Overpay on Mortgage or Pension?

carl310166

This may be a simple or very difficult question to answer,but i would like some advice please.

In approx April 2006,i should have an spare £600-700 per month.

Six months ago,i would have wasted it on the lastest consumer product,but having discovered MSE,i would like to prepare for secure a decent financial future.

The question is basically,do i overpay on my mortgage......pay extra AVC's or both in any particular order?

From April 2006,i believe you can contribute up 100% of your salary towards AVC's.

Our details are,

Both myself and my wife are 40.

We both have works penions (been paying since we started work 20+ years ago).

We have 17 years left on our 77k mortgage.

I know this is very complicated,but there must be forum members who are in the same situation.

I will be posting this in the Mortgage forum

Any advice would be very greatfully received.

Hobo_2

Hi Carl, complicated yes but maybe go with "don`t put all your eggs in one basket" & lots of options & choices but it`s your attitude to risk/accesability eg:-
Pension:- even with a company one now it seems they can default so the more you put in the more you loose + once paid in its locked there till retirement, maybe go cash isa £6000pa per couple= next 5yr = £30K+int to draw tax free income @ retirement + you can get money out if needed

Mortgage:- Have you got the best deal for your circumstances, say if you have 50%-100% of mtg outstanding balance in savings maybe an offset mtg save int & pay it off sooner & have flexibility to borrow back money if needed, alot of discount/fixed mtg`s have this overpay/borrow back feature now.

I favour overpaying my mtg with some cash isa`s & pay a reasonable amount into the core co pension not AVC`s

carl310166

Personally i do not like risk,even though both our pensions are with the Government,i worry things can go wrong.

The situation is,i have just read The Automatic Millionare and the tax benefits on the pension contributuons make it sound like it would be a crime to miss it.


I have just opened 2 ISA's,but i did not realise you can take them out every year?

I am tied to my Mortgage until dec 2008 ! ,the redemption penalty is about 3k,so i was going to save from April 2006 - Dec 2008 and pay a lump sum off the capital when changing to an overpayment mortgage.

I have read somwhere that i would need approx 50% of savings to make an offset Mortgage worthwhile?

Like you say,a mixture of would probably be the best.

dunstonh

AVCs are virtually a dead product nowadays. If the in-house AVC is with an insurance company, then you dont have to worry about the company you are employed by. However, the restrictions of an in-house AVC are a great pain for many people looking for early retirement or phased retirement. A personal/stakeholder/self invested pension with the now much lower charging structure means the flexibility they offer is now usually within 0.25% a year of the charges on AVCs. With the Govt pension, added years is a much better way to go than AVCs if you decide the inflexibility isnt an issue.

You should make sure your retirement planning is split between yourself and your wife. You both have a personal allowance and if you dont use it, its wasted. Between you, you can earn £14k a year tax free after age 65.

If you have children, the extra pension contributions can increase your childrens tax credit so that would not to be checked. You dont mention your tax bracket but I am going to assume 40% based on what you have said. This makes your situation regarding pension contributions a little different to the average person and may result in a different solution than that of a basic rate taxpayer.

Paying off the mortgage saves you debit interest. Paying into the pension would gain you 40% tax relief (possibly up to 72% if children tax credits are applicable). Financially, the pension has the potential to give the highest amount of benefit.

In reality though, no-one can answer your question without knowing the details and already you have had an answer above which may be appropriate under some circumstances but are wrong under others.

Al_Mac

My vote would be mortgage, as you can at least get that back if you needed to.

Maybe some into an ISA. How about some into Premium Bonds?

:beer:

Hobo_2

Pensions are really a stockmarket play, look what has happened after it took a tumble, ok tax relief on the way in but if company scheme collapses or stockmarket crashes it counts for nothing,you get taxed on income from pension at the other end as well living long enough to see it (sorry harsh reality angle there)

On a lighter note IF.com do a variable offset mtg that allows you to offset cash isa`s, no int paid on isa but offseting ( tax efficient) reduces mtg when paid off you still have savings in cash isa wrapper from years when they where available (till 2010 at mo) to receive tax free income in the future, yes you do need 50% + offset

As post above maybe more info required for more focused advice ref 40% tax etc.


.

DavidLaGuardia

Hobo wrote:

Pensions are really a stockmarket play, look what has happened after it took a tumble,
.

Sorry, I don't mean to be rude, but what a load of old tosh! I need not even go into defending the whys and wherefores of share investment. A Pension is just the WRAPPER. Within a few limitations what you invest it in is up to YOU, be that shares, bonds, gilts, commercial property (+residential from next year) or plain old cash JUST LIKE MtANY OTHER INVESTMENTS!

EdInvestor

Hobo wrote:

IF.com do a variable offset mtg that allows you to offset cash isa`s, no int paid on isa but offseting ( tax efficient) reduces mtg when paid off you still have savings in cash isa wrapper from years when they where available (till 2010 at mo) to receive tax free income in the future

That seems an interesting idea, is it new or have I just missed something? You put the cash savings in the ISA, and they are offset against the mortgage while it is still being paid off, then later available in accumulated form tax free for income or capital use, right?

Anybody have any projections on how an "offset ISA mortgage" might pan out over, say, a 20 year period on saved interest/saved taxes? To take full advantage you'd need to deposit cash to the value of 50% of the mortgage, and then the money would be folded into the ISAs @ 3k pa, correct?

Walletwatch

Editor wrote:

That seems an interesting idea, is it new or have I just missed something? You put the cash savings in the ISA, and they are offset against the mortgage while it is still being paid off, then later available in accumulated form tax free for income or capital use, right?

Anybody have any projections on how an "offset ISA mortgage" might pan out over, say, a 20 year period on saved interest/saved taxes? To take full advantage you'd need to deposit cash to the value of 50% of the mortgage, and then the money would be folded into the ISAs @ 3k pa, correct?

I don't see much merit in offsetting your mortgage with your ISA. The way I see it, the two main advantages of a mini-cash ISA are (1) tax-free interest income and (2) compounding and the compounded interest also earning tax-free interest.

By virtue of offsetting your mortgage with your ISA, you lose out on (2), thus it is equivalent to you actually drawing out your interest and spending it, thus losing it's tax-free attribute. The other advantage i.e. the tax-free interest will actually start accruing only once you fully repay your mortgage, thereby freeing the ISA from the offset. Now if this were to happen after ISAs are stopped, not sure if this benefit also will be available to you in full???

Needless to say, I am open to a counter-argument on this one, as I may not be seeing the whole picture.

david78

I would put your money into overpaying your mortgage. You can always move it to your pension fund later, though you might have to do it when you next remortgage (unless you have a flexible, offset or CAM). There may be tax advantages to doing it this way because you may change from a basic rate to higher rate tax payer (more tax relief). Also the rules on pensions are changing from April 6th next year and you will be able to make larger payments into your pension than you can now.

DavidLaGuardia

Walletwatch wrote:

I don't see much merit in offsetting your mortgage with your ISA. The way I see it, the two main advantages of a mini-cash ISA are (1) tax-free interest income and (2) compounding and the compounded interest also earning tax-free interest.

By virtue of offsetting your mortgage with your ISA, you lose out on (2), thus it is equivalent to you actually drawing out your interest and spending it, thus losing it's tax-free attribute.

The other advantage i.e. the tax-free interest will actually start accruing only once you fully repay your mortgage, thereby freeing the ISA from the offset. Now if this were to happen after ISAs are stopped, not sure if this benefit also will be available to you in full???

Needless to say, I am open to a counter-argument on this one, as I may not be seeing the whole picture.

[/QUOTE]

You have made an understandable error here. You ARE getting the compounded effects on what you save into an offset account, because IF you continue the normal mortgage payments PLUS have the offsetting money to reduce the interest, your mortgage will reduce exponentially like the interest in a savings account

It is also going to be effectively tax free (ergo there is no need for it to be an ISA) because you are offsetting the full gross interest. Furthermore, this is equivalent to an interest rate higher than the mortgage rate as for example (using an easy example) a 6% mortgage is 6%/12 = 0.5% monthly which compounds to 1.005^12 = 6.17% annual equivalent return. Actually (thinking of this as I type this) on most offset mortgages, the return would be higher than a cash ISA