me extremely happy.

Edinburgher, totally agree on the planning for future (I'm 36) and am very mindful of retiring comfortable enough to have a good standard of living, but are Pension provisions going to give me a good enough return?

Resilie, yes I do incur tax at the basic rate but the figure I quoted is the already-taxed figure.

Tilly, long time no speak, hope all is well with you (haven't been on here for a long while!). Appreciate your advice and obtaining a transfer value might be the way to go.

Thank you everybody. I'm going to obtain the transfer value to see what this is versus the after-tax lump sum, then make the decision from there. As much as it pains me (cos I'd love nothing more than to kick this mortgage into touch), I think Pension is the way to go on this, thanks again and good luck in all your journeys!!

Twiddy

edinburgher

Edinburgher, totally agree on the planning for future (I'm 36) and am very mindful of retiring comfortable enough to have a good standard of living, but are Pension provisions going to give me a good enough return?

Well, there's no crystal ball, but the historical (ever) average rate of return for UK equities is c. 5% after inflation (article on the topic from a good blog). Past performance does not predict future returns yada yada do your own research etc.

What's your mortgage APR? Can you beat 5% a year by overpaying? I doubt it unless your mortgage is a monster.

Twiddy

Current APR is 2.38% so I can't beat 5% a year by converting it to an overpayment, it makes sense to leave it where it is but it's so tempting!! Don't worry, I'll be doing the sensible thing, thanks again edinburgher!!

jamesd

The best option has probably been missed so far.

It appears that this is a winding up lump sum. If it is, the best thing to do is take the lump sum, then pay it into the new pension.

In the winding up case, 25% is paid tax free and the remainder is taxed at your normal tax rate. Pay the whole into the pension pot and you get tax relief on it all, including the 25% that you paid no tax on on the way out.

If you were just to transfer it, you wouldn't get the extra bit of tax relief on the untaxed part of the 25% so you'd be worse off.

If the new pension is by salary sacrifice there's also some NI benefit from taking it and paying it into the new scheme.

When it comes to investment growth vs mortgages, the UK stock market return of 5.2% plus inflation is about 9% overall and it's that 9% that needs to be compared to the mortgage interest rate. 5% or 5.2% is good for pension planning, just under-states how good it is compared to a mortgage.