pension contribution or over payment on mortgage

TCPPC

Hi

Just need some advice, currently im paying into the standard pension 1% plus my employer match this.

They are offering a deal where we can paying 8% and they top it up by another 6%.
Not sure if we can get a lump sum at the end.

My question is would it be better if i pay in to this which seems a lot around 120-135 per week. They did mention I can get tax relief off it but would the money be better spend by over paying my mortgage?

with the change in legislation soon to 68 haha only people work at desk can ask people to work till that age. I got another 40 years.

Thanks

HappyMJ

It depends...

Would you feel more comfortable being debt free before making pension contributions?

Is the pension provider outperforming the interest rate charged on your mortgage taking into account the tax relief you get and the matched contribution?

Do you possibly need access to this money at any point before retirement?

Personally, as long as you have enough money to get by on each month then I'd go for the pension contributions and pay off the mortgage over a longer period if necessary if you need a few more pounds each month.

TCPPC

TBH i've no idea how they are performing, been paying into it for over a year. I get the odd pension trust letter thats about it.

Hopefully i wont need it, i presume i can just not renew my phone contract, eat 1/2 night less per month that should be able to make up the difference

But i was just working it out just say i save 500 pm *12 months * 25 years = 150,000 (me and my partner together)

In theory would this be a better options

dunstonh

They are offering a deal where we can paying 8% and they top it up by another 6%.
Not sure if we can get a lump sum at the end.

That seems an absolute no brainer. 6% free money.

My question is would it be better if i pay in to this which seems a lot around 120-135 per week

Based on that, your current provision is pathetic. Barely worth that effort. So, moving to a more sensible 7% contribution is common sense.

They did mention I can get tax relief off it but would the money be better spend by over paying my mortgage?

You are paying virtually nothing into the pension at the moment. So, you almost certainly have a shortfall. The free employer money is a very good way for you to fill that shortfall.

£100 into the pension will be doubled to £200. So, overnight you double your money. £100 into the mortgage will just remove £100 from your debt. And without a decent pension in retirement, you will probably have to sell up or borrow on your property again.

Hopefully i wont need it, i presume i can just not renew my phone contract, eat 1/2 night less per month that should be able to make up the difference

So, you wish to live in poverty in retirement?

But i was just working it out just say i save 500 pm *12 months * 25 years = 150,000 (me and my partner together)

In theory would this be a better options

Now work out £1000pm for 25 years and see which is higher.

TCPPC

thanks dunstonh

yeah Im just looking at the short term view atm, as i just taken on a mortgage so still adjusting in terms of budgeting.
Would of been much easier if they allow us to have a choice i.e 3 - 5% contribution instead etc but i think i will go for that options.

Correct me if i am wrong

A) so atm we get around 400 -420 for state pension and any personal pension contribution as long as the income dont go above the personal allowance then you wont need to pay any income tax.

Which atm is 10k.

so once pay in, i presume the money cant be taken out until it has mature? or if you do take it out then you lose what every gains you have made?

dunstonh

A) so atm we get around 400 -420 for state pension and any personal pension contribution as long as the income dont go above the personal allowance then you wont need to pay any income tax.

Correct.

so once pay in, i presume the money cant be taken out until it has mature? or if you do take it out then you lose what every gains you have made?

It is a pension. You can withdraw the money from 10 years prior to your state pension age onwards (so in your case, that is likely to be any time after age 58).

The rule of thumb with these things it to pay the maximum you can to get the most employer contribution possible. Nothing beats free money. Also, if it is a money purchase pension you have then the investments within them historically beat mortgage interest rate. The last 15 years have been bad for investments but have still managed to return higher than mortgage interest rates.

PeacefulWaters

Maximise your employer's contribution.

Use the tax relief to overpay the mortgage.

TCPPC

Hi dunstonh

I just spend a bit of time reading the pension pdf that was send to us.
the scheme is called care 1/80 not final salary which end a few yr ago and the 1/60 which would of be even better from the example they show.


correct me if im wrong:
before tax, student loan etc
22,000 salary

so its 1 / 80 x 22,000 x 30 years (based on what you mention as you withdraw it 10 yr before retirement age).

is that £8,250 per year? is this subject to me paying the full 8% plus the 6% from the company

i try using the calculator provide but it doesn't make much sense
http://www.thepensionstrust.org.uk/TPT/SHPS/PensionsCalculator/Pension+Calculators.htm

thanks

jamesd

TCPPC wrote: »

They are offering a deal where we can paying 8% and they top it up by another 6%. Not sure if we can get a lump sum at the end.

Most pensions today provide a 25% tax free lump sum at the end. End here means any age from 57 upwards for lump sum and starting to take the pension, assuming that you're not going to reach 55 before the age rises to 57, and assuming it's a personal pension. Yours isn't a personal pension so the age 57 won't apply to your scheme, instead you'll need to check the rules for "normal retirement age" and "actuarial reduction" for each year you take the pension before that normal age.

In practice what you should do with a scheme like yours is start out today doing what you need to pay in to get the employer bit then later in life start a personal pension that you can use to provide the income you'll need between whenever you want to retire and the normal retirement age of the work pension. That's usually a better deal than taking the actuarial reduction of taking such a work pension before NRA.

TCPPC wrote: »

My question is would it be better if i pay in to this which seems a lot around 120-135 per week. They did mention I can get tax relief off it but would the money be better spend by over paying my mortgage?

The mortgage is a poor deal compared to the pension but not one to dismiss completely.

Pension first. Investments in the main UK stock market have averaged about five percent plus inflation, so eight to nine percent total, over the last hundred plus years. That'll beat most mortgage rates. Your part would cost 8% but that's before tax relief. If you're a basic rate tax payer that drops to a net cost to you of 6.4%. For that 6.4% you get 14% in your pension pot. There aren't many deals where you more than double your money on the first day and that's part of why at least enough to get the employer part is a good deal. However, this doesn't apply to your scheme, which is defined benefit, this calculation is for a defined contribution pension or a personal pension where you get investment growth instead of based on years of service.

Then come 57 you get the tax free lump sum available, though you don't have to take it then. You could use some of that money to clear some or all of whatever mortgage you might have then if you like. Going on your current numbers that would all be free money: either the tax relief or that and some of the employer's money and the investment growth on that.

Where the mortgage overpaying can be useful is if you have a high loan to value mortgage. Mortgage interest rates depend on LTV and the whole amount borrowed becomes cheaper as you drop from 95% to 90%, 85%, 80%, 75% and perhaps 60% as well. the biggest gains come from getting down to 75%. Say you borrowed £95,000 at 95% ad 5.25% interest rate. If you were able to remortgage to 90% the interest rate could drop to about 4.5%. That saves you 0.75% of the reduced £90,000 borrowed, £675 a year. That £675 is 13.5% of the £5,000 it cost you in extra deposit so you're effectively making 153.5% on that money. That's a pretty good deal. Not as good as investing on average but it's certain and happens now, not at age 57 or whenever. I ignored the saving on the interest on the £5,000 because I used that to offset the lost investment income a bit and I'll do the same later as well.

I just made up that rate difference, here are some real mortgage rates and after the comma the effective interest rate on the extra deposit cost:

95% LTV: 4.89%
90% LTV: 3.65%, saves £1,116/year, 22.3% of 5k
85% LTV: 2.94%, saves £693.50/year, 12.07% of 5k
80% LTV: 2.48%, saves £365/year, 7.36% of 5k
75% LTV: 2.14%, saves £255/year, 5.1% of 5k

What you can see from that table is that there's a big effective interest rate for getting down from 95% to 90% but it gradually decreases for each extra 5% you put in to reduce the LTV. By the time you get to 85% you've had most of the big gain, saving 12.07% of the extra £5,000, then it drops to 7.36% and 5.1% that don't compare so well to the pension option. But even down to 75% looks good compared to a savings account, since that 5.1% is guaranteed and tax free.

So whether it's good or bad to overpay depends on what your LTV is, in part. Not a reason to stop paying into the pension but knowing that you can make an effective 22.3% on your money might encourage you to do some skimping to get down from 95% to 90% if that's where you are now!

It's also good to look at local property values because an increase in values might let you drop the LTV on remortgaging as well and that can easily be worth an extra surveyor's fee if necessary.

atush

D was talking about a DC pension, not one like yours.

It sounds like you have a Defined Benefits pension (ie CARE) which is different but likely to be very good for you in the end?

In the Care scheme, you get 1/80 I assume (you have the scheme booklet not me) for every year you work there. So it would be for 30 years service, 30/80ths (or 37%) of your average salary whatever that turns out to be? This amt, or 8250 in todays money based on 22K, would be paid each year and I believe indexed (so increasing each year).

As for a lump sum, I dont know if your scheme has one. Read the booklet

So, do you have a DB pension as described above? Or do you have one where you can put in 8% and the employer 7% and that is invested into funds of your choice? This type (or a DC pension) is one where you take 25% tax free and use the rest as income. Currently the age is 55 when you can take it, but will go up to 57 in 2028. You dont have to retire then, you can work longer and make it grow larger.

I am not really sure from the mix of what you have said which type you have

But in either case, a pension is better than overpaying your mtg. After all, you are paying it off, and interest rates are low.

jamesd

A CARE scheme like yours is a pretty good deal. You have no investment risk, you just get an amount that depends on what you earned while working, your career average salary, adjusted for inflation. Yes, it would be £8,250 in today's money if you never earned more or less than that £22,000 a year. You'd also get the flat rate state pension that would be about £155 a week/ £8,060 a year so your taxable income would be about £16,310 after state pension age.

To cover the time between the work normal pension age and state pension age is another use for personal pension contributions. Use those to get whatever timing flexibility or income boost you want.

For your scheme the normal retirement age is 65 and their calculator assumes that your pay rises by 1.5% above inflation each year. That's not a bad assumption.