Pay inheritance into or mortgage or not?

mrjonny5

jamesd wrote: »

You need to pay in more than the capital payment part of a mortgage if you're doing it with regular payments because you won't be able to get back all of your payment as a lump sum, not even after normal tax relief. The part that remains in the pension is the basis for your retirement planning.

Now I am definitely a little confused. If I've understood you correctly you're saying that between now and when I reach 55 I should pay into my pension a sum of more than the capital I am borrowing with my mortgage? Surely if I do this my mortgage repayments will go up because I need to borrow more on the top up mortgage (because I've put the 30K into my pension) plus I need to pay additional into my pension to cover the capital part of both mortgages?

jamesd

Yes, you pay more mortgage interest. The mortgage interest for standard mortgages cost less than likely investment gains and more so once you allow for the tax relief of a pension.

What I really meant there is that you need to allow for only being able to take 25% of the pension pot as a lump sum.

Say you're a higher rate tax payer and you put the lump sum into pension contributions so you get higher rate tax relief on it, which might take more than one year depending on your income.

Ignoring growth except for enough to match the mortgage interest cost, you'd pay in £40,000, get basic rate tax relief topping it up to £50,000 and get £10,000 of higher rate relief so the net cost is £30,000. Then whenever you reach 55 you take out 25% of the £50,000, £12,500. The remaining £37,500 remains in the pension as part of your retirement planning.

That illustrates the way you don't get as much lump sum out as you put in, if you ignore most of the investment growth. But there really is investment growth, at say 4% over a 5% mortgage interest rate, not inflation adjusted. After ten years of that 4% extra the pension pot value is 74,000 plus the interest cost (the 5% bit that I'm not including in the growth is to allow for the interest cost). 25% of that £74,000 is £18,500 that can be paid off the mortgage. The remaining £55,500 has to stay in the pension pot, though it can be used for income production or just be left to grow.

So a question about the £30,000 and pension is when do you want to retire? How keen are you on retiring early? Keen enough to put money into the pension to do it, including money you would have used for mortgage overpaying or reducing?

That's a choice for each person to make. The numbers say it's likely to make people better off but lots of people still prefer the certainty of a lower mortgage or mortgage overpaying.

mrjonny5

Thanks for the replies everyone.

Jamesd - thanks for the explanation, I think I favour the lower mortgage / over paying option though. I'll try and find a good savings account to earn a little interest until we move.

Thanks again.

Cheers,

Jon