DH has no pension! Overpay mortgage or personal pension?!

Noctu

Hi all,
My DH is 35 and currently has no pension. (I know, I know...). He works in a sector with lots of small, family owned businesses who mostly do not offer employee pension plans.

We currently owe £200k on our mortgage and are in a position to overpay around 10-20% of the monthly payment, each month.

What would you do in DH's situation, bearing in mind his only option is a personal pension (and he will be enrolled in the workplace pension scheme soon but I get the impression that will be a drop in the ocean)...

a) Overpay on mortgage, get it paid off ASAP (within 15 yrs), then shove all spare cash into pension pot/savings

b) Get a personal pension

c) Bit of both?

This is all new to us and not sure of the pros and cons... I have a workplace pension (work for a large organisation) so that was that for me!

Many thanks

PensionTech

Personally I wouldn't bother overpaying the mortgage while interest rates are low. Paying more into a pension as early as you can is great because you get the benefit of compound interest and probably being able to tolerate a higher level of risk than you might later on. This is even more the case where employer contributions are at stake - sometimes, if you put more than the minimum into your occupational pension, your employer will match your added contributions - although it doesn't sound like that's the case here.

The other thing you haven't mentioned here is cash savings. If you've got spare cash, that's brilliant, but don't go piling it all into a pension if you don't have enough short-term savings available. Because remember, you won't be able to get at the pension before you're 55 (probably 57 or 58 in your case).

Thrugelmir

What rate of interest are you paying on your mortgage?

Noctu

Thanks, both. Thrugelmir, we're paying £75k @ 2.5% (Nationwide BMR) and £132k @ 2.74% (Nationwide tracker). So fairly low...

PensionTech - good point re the cash savings, we have 3 months salary in savings but that's it.

It's a shame that he doesn't have access to an occupational pension, and I guess we were thinking overpaying the mortgage might 'do the job', but as you've said, a personal pension might be more fruitful.... This is very much an unknown for us so I'm really grateful for any advice. (and if a pension is the best thing to do - any pointers on where on earth to start!)

xylophone

Re personal pension, a SIPP might suit - see

https://forums.moneysavingexpert.com/discussion/comment/68563219#Comment_68563219

or http://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/

Are you using high interest bank accounts to your best advantage?

Thrugelmir

Personally I would opt for a split approach. Owing £200k you are exposed to sudden winds of change. All eyes are on the US Fed and a September rise. Along with the possibility that rates may increase quicker than many forecast. As the Fed appears to ideallywant US base rate to return to around 3.5%. As they'll be another crisis at some point in the future and there needs to a margin of movement available to them.

dunstonh

I guess we were thinking overpaying the mortgage might 'do the job',

And how will that help you with an income in retirement?

Noctu

xylophone, probably not (!) we have a standard Natwest joint account with various personal accounts, they don't pay any special interest. Are there any high street accounts in particular you'd suggest we look at?

Thrugelmir, yes a rate rise does concern me slightly - although we could afford a rise, that would of course impact on what we can afford to do overpayment wise.

I'm getting the impression that DH would have to pay a lot into a pension but he doesn't have a huge amount of disposable income - enough for say £150/month pension payment every month. Is this just a drop in the ocean? (I'm guessing the new Government workplace pension scheme which he'll be enrolled in soon-ish won't be up to much)...

Thanks again for all your advice so far...

Noctu

dunstonh wrote: »

And how will that help you with an income in retirement?

Naively (?!) we thought that once it was paid off (and saving interest) we could pay quite a lot into a pension from that point until retirement. It was mentioned in a Guardian article when considering pensions...

kidmugsy

(i) High St accounts: TSB, Nationwide, Lloyds, Santander.

Be quick with TSB: they'll pay you £100 to switch and 5% p.a. (gross) on up to the first £2k of balance.

(ii) Suppose in retirement he gets about £7.5k as State Retirement Pension, and the Personal Allowance for income tax is about £10.5k (allow for inflation in whatever way you prefer). So he could draw £3000 p.a. from private and occupational pensions tax-free. Therefore well worth setting one up. I suggest you wait until after the Budget on July 8th just in case there are any announcements that might encourage or discourage you.

An alternative view is to wait in hopes that your husband becomes exposed to Higher Rate tax, or is offered the opportunity of salary sacrifice by some future employer. The big deal is that you save for old age; how best to do it is important, but less important than the fact that you do do it. Overpaying is a form of saving for old age, though one sage on this board, jamesd, argues persuasively that it is often a mistake. But who knows? Overpaying now, and contributing to a pension after the next stock market crash, might work out well.

My suggestion? Double your cash reserve, delay opening a pension, even until after the Budget in March '16 if you like, but do try to open one for him sometime in the next few years. That prospect of future tax-free income is alluring; at some point you'll need to grasp the nettle and open a pension for him.

Noctu

kidmugsy wrote: »

(i) High St accounts: TSB, Nationwide, Lloyds, Santander.

Be quick with TSB: they'll pay you £100 to switch and 5% p.a. (gross) on up to the first £2k of balance.

(ii) Suppose in retirement he gets about £7.5k as State Retirement Pension, and the personal Allowance for income tax is about £10.5k (allow for inflation in whatever way you prefer). So he could draw £3000 p.a. from private and occupational pensions tax-free. Therefore well worth setting one up. I suggest you wait until after the Budget on July 8th just in case there are any announcements that might encourage or discourage you.

An alternative view is to wait in hopes that your husband becomes exposed to Higher Rate tax, or is offered the opportunity of salary sacrifice by some future employer. The big deal is that you save for old age; how best to do it is important, but less important than the fact that you do do it. Overpaying is a form of saving for old age, though one sage on this board, jamesd, argues persuasively that it is often a mistake. But who knows? Overpaying now, and contributing to a pension after the next stock market crash, might work out well.

My suggestion? Double your cash reserve, delay opening a pension, even until after the Budget in March '16 if you like, but do try to open one for him sometime in the next few years. That prospect of future tax-free income is alluring.

Thanks kidmugsy - that is really very helpful. I suppose I'm concerned that we're facing a ticking time bomb of him being pension-less or having a very poor pension pot!