Mortgage overpayments or AVC's

starsky27

Hi all,

I hope I'm posting this in the right section.

My personal circumstances are as follows, I lucky enough to have a final salary pension at work which I've been in for 13 years. I'm 45 and plan to retire at 60. Im a higher tax payer(just). My mortgage is 300,000 which has an interest rate of 3.79 %. I will be in a position towards the end of this year( contingency fund saved) to start making overpayments. My question is am I better to do this with my mortgage or AVC's on my pension ?.

Any advice would be appreciated.

Many thanks,
Mark

atush

Ok, there are a few factors but in general the AVC could be best. But do not forget (many do) that you could split your money and do both?

First of all, in these days of low rates that mtg is a little high, then yes you could benefit for some overpayment esp if your LTV is high (what is it?) as a lower LTV will open up better deals when re-mtging. When do you think you might re-mtg?

but if your AVCs get salary sacrifice (do they?) you'd not only get TR but save in Nics as well, then that makes Avcs a better deal. Not to mention if your AVCs can be used to supply the TFLS from your DB pension so that you dont have to commute any of the DB pension. Also you are looking to retire early, and if that means getting a reduced DB pension payment, it could make sense to have a personal pension instead of or as well as an AVC as this isn't linked to your DB pension and can be taken at 60 and you could live off this while getting closer to your scheme age?


So if you have a healthy emergency fund, plus are saving for large upcoming expenses such as a new car or holiday then the AVC sounds a good bet. If your LTV is high, and you are looking to re-mtg in the near future then saving by overpaying the mtg might be a good idea.

If you are unsure, do both by splitting your available monthly amt?

starsky27

Atush,

Thanks for the prompt and informative reply.

In regards to my mortgage my LTV is about 65 %. I got my current five year deal 18 months ago when it was starting to look like rates might go up. It was a mistake on my behalf to tie in for so long especially given how fast the value of my property has gone up since moving in.My AVC contribution would be salary sacrificed. I'm only just above the 40% tax bracket ( 50k salary). My partner who who I share the mortgage with is also a 40 % tax payer ( 52k).
We would be looking to make overpayments of £1000 a month.

I would like to retire once I'm in a position to pay my mortgage off and using mortgage overpayment calculators its estimating I will be about 57. I definetly don't want to work past 60 as I'm sure I will be fed up with extreme shift work by then. My company scheme says I will lose 8 % if I go at 58 instead of 60.
I never thought of splitting the payments, good idea.

By the way what does DB stand for ?( sorry if I'm being a numpty).

Thanks again for your advice.

Mark

jem16

starsky27 wrote: »

By the way what does DB stand for ?( sorry if I'm being a numpty).

Thanks again for your advice.

Mark

DB = Defined Benefit which is the type of pension your final salary pension is known as.

starsky27

Jem 16,

Thanks for clearing that up.

jamesd

Given your income tax rates pension contributions are a big win. Once you reach age 55 you can take money out of a pension to reduce the mortgage value, if you wish, though I'd hope that you'd leave it invested so it continues to on average grow at a higher rate than average mortgage interest rates.

AVCs attached to defined benefit pensions like final or average salary might not allow taking pension benefits from the AVC without also taking the main pension at the same time. Something to check to help you decide whether to use AVCs or personal pension contributions.

Mortgage overpayments are a good option for those with the lowest risk tolerances, wh just can't stand investment ups and downs. Other than that they are a way to make yourself poorer compared to investing.

atush

At the moment your AVCs have such good tax advantages i'd keep using them. What is your scheme retirement age? Will taking your pension at 60 bring a reduction?

If you want to retire early, i'd switch to a PP or Sipp later as this pot could be taken early to live off while waiting for your DB pension to pay out w/o reduction. If you have 15 years to go, revisit this point in either 5 years or sooner if there are again major pension changes.

starsky27

Hi all,
Thanks once again for the excellent advice. It seems like the pension is the way to go at the moment.
Atush,
My scheme retirement age without any penalties is 60. I can go as early as 55 but with a 18 % loss I believe.

Thanks,
Mark

kidmugsy

If you can both afford it, the best bet is to put enough into pensions (e.g. AVC) until you avoid all higher rate tax, but not necessarily any more than that.

It's probably urgent to act on that as the 40% tax relief may well be swept away by the next government (of whatever colour). If it is swept away, you can then reconsider; overpayment might become more attractive. Put otherwise: both contributing to pensions and overpaying might arise naturally by doing one first and then the other.

atush

They get salary sacrifice so BR tax relief and Nics releif at 12% makes the AVCs better

kidmugsy

atush wrote: »

They get salary sacrifice so BR tax relief and Nics releif at 12% makes the AVCs better

That depends on how much flexibility they give up to acquire the extra moolah.