Pension vs Mortgage overpay?

atush

But that is even curter lol

232607

WickyWickyWa wrote: »

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?

The 17p in the £1 was worked out from my own pension which sounded not too dissimilar to yours albeit I didn't know all your facts hence had to guess a little.
This is how it's worked out:-
My company pays 15% to my 5% meaning they pay a factor of 3 to my 1. This means for every £1 they pay 75p to my 25p.
I also save 20% tax + 12% NI meaning I only pay 68% of my contribution. Therefore 0.68 x 25p = 17p
Use this as a "ball park" figure but trust me when I say yours will not be far off.

It's so unusual for a company to offer to increase your salary if you don't join the pension that I suspect that this is not the case albeit not impossible. Seek clarification of this in writing.

Not wanting to sound curt again but also trust me when I say it's a terrible idea even if your company does increase your salary.
You'd only get 68p net pay increase as opposed to £1 in your pension.
Or put it another way...Your 68p gets an immediate 47% uplift and then is invested in a highly regulated/policed environment that will almost certainly continue to grow at a higher rate than your 2.5% mortgage rate.

jamesd

WickyWickyWa wrote: »

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 does it say you would have if you didn't do that but invested the money in the pension or outside the pension instead?

The answer: like almost all mortgage savings calculators it has a one track mind and completely ignores what you would have if you did something else instead. this creates a misleading positive picture that causes mortgage overpayment to look attractive when it's really not.

So, use a regular savings calculator. Put the amount you'd have in the pension into it and see what you'd have for the same money after the same total time (the time until the mortgage would be cleared). Typical investment returns after fees are around 4.5% plus inflation, or around 6.5% if used on the no inflation adjustment basis that the mortgage calculators use.

You aren't likely to ever catch up from overpaying on a mortgage then investing later. You'll have lost too much compound growth to catch up.

pathtofreedom

Forget the mortage a second and the interest you're paying on that.

Forget about the pensions, inflation and tax too.

Looking at how long your mortgage has left lets assume you have 15 years or more until you get your state pension. Assuming you're going to continue working all that time it is 15 years that savings could be compounding up.

This calculator is your friend.

http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Now maths isn't my strong point but hopefully this will help explain the point a bit more so you can play with your real numbers....

So say you put £100 a month in a savings account at 4% for the next 15 years (again forget about tax for now) with compounding over the years you'd end up with £24,691.08 woo hoo.

Now if that money was in an isa you wouldn't pay tax on the interest which sounds good right? What if you put it in one of those good current account deals of 6%, even with tax you're better off than an isa right now. What if you could save that same £100, lock it away for a few years but actually save £132 a month the whole time and not have any cut in your take home pay. At the end of 15 years you'd be up to £32,592.22 instead so you'd have nearly 8k more by doing nothing. Yes ok it will be taxed when you take it out, but if you do it right you could just take your free allowance each year, you would also end up with a bigger tax free lump sum to play with.

Now from what you've said I'm guessing the amounts are a lot more than £100 a month, and that is having to lose 32% of that amount each month on 20% income tax and 12% ni. So if you take the cash now rather than put it in your pension, even if you stick it in an isa you're losing that extra money you're saving in tax.

Have a play with some pension calcuators and see how much you can save. If your company does a matched contribution as well as the 10% you will want to do that too as that is again free money you will be having compounding to get back later.

For OP the mortgage there are different ways of doing it. Depending what your rate is now it might work out better to do a virtual offset. Which means if you can save / invest at a higher interest rate after tax than your mortgage rate then do that for now as mortgages are cheap. If the rates start going the other way round and the mortgage rate is 7% and the highest you can get on savings is 3% then it is a no brainer to chuck all the savings at the mortgage. The calculators will show you that due to it being through salary sacrifice as others have said to pay £1 in your pension it only reduces your take home by a tiny amount, but it could mean you could end up retiring early instead and still have paid off the mortgage too. Or use your 25% tax free lump sum to pay off the mortage and still have money to spare you wouldn't have had otherwise.

Do you ever think you will be a higher rate tax payer as well as that changes the money you can save in tax a lot more.

Post an SOA on the mortage or debt free board. See where you can cut down your expenses. Use that money to OP your mortage, or put in savings at a higher rate to still pay it off early later, take advantage of any pension tax break you can and any free money like the 10% or extra matching contributions.

fairleads

Pensions can be confiscated, wholly owned property can't.

pathtofreedom

fairleads wrote: »

Pensions can be confiscated, wholly owned property can't.

By who?? Even if you got divorced they could probably force a sale for half the house if no kids.

By having savings in a pension rather than an Isa it isn't means tested either, so if the worst happened and you need means tested benefits for some reason it won't count towards those until you get to retirement age, where savings in an isa etc would.

atush

Pensions are safe from confiscation over debt. Property isn't. Both are split from divorce, pensions dont affect benefits unless in payment.

kidmugsy

fairleads wrote: »

Pensions can be confiscated, wholly owned property can't.

That's not what history teaches. Even now, what is Inheritance Tax but a partial confiscation?

pathtofreedom

kidmugsy wrote: »

That's not what history teaches. Even now, what is Inheritance Tax but a partial confiscation?

Depends how old you are when you die but they are talking about changing the tax rules for that for pensions. Also depends if you use an anuity or not but that isn't consfication. You will get taxed on it at some point but it makes more sense to leave it compounding so you can have a bigger tax free lump sum, and more to live on in retirement, than to take the tax hit now and miss out on that extra money.

232607

fairleads wrote: »

Pensions can be confiscated, wholly owned property can't.

Surely this wins the award for the most stupid comment in this thread.

In Bankruptcy a pension will be the only asset protected.
In divorce a pension will be split along with every other asset, including wholly owned property.
How does this make a pension more vulnerable to confiscation?

The only way to protect assets in divorce is to squirrel it away without your partner knowing. Perhaps you are suggesting the OP should not join the pension scheme or pay off the mortgage but bury money in the back garden instead.