Auto enrollment pension vs Overpayment on Mortgage

userbob666

So for example, now this is where I need the advice to see if this is all correct

23 years left on a mortgage with ~150k left to pay and ~£800 per month

Assuming a wage of 40k per annum

Then the pension contribution for my part (0.5%) in the future is £167 per month

If i put that £167 towards overpayment then using the calculate on this site then I shave off 5 years 8 months off the mortgage term.

Now if I do a simplistic sum where I add the £167 + £800 over that period that turns out to be £65756 saved in that period

For a pension pot assuming a start at 5% now then how much would that net me in the 23 years? Better than that amount?

grey_gym_sock

ok, though i'd put it slightly differently ...

suppose the choice is to contribute 5% of salary to a pension, which also attracts 3% employer contributions (since those will be the minimum amounts for auto-enrolment pensions, after starting with lower figures), or to overpay the mortgage.

if you overpay the mortgage, you first have to pay (at least) 20% tax on the £167, so the overpayment is only £133, which shortens the mortgage by 4 years 9 months.

or, including employer contributions, you can have £267 paid into the pension each month.

so you could either pay the mortgage off over 23 years, while you have £267 a month going into your pension over the same 23 years - total contributions of £73,600. and investment returns would probably make the pension pot larger. supposing quite low investment returns of 3%, a compound interest calculator ( http://www.candidmoney.com/calculators/savings-how-much-calculator ) says the pot would be £105,664.

or you could pay the mortgage off over the next 18 years 3 months, while opting out of the pension. that would leave you 4 years 9 months to try to catch up. so suppose you join the pension at this point, and for the last few years, you pay in not just the 5% + 3% employer contributions, but you increase your employee contributions using the entire £800 which you no longer need to pay on the mortgage. with 20% tax relief, that means that you now have, not £267, but £1,267, going into your pension every month! after 4 years 9 months, that makes total contributions of £72,200. however, the money has been invested for a much shorter time, so the same assumption of 3% returns would make the pension pot only £77,632.

bear in mind that higher investment returns would make the difference greater. 3% is a rather low assumption. it's a bit less than the mortgage rate (of 3.6%, according the overpayment calculator). i would expect investment returns to beat mortgage rates in the long run, though they may not.

the decisive factor is whether you throw away the employer contributions for many years, or use them.

evosy1978

grey_gym_sock wrote: »

ok, though i'd put it slightly differently ...

suppose the choice is to contribute 5% of salary to a pension, which also attracts 3% employer contributions (since those will be the minimum amounts for auto-enrolment pensions, after starting with lower figures), or to overpay the mortgage.

if you overpay the mortgage, you first have to pay (at least) 20% tax on the £167, so the overpayment is only £133, which shortens the mortgage by 4 years 9 months.

or, including employer contributions, you can have £267 paid into the pension each month.

so you could either pay the mortgage off over 23 years, while you have £267 a month going into your pension over the same 23 years - total contributions of £73,600. and investment returns would probably make the pension pot larger. supposing quite low investment returns of 3%, a compound interest calculator ( http://www.candidmoney.com/calculators/savings-how-much-calculator ) says the pot would be £105,664.

or you could pay the mortgage off over the next 18 years 3 months, while opting out of the pension. that would leave you 4 years 9 months to try to catch up. so suppose you join the pension at this point, and for the last few years, you pay in not just the 5% + 3% employer contributions, but you increase your employee contributions using the entire £800 which you no longer need to pay on the mortgage. with 20% tax relief, that means that you now have, not £267, but £1,267, going into your pension every month! after 4 years 9 months, that makes total contributions of £72,200. however, the money has been invested for a much shorter time, so the same assumption of 3% returns would make the pension pot only £77,632.

bear in mind that higher investment returns would make the difference greater. 3% is a rather low assumption. it's a bit less than the mortgage rate (of 3.6%, according the overpayment calculator). i would expect investment returns to beat mortgage rates in the long run, though they may not.

the decisive factor is whether you throw away the employer contributions for many years, or use them.

Now that is a good answer...