Pension vs Mortgage overpay?

WickyWickyWa

I have worked for the same company for a long time on a DB (Final Salary) scheme. Like many companies they are dropping it and moving to a DC scheme.
I now have the option to not contribute to a pension at all and take all the money (meaning paying NI and tax on amounts taken).
The company will be contributing 10% of my salary to the new scheme. There will also be an additional amount contributed by the company as a kind of compensation for moving schemes.

As there is now the option for me to take the money instead of the contributions I am thinking that I may be better off if I pay my mortgage off. I have calculated how much extra I could recieve (taking into account the company's NI and my NI and Tax) and have used the MSE mortgage calculator to work out what would happen if I took the money and used it to make overpayments on my mortgage.
It says that I could cut my mortgage by 15 years and 7 months and save £37569 in interest!

What do people think? Any comments/thoughts?

My estimated DB scheme is now £7545 a year.
My state pension is estimated to be £6029 a year.

atush

It would be silly to chose a mtg over pension at todays low mtg rates.

It would be INSANE to give up 10% of your salary in free money (employers contribs).

Join the new pension, consider (if you have a good emergency find in cash and some S&S isas) then overpaying mtg with some spare cash if you choose to? Maybe throw 50-100 a month that way but save the rest in S&S isas and pensions.

WickyWickyWa

Dont see how I would be "giving up 10% free money"? I would be taking those contributions as Salary.

232607

I think it's a ridiculous idea.
Let's do the maths making a few assumptions....

Your Co is paying in 10% + extra for loss of DB. This is typically 5% so I'll use this figure. I'll also assume your min contribution to get the Co max is 5%. I'll also assume you're in the 20% tax band & the Co operate via salary sacrifice.
This means that for every £1 that goes in to your pension you will only pay 17p from your net pay.

Giving this up to pay off a mortgage with historically low interest rates would be committing financial suicide.

232607

WickyWickyWa wrote: »

Dont see how I would be "giving up 10% free money"? I would be taking those contributions as Salary.

If you don't join the pension scheme you generally don't get the money paid as extra salary. If you're saying your Co will then that's the only time I've ever heard it.

WickyWickyWa

Thanks for replies - although they seem a bit curt so far.

To clarify:
The extra for loss of DB is a fixed amount (£3000) which does not change.
There is no minium contribution to get the 10%.
I am in 20% tax band.
Why does this all mean that for every £1 I pay 17p?

Mortgage rate is 2% above BoE rate (2.5% total).

I'll admit that I do not fully understand the pension stuff - whch is why I asked the question.

On the face of it, paying my mortgage off 15yrs and 7 mths early seems like a good thing to me. I can then use the mortgage payments + overpayments for investments, etc?

WickyWickyWa

232607 wrote: »

If you don't join the pension scheme you generally don't get the money paid as extra salary. If you're saying your Co will then that's the only time I've ever heard it.

Thats what I have been told. I will have to pay both the company's NI and my own plus income tax on it. Still early stages, so perhaps they will revise their statements down the line.

d70cw6

id have thought pension growth would outstrip the mortgage interest.

atush

for 100 into your pension you get 20p back in TR

is the 3K PA in addition to the 10% or is it part? WE cant tell as you dont mention base pay. Cant work out the rest of the above figures (by someone else) w/o this point? the 3K per year is 250/month into your pension. At a Bare min, you'd be getting (if you put 80 into the pension) 350 of pension for a cost to you of just 80. does that make enough sense?

As for paying in later AFTER the mtg is gone, a fine idea but you would not make up for the compound interest. Google the term and look up Moneyvator's blog for an explanation of why/how? the long term average for investments (and they are a long term thing) is 5% above inflation. Which is far better than saving 2.5%. BTW, can you get a cheaper deal? I am paying less.

Basically it is an insane idea, and no we are not being 'curt'. We are telling you what a huge mistake you would make. And trying to keep you from doing it?

atush

WickyWickyWa wrote: »

Thats what I have been told. I will have to pay both the company's NI and my own plus income tax on it. Still early stages, so perhaps they will revise their statements down the line.

Get this clarified (in writing) but on the face of it, you lose basic rate tax, your NI (12%) plus their NI (higher) off your money. So you'd be lucky to see even half of it.

Not worth doing. And like I said, we have never heard of ANY employer doing this before.

kidmugsy

WickyWickyWa wrote: »

Thanks for replies - although they seem a bit curt so far.

They seem positively verbose to me, since all that's really required is "NO!".