Pensions Versus OP mortgage

SpeedSouth

Hi,

I've reached the age (33) now when I realise I should have done something about pensions a few years ago.

But we've recently been Auto enrolled at work, so I figure I need to step to it.

We have been overpaying the mortgage since we took it out nearly 4 years ago at a rate of £500 per month bar a period of 6 months and the thought of continuing to do this to be MF within 7 years is very appealing.

I've read as rule of thumb I need to save around 16.5% to pension, so with work contribution of 4% and tax relief means I need to probably save 10% per month which will seriously impact OP'ing I suspect.

But I guess the money may be better served in pensions. What have other people down in similar situations?

Key Facts
33, married 2 kids under 3. £40k salary. OH earns around £7200, but we will potentially lose this income if we have further kids

Mortgage 1 - Family Home - 1.99%
£80,000 left, OP'ing £500 per month at present.

Mortgage 2 (Left over when we combined houses) - BTL - 2.49%
£125,000 left, Interest only at present, roughly a 5% yield on this one.

WobblyDog

I prioritised becoming mortgage free over making large pension contributions, but that was perhaps more an emotional decision than a rational one, and mortgage was quite small.

It's a good idea to pay enough into your pension to get the maximum employer contribution. If you pay any tax at the 40% rate, it's worth paying enough into your pension to avoid that. If your employer offers salary sacrifice pension arrangements, the National Insurance savings can be attractive.

atush

With a mtg under 2%, i'd put more into your pension. Assuming you have 3-6 months spending in emergency cash.

If you do, and you are worried should rates rise, then put most into pension, and some into a S&S isa. which could later be used ither to boost pension, or to help pay down mtg if rates rise, or to replace your OH's income in case she has to stop working for a 3rd child.

As a side note, she could open a PP in her name.

SpeedSouth

We do have additional savings already of around £17k, in a 123 account so the interest here is outperforming the benefit of clearing the mortgage with amount and it serves as the emergency cash fund as well.

With the rate so low, and the mortgage not an astronomical amount (on family home) I know we can afford a hike in interest rates which will come at some point of course, but would drop the OP accordingly.

On the BTL, we have pretty good equity and would sacrifice this property if needed, so not factoring that one into interest rate hikes really.

I am receiving the most I can from my employer as these are irrespective of my contribution anyway. At £40k I'm just below the 40% tax bracket, bonus dependant.

I think like you say Wobblydog the MF carrot is probably more emotional than savvy financial thinking.

atush

Ok, so look at your work pension. Are you happy with the performance? Fees? Investment choice? If so, add more here.

Otherwise, look at a personal pension elsewhere.

Do you have the potential to become a HRTaxpayer? If so, and you think it could come sooner rather than later, then a S&S isas could be a good move? How long could you live on 17K if you needed to?

But, given your salary now and pension contribs you'd have to quite the boost in income to get over the threshold.

SpeedSouth

Thanks,

I'll have a look around then.

Just to touch on the HRT issue Presently at £40k I'm only just under the threshold.

I initially thought if I went up to £42k, I'd become HRT for the small bit, but reading you past sentence

But, given your salary now and pension contribs you'd have to quite the boost in income to get over the threshold.

Does this imply, that if I start to contribute 10% a year, £4k, this in effect makes my earnings £36k as fas as the thresholds are concerned?

Triumph13

atush wrote: »

Do you have the potential to become a HRTaxpayer? If so, and you think it could come sooner rather than later, then a S&S isas could be a good move?

Using S&S ISAs as a temporary home pending a better rate of tax relief might also make sense if you think there is much chance of them scrapping HRT relief and bringing in a flat 30% relief as has been mooted.


+1 for having paid off the mortgage for emotional rather than financial reasons. I'd almost certainly have been richer if I'd put the money in a pension instead, but I sleep better this way.

Triumph13

adam81 wrote: »

Does this imply, that if I start to contribute 10% a year, £4k, this in effect makes my earnings £36k as fas as the thresholds are concerned?

It does indeed.

jamesd

There are two key reasons why overpaying on a mortgage makes you less well off than you could be:

1. Investment growth. The long term average investment returns of the UK stock market have been a hair over 5% plus inflation. This beats mortgage interest rates. This advantage is shared by investing within a stocks and shares ISA.

2. Tax relief. A basic rate tax payer makes 6.25% on their money net from tax relief. Pays in £8k, gets 25% added to give 20% basic rate tax relief, leaving £10k in the pension. Takes out 2.5k tax free and 7.5k taxed at 20%, total out £8,500. Plus whatever investment growth delivers.

The problem in your case is age. You're too young for the current age 55 to clear your mortgages except interest only, because your mortgage will largely have ended by then. Also, it's likely that the minimum pension age will have increased to 57 or 58 by the time you get to 55, since a change has been announced to happen by 2028.

One question is whether your own home is likely to be your last home or whether you expect to buy a more expensive place that a pension could help to pay off later.

Overall, given your age, investing in a S&S ISA seems like a better move for most of your investable money than a pension. This gives you the flexibility to withdraw the money whenever appropriate. You could do something like paying in then knowing that after a while you could clear the mortgage whenever you want to, without actually doing the clearing.

Personally, I went for an interest only mortgage a few years ago and invested instead of paying more than the interest. Even when I took it out I could have paid it off. Now a few years later I could do that several times and I'm not that far from getting pension money that will let me pay it off just with tax relief, in effect. Hard to beat a free house thrown in with your pension, which is one way of looking at what I've done.

SpeedSouth

One question is whether your own home is likely to be your last home or whether you expect to buy a more expensive place that a pension could help to pay off later.

At this point I don't know the answer to that, at present we have no need to move but you never know what will come up.

A bit more reading up on S&S Isa's then. The missus sees these as a risk compared to the mortgage mind you..

dunstonh

The missus sees these as a risk compared to the mortgage mind you..

How much income in retirement will the house provide? Surely the risk is not having any retirement plans?