Pension vs Mortgage overpay?

bowlhead99

232607 wrote: »

1 other thing to question your employer rep on. They have indicated a 43% reduction for tax & NI. This is the sort of reduction if you were in the 40% tax band. You say the company contributes £3330 PA representing 10%. This would indicate your salary to be £33330 PA which would not put you in this tax band. Something doesn't add up here so you need clarification.

That 43% seems reasonable given the circumstances and the rationale that has already been explained.

Basically the company has a certain budget, a fixed amount of money they are willing to give him on top of his base salary as a pension. He also gets a little bit on the side as compensation for taking away the lucrative DB scheme. But looking at the core amount they are willing to put into the new group personal pension - they have said they are willing to be flexible on it and pay it as extra salary, if the person wants.

If they did that, and say the money they have in the pot to pay into a pension scheme as a core annual pension each year, or alternatively give to him as extra salary is £3000:

If they were going to give him £3000 extra salary, they would have to pay employer's national insurance on that salary and it would cost them more like £3400. So, they're not going to do that, they are going to pick a number lower than £3000 and give him that as a salary - maybe £2600 - so they can afford to pay the employer national insurance on top and still afford it with the £3000 they have available. Employer's national insurance isn't something they would pay if they gave him a pension contribution: so the choice is £3000 pension or £2600 gross salary.

Then as an employee earning £30k a year or whatever, well and truly in the 20% tax bracket and 12% employee's NI bracket, you will have to pay those 32% deductions to get your hands on the £2600 extra 'salary'. This leaves you with only about 1750 net cash from the £3000 that the employer would have happily put directly into a pension for you. Total 'cost' of tax and NI is about 42% with those figures but would probably be the 43% if I hadn't been using rounded numbers. So, doesn't seem like anything 'doesn't add up here'. The maths checks out.

So, the question back to the OP is: what would you really prefer -

a) £1750 cash in your hand so you can stop £1750 of your mortgage costing you 2.5% for the next few decades?

Or would you prefer
b) to have £3000 (yes, a 70% bigger number) inside a pension scheme growing at something like 5%-9% depending on the exact underlying funds held, over the long term, and then take out a quarter of it tax free, and just pay your marginal tax rate on whatever else you take out as an when you need it - which might be 0% when you give up work before your other pensions kick in, or might be your usual 20% basic rate if not.

To most of us, (b) is the no-brainer.

The advice in the first reply that you would be 'silly' to pay off a 2.5% mortgage instead of make an investment at 5-9%, is perhaps a bit harsh because maybe you have a really low tolerance for investment risk and would have much greater peace of mind if you had cleared down your house debt even if it is at a known low rate. It might go up later with base rates. Still, it is a loan secured on an asset - a house - and the value of the house and therefore the security to the lender is likely to go up over time. As such, banks and building societies are still not going to want to charge super-high interest rates on it, compared to what you can earn on your pension pot invested into equities and unsecured bonds, held for the long long term.

The other advice in that first post, which was made with incomplete information about your circumstances, to the effect that you would be 'insane' to take the cash instead of the pension, does still have merit now we know the facts. You would be volunteering to pay over 20% of income tax and over 20% of national insurances to access the money, when you could instead pay a lower rate of tax and zero national insurance when taking the money out of your pension in retirement.

fairleads wrote: »

As to who owns a pension fund, the clue is in who upped the retirement age (and stole 5 yrs of an individuals’ retirement), HMRC or the trustees?

In the type of pension fund being contemplated here, the money you get to take out is defined by the money you put in (or what is put in for you), and investment growth over time, and how long you leave it.

If the undoubtedly evil government and HMRC conspire to up the retirement age and 'steal' a year of your retirement, the money simply grows into a bigger number while you wait. Likely you will be able to continue to take private pensions and employer defined contribution pensions (like this new one) well in advance of state pension being available - 10 years earlier, being the mooted level. So if state pensions moved later again, having a large personal pension would help fund the gap.

And so choosing to take £1750 plus low growth now, instead of £3000 plus high growth later is literally like saying you prefer a bird in the hand to two in the bush.

Taking the cash has some certainty.

Whether that is wise, depends on whether you want to live through a 40-50 year retirement with just the one out of the two birds that are being offered. (:kisses:)

HardCoreProgrammer

If you do not join the pension, you will have to pay employer NI (about 14%), employee NI (12%) and income tax (20% as you are in basic tax rate) on 10% of your pay.

When you withdraw money from the pension you will need to pay income tax (probably higher than 20% then) and perhaps employee NI (if before state retirement age, probably higher than you may expect). So the only thing you will definitely save is employer NI.

With all political parties treating pensions as a pot of money to be stealth-taxed, it may be a more finely balanced decision than some claim. If you can use the 3000 pound allowance in something useful, personally I would just go for the certainty of paying off the mortgage.

justme111

I did not think one had to pay NI on pension even if before state retirement age?

232607

bowlhead99 wrote: »

That 43% seems reasonable given the circumstances and the rationale that has already been explained.

Basically the company has a certain budget, a fixed amount of money they are willing to give him on top of his base salary as a pension. He also gets a little bit on the side as compensation for taking away the lucrative DB scheme. But looking at the core amount they are willing to put into the new group personal pension - they have said they are willing to be flexible on it and pay it as extra salary, if the person wants.

If they did that, and say the money they have in the pot to pay into a pension scheme as a core annual pension each year, or alternatively give to him as extra salary is £3000:


If they were going to give him £3000 extra salary, they would have to pay employer's national insurance on that salary and it would cost them more like £3400. So, they're not going to do that, they are going to pick a number lower than £3000 and give him that as a salary - maybe £2600 - so they can afford to pay the employer national insurance on top and still afford it with the £3000 they have available. Employer's national insurance isn't something they would pay if they gave him a pension contribution: so the choice is £3000 pension or £2600 gross salary.

Then as an employee earning £30k a year or whatever, well and truly in the 20% tax bracket and 12% employee's NI bracket, you will have to pay those 32% deductions to get your hands on the £2600 extra 'salary'. This leaves you with only about 1750 net cash from the £3000 that the employer would have happily put directly into a pension for you. Total 'cost' of tax and NI is about 42% with those figures but would probably be the 43% if I hadn't been using rounded numbers. So, doesn't seem like anything 'doesn't add up here'. The maths checks out.

So, the question back to the OP is: what would you really prefer -

a) £1750 cash in your hand so you can stop £1750 of your mortgage costing you 2.5% for the next few decades?

Or would you prefer
b) to have £3000 (yes, a 70% bigger number) inside a pension scheme growing at something like 5%-9% depending on the exact underlying funds held, over the long term, and then take out a quarter of it tax free, and just pay your marginal tax rate on whatever else you take out as an when you need it - which might be 0% when you give up work before your other pensions kick in, or might be your usual 20% basic rate if not.

To most of us, (b) is the no-brainer.

The advice in the first reply that you would be 'silly' to pay off a 2.5% mortgage instead of make an investment at 5-9%, is perhaps a bit harsh because maybe you have a really low tolerance for investment risk and would have much greater peace of mind if you had cleared down your house debt even if it is at a known low rate. It might go up later with base rates. Still, it is a loan secured on an asset - a house - and the value of the house and therefore the security to the lender is likely to go up over time. As such, banks and building societies are still not going to want to charge super-high interest rates on it, compared to what you can earn on your pension pot invested into equities and unsecured bonds, held for the long long term.

The other advice in that first post, which was made with incomplete information about your circumstances, to the effect that you would be 'insane' to take the cash instead of the pension, does still have merit now we know the facts. You would be volunteering to pay over 20% of income tax and over 20% of national insurances to access the money, when you could instead pay a lower rate of tax and zero national insurance when taking the money out of your pension in retirement.


In the type of pension fund being contemplated here, the money you get to take out is defined by the money you put in (or what is put in for you), and investment growth over time, and how long you leave it.

If the undoubtedly evil government and HMRC conspire to up the retirement age and 'steal' a year of your retirement, the money simply grows into a bigger number while you wait. Likely you will be able to continue to take private pensions and employer defined contribution pensions (like this new one) well in advance of state pension being available - 10 years earlier, being the mooted level. So if state pensions moved later again, having a large personal pension would help fund the gap.

And so choosing to take £1750 plus low growth now, instead of £3000 plus high growth later is literally like saying you prefer a bird in the hand to two in the bush.

Taking the cash has some certainty.

Whether that is wise, depends on whether you want to live through a 40-50 year retirement with just the one out of the two birds that are being offered. (:kisses:)

Understand your comment on the employer taking account of their extra NI contributions in regards to the offer of paying as extra salary. This makes the figures "stack up" now.

Thanks.

232607

fairleads wrote: »

James

It is of little comfort to those who have lost pension capital by illegal actions to be told its not gov.uk’s fault but rather the fault - by lack of oversight/due diligence - of some or other quango.
And just because you’re unacquainted with this phenomena doesn’t mean it never happens. It happened to two of my friends.

Appears my 90% compensation cap was woefully out.
A 50K cap on an expectation of receiving 150K is theft.
As to who owns a pension fund, the clue is in who upped the retirement age (and stole 5 yrs of an individuals’ retirement), HMRC or the trustees?

Like anything in life, pension governance rules evolve over time, generally although not always for the better. The sudden upping of 5 years probably fell in to the not for the better camp. It probably should have been done with a lot more notice & with a bit of tapering. That's what's been done when it changes from 2028 when it starts to be linked to SPA -10 years. This gives people time to alter their plans to negate the effect of the changes.

You have my sympathy if indeed part of your pension did not materialise as you expected/had been promised.

Current governance protects against a lot of previous evils of the past. Using your no doubt bitter experiences as a guide for people not to build up a pension would be misleading them.

Regards.

fairleads

Mania
[FONT=&quot]First, You need to widen your research and information base.[/FONT]
[FONT=&quot]The financial press is littered with stories of pension expectations trashed by corporate action including fraud and bankruptcy and for that matter, penurious costs, all of which successive governments have turned a blind eye to.[/FONT] Tesco employees are possibly the next group to suffer.[FONT=&quot][/FONT]
[FONT=&quot]Many employees of recently privatised institutions have also lost out in the pension stakes.[/FONT]
[FONT=&quot]Married women who thought they would get a state pension based upon their husband’s contributions will be, to say the least, disappointed with the new legislation that denies them the benefit of this long established tradition. 100k women will be affected by this sleight of hand. [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]As to personal wealth, I don’t have a large financial base, but I do have a wealth of experience. [/FONT]
[FONT=&quot]And it is this experience that prompts me to make the odd contrarian interjection.[/FONT]
[FONT=&quot]So, to qualify my answer to the OP’s question.[/FONT]
In a high inflation environment, inflation devalues debt. James has alluded to this.
And it is for this reason that I never ever made overpayments into the mortgage.
But there is no guarantee that the high inflation scenario will return any time soon.
In fact, it is highly possible that we are staring deflation in the face. As per Japan.
In which case the Real value of debt may not decline in the way it has done in the past. It may, in Real terms, even increase in value.
So, bearing in mind the OP is already receiving a free, and relatively healthy, contribution into their pension, I ask wouldn’t it be prudent to first reduce the mortgage obligation rather than increase the pension contribution. Interesting is that this option is reversible; the converse isn’t.
Yes i do understand the tax boost to pension contribs is a consideration, but for 20% taxpayers the benefit is over-rated, in fact it is a zero sum game.
So drunk or sober, sane or stupid this is nothing to get excited about, because we are after all, just discussing options.
Ps Years ago I chose not to contribute to a pension fund, and with every passing minute, I bless the day I took that decision.
[FONT=&quot]But acknowledge that that option is only suitable for the minority - those of us who value financial independence more than outright wealth.[/FONT]

jamesd

fairleads wrote: »

i do understand the tax boost to pension contribs is a consideration, but for 20% taxpayers the benefit is over-rated, in fact it is a zero sum game.

The 25% tax free lump sum provides a gain of 6.25% vs identical investments in a stocks and shares ISA. Both provide a tax wrapper that protects against income tax and capital gains tax while the pension pot is growing. It isn't a zero sum game unless income tax rates rise substantially or the 25% tax free lump sum gets capped or removed.

fairleads wrote: »

The financial press is littered with stories of pension expectations trashed by corporate action including fraud and bankruptcy

You've yet to provide even a single example of this under current laws, perhaps because successive governments didn't turn a blind eye to it but introduced the protection of the Pension Protection Fund and the Financial Services Compensation Scheme. Neither fraud nor bankruptcy of a company pension scheme will trash the pensions delivered to employees. The defined benefit schemes will have the 90% protection from the PPF for most employees, while the defined contribution ones ceased all link to the company as soon as the contribution made.

fairleads wrote: »

Tesco employees are possibly the next group to suffer. Many employees of recently privatised institutions have also lost out in the pension stakes.

Companies are allowed to change pension schemes, it's an employee benefit, part of their pay package. Most private sector employers have already moved to the easily portable defined contribution pensions that are also completely safe from the financial future of the employer, however good or bad.

fairleads wrote: »

Married women who thought they would get a state pension based upon their husband’s contributions will be, to say the least, disappointed with the new legislation that denies them the benefit of this long established tradition. 100k women will be affected by this sleight of hand.

Instead they get higher state pensions in their own right because the contribution of things like raising children (receiving child benefit) is increased. They retain entitlement to means tested benefits if they end up alone and on a low income, just as now, when a woman relying on husband's contributions and living alone would need them. And of course if not receiving child benefit, the family budget should include ensuring appropriate pension provision for each person in a couple, not just one of them.

fairleads wrote: »

So, bearing in mind the OP is already receiving a free, and relatively healthy, contribution into their pension, I ask wouldn’t it be prudent to first reduce the mortgage obligation rather than increase the pension contribution. Interesting is that this option is reversible; the converse isn’t.

A pension is only one of the options,. Outside the pension it's possible to get 10% income tax free and 30% initial tax relief from VCT use, or 11% taxable or 8% tax free or 6% taxable from a range of non-pension alternatives.

greenglide

[FONT=&quot]Married women who thought they would get a state pension based upon their husband’s contributions will be, to say the least, disappointed with the new legislation that denies them the benefit of this long established tradition. 100k women will be affected by this sleight of hand. [/FONT]

But nSP has transitional protection for women who paid the MWRRE so they will get around about 60% or so.

WickyWickyWa

Thanks for the continued responses. I am still waiting a reply from the company and will update you when I do. For info, I have 33 years left on mortgage (takes me to age 70). Pension figures posted from the company assume that I will retire at 65.

Someone said I will have a 40-50 year retirement - retiring at 65, that would take me to at least 105 - wow

[Deleted User]

Hmmm... personally I would want the mortgage cleared by 60 latest.

I do both, some mortgage overpayment, top up private pensions to provide flexibility on top of to DB schemes plus S&S ISAs. Making sure the pensions etc will provide what i'm looking for at retirement hence why i'm skint right now Spending diary's help with planning to map out you finances now and in the future.

Well not skint is probably the wrong word i'm just very frugal and try to get the best value for every £1 spent.

Cheers