Private Pensions vs Overpaying mortgage

RJDidier

Hi All,

Just wanted to ask a bit of advice. About four, five months ago, I bought my first flat, and for the last 5 years I have been working for a large, public sector company, with a final salary pension (I’m 26).


My monthly salary are approx. £1,800 (after tax / mandatory pension payments etc.) and my mortgage is approx. £600 per/month (over 35 years). I have approx. £300 which I can save per month in addition to paying the mortgage, and thus far I have been using this to overpay my mortgage. This is on the basis that:

• · I would say am quite financially cautious, and the idea of a 35 year mortgage is terrifying. I took out a 2 year-fix, so plan was to overpay as much as possible for the next 18 months, so that when I re-mortgage I can reduce the length of term.
• Interest rounds are bound to go up in the future, possibly quite dramatically compared to their current basement level
• I am already paying into a very, very good pension scheme
• If possible, I am keen to retire prior to 60, but not sure how feasible this is, as will obviously depend on many, many factors…

However, based on other advice I’ve seen on here, sounds like it might be more sensible to start a private pension, and pay the £300 p/m into this – especially as I will get 20% tax relief on this.


Anyway, would welcome any thoughts on this…

Linton

What other savings do you have? Before overpaying your mortgage or paying extra into a pension you should ensure that you have a significant amount of money saved as immediate access cash, say up to 6 months living expenses, so that you can withstand any emergencies (eg losing your job) without borrowing or selling assets.

The one potential drawback with your DB pension is the date at which it becomes payable. If this is 65 and you aim to retire by 60 you will need to build up sufficient money to bridge the gap - it is often a bad idea to take a DB pension early. That is where a separate private pension could be extremely useful.

So what to do once you have your emergency fund? I suggest paying off the mortgage with an extra £150 which if continued could reduce the duration to 25 years to tie in with your retirement date and you could put the other £150 into a pension.

There is another consideration though. How old are you? If as I assume you are relatively young and unmarried there may be many expenses ahead for you. So it would be more flexible even though marginally less tax efficient to put your spare money in an S&S ISA.

saver861

Another option is a Flexible mortgage where you can put in your savings and which is thus growing at the level of your mortgage interest rate. You are not tying up the money and it is there should you need it.

I have had a flexible mortgage for years and I have been able to use it very beneficially. It doubles up as a means of reducing your interest while also being an emergency fund. In addition, I was able to reduce the mortgage considerably by stoozing the credit cards, then there was no BT fees but this option seems to be making a comeback.

The interest rates are higher though and there is a point where you need to be able to have sufficient saving funds in it to make it efficient.

The pension route is certainly tax efficient but not accessible until you are 55. As you are already in your public sector scheme and you are only 26 years old, the tax efficiency of additional long term pension versus immediate mortgage costs might be slightly more balanced one way.

atush

An offset mtg might be an idea, but you ahve your mtg now and you are set.

I agree with Linton, while eventually it would be good to build up a private pension to retire early, in your case i would start with saving a large emergency pot, and a S&S isa. These could be used int he future for either pension contribs, or paying off part of your mtg if rates rise, or other spending such as marriage, children etc.

Revisit this once you have filled your savings pot and built up a decent S&S isa. at 3600 a year, it wont take you too long to save up a decent amt.

saver861

atush wrote: »

An offset mtg might be an idea, but you ahve your mtg now and you are set.

True - tho OP has stated intention to remortgage in 18 months. Thus he could use the interim to build up the 6 months emergency fund and as much as possible otherwise and have it ready to put into the offset account.

I would agree tho, were it my case, the pension option would be the lesser advantage at this early stage. At 26 still lots of time to plan for additional pension. At 26, equally you want to do a bit of 'living' as well - its easy get overly caught up in providing for the future while missing out on the present - keep everything in balance.

atush

If it was a reg 26 yr old with a DC pension, I might have said put half of savings there. but given they have banked a good number of years already in a DB pension I feel they are ahead of the pension game for their age.

I would say living is important, but i dont find many at that age deny themselves enough to need encouragement with 'living' lol.

jamesd

What is the loan to value of the current mortgage? If it's higher than 75% it is possible to get large leveraged interest rate savings by reducing LTV. This would probably be a better buy than a pension at present. By leveraged interest rate savings I mean that say £5k of mortgage reduction could save you 0.1-0.5% on £90k, depending on just what the mortgage size and rates are.

Pension contributions are very valuable and a more efficient way to clear a mortgage but at the moment you're really too young to benefit from this because it's too long until you reach age 57, the earliest age at which you will be able to take any money out of a pension pot.

It's worth comparing your mortgage interest rate to savings rates since you might be able to earn more interest after tax than you're paying in mortgage interest. If so, better to save than overpay until you can lower LTV enough to make a difference to interest rate.

When trying to lower LTV it's worth considering using a 0% for spending credit card for normal spending to increase the amount you can reduce the LTV by if it takes you over one of the 5% thresholds. Just save the spent money and use it at remortgage time. The borrowing will reduce affordability but the lower LTV will help and can be a good way to save interest long term.

RJDidier

Thanks to everyone who has contributed so far.

LTV when I took it out was 80%. What I've taken away from the above so far (as well as my own thoughts):

- Focus on building up an emergency fund
- Continue overpaying on mortgage for next 18 months, possibly allowing improved interest rate (via lower LTV) when re-mortgage
- In 18 months, try and start contributing to private pension

saver861

RJDidier wrote: »

- Focus on building up an emergency fund
- Continue overpaying on mortgage for next 18 months, possibly allowing improved interest rate (via lower LTV) when re-mortgage
- In 18 months, try and start contributing to private pension

In 18 months you will still be relatively young for tying up money in a pension. By then of course the landscape could be somewhat different and so you would weigh up the options then. In the mean time, you will be gaining experience and knowledge that will put you in a better position when coming to making your decisions down the line.

I've a feeling your maturity will see you right whichever options you choose.

Dunnit

Be sure not to forget to live!
£100pcm into another pension - review every 10 years. You will not miss it. Move to flexible mortgage in the future. As a government employee you can take more risks as you are in theory less likely to be made redundant/sacked.

http://www.telegraph.co.uk/finance/p...ng-for-40.html

As above, you are on the right track whatever you do. Good Luck!

atush

In 18 months assess how much you can save monthly, and save half into S&S isa, and half into a PP. that way you have money you can access for whatever reason later on and you have money to help retire early.