Should I overpay my mortgage or add to my pension

Kua

I'm sure this has been done to death. I'm currently on a pretty good deal on my mortgage, 3.84% locked in for 10 years. I'm sure the rate will jump up at that stage however. So it is tempting to overpay as much as I possibly can during the next 10 years.

However my real aim is to retire (or at least have the option to retire) as early as possible. In view of that, the only reason to pay off my mortgage quickly would be in order to more easily buy a second property so I can let out one of them.

But is the better option to put more in a pension. It occurs to me that the instant boost from getting tax back and compound interest over 30 years (I am 30 now) must be hard to beat. Plus this route is a lot less stressful than buying more property (I really didn't enjoy the process!).

Also under current (new) rules, it occurs to me that if possible you should take the 25% tax free then drawdown an amount that means you're total income for the year doesn't go above £10,000.

I wouldn't mind getting an idea of how much pension rules change over time and how likely something close to the above is to apply when I come to retire but googling "pension rule changes over time" doesn't help.

Thanks for any help received!

edinburgher

What a muddle of themes

1. BTL. Why do you assume that it's a good idea to own multiple properties?
2. Staying under the tax threshold. Yes, that makes sense, but your flat rate state pension will be c. £6k/year, so you're going to pay tax at some point in retirement unless you're wildly frugal
3. Pension changes over time. Google is only as good as our keywords, you would need to be more specific.

I'm in a similar boat (31, no plans to work 'til I drop). My main plan at the moment is to use ISAs for as much money as possible, have you considered this? I'm very wary of paying too much into a pension this early on.

Kua

edinburgher wrote: »

What a muddle of themes

1. BTL. Why do you assume that it's a good idea to own multiple properties?
2. Staying under the tax threshold. Yes, that makes sense, but your flat rate state pension will be c. £6k/year, so you're going to pay tax at some point in retirement unless you're wildly frugal
3. Pension changes over time. Google is only as good as our keywords, you would need to be more specific.

I'm in a similar boat (31, no plans to work 'til I drop). My main plan at the moment is to use ISAs for as much money as possible, have you considered this? I'm very wary of paying too much into a pension this early on.

Hiya,

How do you know my state pension will be around 6k? Also why are you wary of putting too much into your pension?

Multiple properties: just for the rental income.

Sorry for mixed themes. I guess all that has been buzzing round my head!

jamesd

Pension rules have been changing to be more liberal rather than more restrictive but there's no guarantee that this won't be reversed sometime, particularly given the 30 years until the new rules will allow you to get access to pension funds.

The long term return of the UK stock market has averaged around 5% plus inflation over the last hundred plus years. That in general means that investing is likely to beat overpaying on a mortgage.

An ISA is subject to means tests for benefits and also vulnerable to bankruptcy, a pension isn't until the day it can be taken. If you aren't currently paying higher rate income tax or in a salary sacrifice pension scheme and think that you might be later it can be a better idea to use the ISA until then, so you get the investment returns and later get the higher tax relief.

Multiple properties reduce the risk of BTL since it's unlikely that all will have no tenants at the same time and it also allows selling of parts of the portfolio.

The flat rate state pension is to be around £155 a week in today's money, so around £8,000 a year. Given your age this is what you can expect from it. This would leave around £2,000 of other pension income that could be taken tax free under current rules.

lawrie28

Dont forget to take cashflow into account. Money in a pension is tied up till you retire. Money put into reducing your mortgage is equity in your property(unless prices fall) which you can access buy remortgaging or selling your home. So putting it into your mortgage gives you flexibility.

And also dont forget that if you are mortgage free, that gives you more peace of mind and more choices.

For example if you are unable to work so much or had a career change, a reduced mortgage would make a lower income easier to live on.

jamesd

Overpaying on the mortgage doesn't increase your choices, it reduces them. Withdrawing overpaid money or remortgaging normally requires underwriting or permission and you'll be refused if you don't meet the lending criteria at the time you're trying to take out the money. Overpaying and then getting out the money in times of trouble is a nice dream but that's all it is, a pipedream.

The ISA option protects against that risk, since the money is available, and also delivers likely higher growth than most mortgage interest rates can save. You're not restricted to just having partly reduced housing costs, you can use the money for other living expenses as well.

There is one exception to the money access pipedream in mortgages: offset savings and current accounts. The money in those is yours by right and the lender will not have discretion to prevent you from withdrawing the money. But these lose to the investment option except for emergency funds because of the likely growth rate of investments vs the mortgage interest rate.

The assured access to the money is part of why I chose an offset mortgage instead of a flexible one that lets the lender decide not to allow access to the money when I'd need it. But I'm still using investments for most of my "overpayment".

Kua

OK, supposing I change things slightly and decide I would like to use BTL to fund my retirement. What is the best way for me to invest my cash in order to allow me to buy a second property? Presumably over paying the mortgage wins out...

enjoyyourshoes

Hi
have a plan to repay mortgage at expiry of your 10 year deal, (dot hey allow overpayments and what sot of redemption penalty do they charge?)
The use what you have been paying with mortgage + overpayments to increase your pension (AVC with employer pension or SIPP (self investing personal pension)

Kua

enjoyyourshoes wrote: »

Hi
have a plan to repay mortgage at expiry of your 10 year deal, (dot hey allow overpayments and what sot of redemption penalty do they charge?)
The use what you have been paying with mortgage + overpayments to increase your pension (AVC with employer pension or SIPP (self investing personal pension)

I can over pay 10% of the original loan every year without penalty. Regularly or as lump sum. I.e. 6,800 per year.

Yes I thought about that. But investing in the pension now will yield far greater results than later.

enjoyyourshoes

Hi

you will have tax advantage of Pension payments

Psychologically if overpay Mtge you will be debt free in less than 10 years (when the interest you will be saving = or > early repayment penalty)
Also you will have prepared yourself to fund your extra pension with both the mtge payment and the overpayment. Also your life has adjusted to these increased payments and its an easy step to put such a large wedge onto pension saving.

Savings seem to me to be psychological or do I really mean spending is psychological ?

elantan

I feel i have to ask ... why does it have to be one or the other? both have advantages and disadvantages... why not do a 50/50 split or maybe 60/40 etc ( i would do 75/25 personally speaking but thats what works for me)

play about with the figures and see what happens