Pension contribution or mortgage overpayments?

Auntie-Dolly

I'm 52 and when my mortgage finishes in 11 years I will have an amount of approx. 20k unpaid from the interest only portion of the loan. I have been making overpayments, but it has occurred to me that it might make more sense to put the value of the overpayments into my SIPP and use part of my pension pot to pay off the outstanding mortgage when it finishes. My pension pot is currently approx. 200k and I haven't made any contributions to it for 15 years. Any thoughts from you clever people?

atush

Well even now you will be able to pay it off with some left over from the 50K tax free?

I would pay more into pensions.

kidmugsy

Tell us, Auntie, what the interest rate is on your mortgage, and what are the attractions of your contributing to a pension e.g. will you get employer contributions? Will you avoid higher rate tax?

Auntie-Dolly

The mortgage rate is 2.99. The attraction of putting more into the pension pot is the tax relief on contributions and being able to take 25% of the pot tax free. The fund has been growing at a nice rate. No employers contribution - I was 'bought out' of an old final salary scheme. It doesn't make any difference to my rate of income tax. It seems like a good idea to me - am I missing something?

atush

I suppose Kid was thinking S&S isas instead.

AS to if you should have kept the FS pension, that is another matter?

Auntie-Dolly

Pretty academic now!

atush

indeed. To bad you didn't come here forst to have others here run the numbers for you.

Generally, when you are 'bought out' it is a good deal for them and not you.

kidmugsy

Side-stepping 20% tax on the way in to a pension isn't a wonderful idea if basic rate tax is 25% on the way out. It could be 25%: it certainly seems to me that increase in the basic rate is likelier than decrease.

You could always consider saving instead into high-interest current accounts while they still exist (backed up perhaps by ISAs). The current accounts currently pay 5% p.a. gross (Nationwide, TSB) and 4% p.a. (Lloyds). After 20% tax that means they still pay a higher interest rate than your mortgage costs you. Free money!!


Then when you are 55, and therefore can have access to the pension funds if you want, consider what to do next. Apart from anything else, there's been a lot of political talk about replacing 20%/40% tax relief by a uniform 30%. If that happened you'd be pleased as punch that you'd put off contributing to a pension for a year or two.

My own plan is to open a high interest regular saver at the beginning of the new tax year so that I receive the interest tax-free at the beginning of 2016-17. That's a gamble that Osborne's £1k p.a. zero-rate band on savings income is adopted by the new government after the election. heh, heh.