Auto enrollment pension vs Overpayment on Mortgage

userbob666

Hi,

Just a quick one if someone could help me with some questions

I have a 150k mortgage outstanding which I pay ~£800 on a month and I am 37 currently with 23 years left on the mortgage.

1. If I choose to opt out of the auto enrolment pension and put that money instead in to overpayment I assume that the pension is still better? Due to the company contribution?

2. Pensions do not allow for early withdrawal correct? Say for example if I get a terminal disease tomorrow I cannot touch the money?

3. The company contributions will most companies this year who have to put it in place see this as part of a pay increase? Or does it come from some other tax relief from the chancellor so doesn't cost anything? I am just wondering if I opt out if I can then justify an increase or the contribution amount from the company? (being cheeky!)

Please bear in mind I don't like pensions due to an innate mistrust of financial institutions. If the bank collapses then I still live in my house, whereas my pension is just numbers on a computer screen!

Thanks in advance,

Richard

dunstonh

1. If I choose to opt out of the auto enrolment pension and put that money instead in to overpayment I assume that the pension is still better? Due to the company contribution?

Pension wipes the floor with the mortgage overpayment. Free money from employer vs no free money. Also, you would expect long term investment returns to exceed mortgage interest rates.

2. Pensions do not allow for early withdrawal correct? Say for example if I get a terminal disease tomorrow I cannot touch the money?

The clue is in the name pension. However, terminal illness does usually qualify for earlier access.

3. The company contributions will most companies this year who have to put it in place see this as part of a pay increase? Or does it come from some other tax relief from the chancellor so doesn't cost anything? I am just wondering if I opt out if I can then justify an increase or the contribution amount from the company? (being cheeky!)

Quite possibly some will do it instead of a pay rise. However, if you opt out, the company does not have to pay you in cash and most wont as its more expensive fo them to do that.

Please bear in mind I don't like pensions due to an innate mistrust of financial institutions.

A rather foolish position to take.

If the bank collapses then I still live in my house, whereas my pension is just numbers on a computer screen!

No its not. The pension is just a tax wrapper that contains assets. Those assets have a value just as your house does.

userbob666

Hi,

Thanks for the answers it is as I expected.

"A rather foolish position to take." - were you around in 2008?

"No its not. The pension is just a tax wrapper that contains assets. Those assets have a value just as your house does." - those assets being shares, those shares are subject to market forces and collapses the same as anything in the free market. However I don't want to get into a debate here as I am no expert except to say a share in a mine in Africa is not the same as a roof over my head!

Richard

dunstonh

"A rather foolish position to take." - were you around in 2008?

And what has that got to do with the pension tax wrapper?

"No its not. The pension is just a tax wrapper that contains assets. Those assets have a value just as your house does." - those assets being shares, those shares are subject to market forces and collapses the same as anything in the free market. However I don't want to get into a debate here as I am no expert except to say a share in a mine in Africa is not the same as a roof over my head!

A shaft mine in Africa? Is that what you think it is about?

Your property value is subject to market forces and can go down in value. Your house will not provide an income for you in retirement.

userbob666

And what has that got to do with the pension tax wrapper? - it was merely an observation that financial institutions aren't exactly infallible

Shares are invested are they not? Those investments can be in many things hence a rather arbitrary example I set it could just as easily be a software company in the UK

A pension will also not give me an income it will allow me to purchase an annuity which will give me an income. I could do the same by selling the property or paying off my mortgage and then keep on paying that mortgage payment into a savings vehicle once it is done with.

Anyway getting totally off point. You have answered my original questions thanks, it was more about them mathematics of it all.

dunstonh

And what has that got to do with the pension tax wrapper? - it was merely an observation that financial institutions aren't exactly infallible

Harold Shipman was a murderer. So, on that basis, all GPs must be too. He was also human. So, that makes us all murderers. Financial institutions covers a wide range of things. Some behaved poorly. Others did not.

Shares are invested are they not? Those investments can be in many things hence a rather arbitrary example I set it could just as easily be a software company in the UK

The investments are assets. Assets with a value.

A pension will also not give me an income it will allow me to purchase an annuity which will give me an income.

A pension annuity is one option. However, it is not the only one and the pension can give you an income.

I could do the same by selling the property or paying off my mortgage and then keep on paying that mortgage payment into a savings vehicle once it is done with.

If you sell the property, where would you live? Savings are a typically poor option for long term planning. Indeed, the risk can be higher than using investments.

userbob666

It is truly impossible to argue with someone so entrenched so I am frankly not going to even bother, I just wanted advice not an argument/discussion.

Thanks you have given me a nice reminder of why I never really bother with forums

dunstonh

It is truly impossible to argue with someone so entrenched r

Agreed. I should have realised that about you sooner.

I just wanted advice not an argument/discussion.

This is a discussion board. The purpose of it is discussion. Whilst you may not choose to take any notice of the things said, there are plenty of other people reading posts and not commenting who may benefit from these things.

kottar

I'm in the same position as the original poster; currently overpaying mortgage rather than contributing to pension and haven't yet decided how to proceed.

dunstonh wrote: »

Pension wipes the floor with the mortgage overpayment. Free money from employer vs no free money.

It's never 'free money'; employers will compensate for mandatory pension contributions by reducing future salary by the same amount. So the net gain is zero.

And technically it's not money; money is a liquid asset which can be exchanged for goods or the reduction of debt. Pension contributions are a notional increase in an investment which may be wiped-out.

Compared to that , overpaying into a mortgage has a direct financial benefit.

dunstonh

It's never 'free money'; employers will compensate for mandatory pension contributions by reducing future salary by the same amount. So the net gain is zero.

its free money in that the alternative is getting nothing from the employer.

And technically it's not money; money is a liquid asset which can be exchanged for goods or the reduction of debt. Pension contributions are a notional increase in an investment which may be wiped-out.

And when you have no money in retirement because you didnt put anything aside, what will you exchange for goods then?

Compared to that , overpaying into a mortgage has a direct financial benefit.

It has a benefit but one that is not as good as a pension with employer contribution.

userbob666

"It has a benefit but one that is not as good as a pension with employer contribution."

Which is why both of us came on to the board to check out the financial differences.

Neither of us have said we won't have savings for retirement, we just wanted to know whether paying the mortgage off first and therefore saving the interest payments BEFORE saving money was a better use of what excess cash we currently have.

I was hoping someone would give me a financial comparison and so on rather than the same spiel the government as most posters are putting up, I wanted to see hard figures and so on.

And I would hardly call myself entrenched given that I am here to get advice, which I will probably be following coincidentally!