Second pension or overpay mortgage?

gavcradd

My wife and I are both teachers and so have occupational final salary pension schemes (will be average salary in a few years but that's another story). I am 34, been teaching since I was 23 with no breaks. My wife is 36, has been teaching since she was 27 and has recently gone back to being full-time after a few years of part-time when the kids were small. We're both happy to continue teaching until we're 60+.

I also have a small stakeholder pension that I started up when I was 21, before I started teaching. I only pay £50 a month (plus the tax reclaimed) into it but I'm looking at increasing that now we're spending less on childcare.

However, we also have £150,000 / 22 years left on the mortgage. Would we be better off by overpaying £100 a month on the mortgage or increasing the pension to £100 a month?

Any advice gratefully received!

Thrugelmir

gavcradd wrote: »

I am 34, been teaching since I was 23 with no breaks.

No holidays?

I've been at work for over 4 decades.

Personally I would overpay the mortgage. Being mortgage free removes one of life's biggest worries. Should the unexpected occur. There's the possibility that investment returns may be disappointing in the short term to medium term.

PeacefulWaters

Given the quality of your pension arrangements I would suggest overpaying the mortgage (or other more expensive debts) unless you have an exceptionally low mortgage rate. Then top up pensions later on when mortgage free.

Given the shorter service and part time period for your other half it may be more appropriate to switch your extra £50 over to a pension for your wife if you both have the same tax status at present. Would teacher scheme AVCs be suitable for this?

Also, check out the charges on your stakeholder fund. Could somebody like Cavendish Online manage the fund for less?

I only pay £50 a month

Remember to increase this each time you get a pay rise unless you choose to use it to overpay the mortgage.

We're both happy to continue teaching until we're 60+.

I would have said the same at your age (different profession mind). I now have absolutely no intention of working beyond 55 and I'm totally focused on this. Your attitudes may change.

smifffy1989

Split between the two £25 a month each?

atush

Like Peaceful, I think it depends on yoru mtg rate- if highish, then overpay. If 1-1.5% I'd say pension.

but you didn't mention how you are on other savings and investments- do you have 6 months spending in cash? Do you have S&S isas? this needs addressing too. and if mtg is low now, you could use your S&S isa to help pay down the mtg later on when the rates go up?

and you say you will retire at 60+, but if you have any idea to retire earlier than your scheme age (will it be 65 or more) then you would retire at 60 with a 25-35% reduction in your pension. Better to use a PP to retire earlier and Not take the TPS pension for a few years.

Happier_Me

I would pay any income taxed at 40% into a pension. May not be applicable now but could be in the future. At what age is your teacher pension protected from reduction? Is it state pension age or 60? You both may want to consider saving into a personal pension to bridge the gap between the date you take your teacher pension and your actual retirement date (early retirement might look attractive 10 or 15 years from now).

Personally I hate having a mortgage and I would prioritise paying this off but this isn't necesarily the best financial move. The psychological benefits outway the financial 'loss' for me but not everyone feels that way.

kidmugsy

gavcradd wrote: »

I also have a small stakeholder pension that I started up when I was 21, before I started teaching. I only pay £50 a month (plus the tax reclaimed) into it but I'm looking at increasing that now we're spending less on childcare.

However, we also have £150,000 / 22 years left on the mortgage. Would we be better off by overpaying £100 a month on the mortgage or increasing the pension to £100 a month?

(i) Does either of you pay income tax at the higher rate?
(ii) What's the interest rate on your mortgage?
(iii) If you overpay the mortgage, can you borrow the overpayment back again later?
(iv) If not, can you at least take a payment holiday later?
(v) For how long does this current mortgage last?
(vi) Are you anywhere near an LTV such that you could hope to swap to a cheaper mortgage?

Thrugelmir

kidmugsy wrote: »

(iv) If not, can you at least take a payment holiday later?

With changes in regulation. Payment holidays are now thoroughly scrutinised in accordance with affordable and responsible lending. Overpayment at least allows the standard monthly repayment to be lowered to repay the debt over the original mortgage term. In a sense an insurance policy.

kidmugsy

Thrugelmir wrote: »

With changes in regulation. Payment holidays are now thoroughly scrutinised in accordance with affordable and responsible lending. .

Thanks for that. In which case, in their shoes I'd be tempted to see whether the available interest-bearing current accounts would let me save cash at a higher net interest rate than I pay on my mortgage. I'd use the savings to overpay the mortgage when the difference reversed, but not until (not forgetting the LTV point made earlier).

jamesd

gavcradd wrote: »

My wife and I are both teachers and so have occupational final salary pension schemes ... I am 34 ... My wife is 36. ... we also have £150,000 / 22 years left on the mortgage. Would we be better off by overpaying £100 a month on the mortgage or increasing the pension to £100 a month?

Normally I favour pension contributions. This is because you get tax relief on the way in and at least 25% of the pension pot on the way out is tax free. You can then use that to pay some money off the mortgage, having gained from the tax relief.

In your cases the mortgage will be finished before you reach the current minimum age to take pension benefits, 55, and you appear to reach that age after 2027 when the minimum age is expected to increase to 57, then in line with increases in state pension age. So you won't be able to use the pension to clear this mortgage because it'll be cleared before you can.

If you anticipate moving and having a mortgage with longer term or extending the term of the current mortgage then using the pension would be possible.

Beyond just the tax relief, investments inside a pension are likely to grow at a higher rate than the interest on a mortgage. Long term average for the UK stock market is around 5% plus inflation, so equivalent to 8-9% at current inflation levels. Few people have such expensive mortgages so in general you make yourself better off with the pension than by overpaying on the mortgage.

Under the new rules from April 2015 you can take pension pot money as rapidly as desired. This can work really well in conjunction with defined benefit pension schemes like yours because you can retire and draw on the personal pension to cover the time until normal retirement age on the work pension. That tends to be a better deal than taking a work pension before normal retirement age.

Because of compounding there are considerable rewards for starting the investing as early as possible so I suggest that you consider getting started on the investing part now and wait at least quite a few years before doing mortgage overpaying.

There's one other reason not to overpay on the mortgage. Inflation reduces the real - inflation-adjusted - value of the capital owed. The longer you leave the capital repayment the lower the real cost to you becomes. So don't overpay until you've let compounded inflation reduce the real cost a fair bit!