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

jamesd

Noctu wrote: »

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...

You were misled, though it's a common mistaken justification for doing it. The problem is compound interest combined with time. Investments tend to grow by more than mortgage interest costs so by overpaying the mortgage you lose the years of compound growth. By the time the mortgage is gone there isn't enough time left for the higher payments into a pension to catch up on all the lost growth.

Noctu

jamesd wrote: »

You were misled, though it's a common mistaken justification for doing it. The problem is compound interest combined with time. Investments tend to grow by more than mortgage interest costs so by overpaying the mortgage you lose the years of compound growth. By the time the mortgage is gone there isn't enough time left for the higher payments into a pension to catch up on all the lost growth.

I understand - and that makes sense. Thank you! Do you think it's worth overpaying ANYTHING on the mortgage - or should we get it all into a pension?

xylophone

With a modest amount to pay into a pension, one of the Personal Pensions offered through Cavendish might suit.

The Santander 123 account is excellent as your household account -

http://www.santander.co.uk/uk/current-accounts/123-current-account

You might get the emergency savings into TSB accounts ( sole and joint) and /or a Lloyds Club - "paying in" easily managed with cycling round - re T&Cs carefully re any DDs/accounting periods.

http://www.tsb.co.uk/

http://www.lloydsbank.com/current-accounts/club-lloyds.asp

atush

I would say, pay 50% of spare cash into a PP for him (but his company WILL have to pay into a pension at some point) and 50% into a S&S isa.

Which can be put into pensions later on, kept and used for spending in 10+ years time, or even used to pay down the mtg ater if prices go up too high.

jamesd

Noctu wrote: »

Do you think it's worth overpaying ANYTHING on the mortgage - or should we get it all into a pension?

I have an interest only mortgage, so no. I'll end up clearing mine effectively free, paid for out of pension tax relief. I've already accumulated enough ISA investments to pay it off a couple of times over if I wanted to. You two are a bit young to be doing that because it'll be age 57 before you can get at pension money.

I think it's best to delay the pension until his employer has to pay in. In the meantime, though, use the stocks and shares ISA option. That way you'll both get investing experience and investment-related compound growth even while not using the pension. later on, if it makes sense then, you can withdraw money from the ISA to pay into a pension and get pension tax relief.

One reason I think waiting is better for the pension is that his employer might use salary sacrifice for his pension contributions. that would save him at least 12% employee NI on top of the income tax saving.

atush

Noctu wrote: »

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...

Read this (and the other articles he has there about the subject) to understand why your reasonable assumption is incorrect


http://monevator.com/compound-interest/

Thrugelmir

jamesd wrote: »

You were misled, though it's a common mistaken justification for doing it. The problem is compound interest combined with time. Investments tend to grow by more than mortgage interest costs so by overpaying the mortgage you lose the years of compound growth. By the time the mortgage is gone there isn't enough time left for the higher payments into a pension to catch up on all the lost growth.

If that were the case pension mortgages would have been the option years ago. Likewise endowments would have performed better. These are best described as unusual economic times. Investments need to grow organically i.e. generate bigger profits. Not just perform well due to excess liquidity looking for a home due to the vast amounts of Central Bank intervention. Thereby inflating asset prices. I guess you've yet to experience a different type of market.

dunstonh

A lot of the problem with pension mortgages and endowment mortgages wasnt so much the concept but the target growth rates that were used.

Indeed, drawdown in retirement is very similar to a pension mortgage or endowment mortgage. i.e. you need it to grow by x% to achieve the income of £x. Just as you need the endowment or pension to grow by x% to hit target.

Purplesky_2

For me, it depends what your priorities are.
I would suggest getting maybe 6 months expenses together and then figuring out exactly how much you can afford to put away. (Depending on your income 10% and 20% might be drastically different values, after all!).

You don't mention any consumer debt, but if you are carrying debt, you don't want to be in debt and investing at the same time.

Have a look at your basic household bills and see if you can reduce them. We have managed to get our household bills under 40% of our combined income, thankfully! LOADS more room for manoeuvre.

Finally, it may make you feel better to be putting something towards your mortgage. I think the conventional advice here is amazing, but I disagree with not putting anything towards a mortgage if you feel like it's a burden. It's still going to be there when the interest rates go back up. Can you afford it if your mortgage rate doubles or even quadruples? It's not out of the realm of possibility. 10% was considered quite normal for a long time.

It's up to you, but putting 15% into a pension/S&S ISA and 5% to your mortgage might work well? or 5% into a dedicated savings account that pays more than your mortgage interest is costing you?

jamesd

Thrugelmir wrote: »

If that were the case pension mortgages would have been the option years ago. Likewise endowments would have performed better.

In both of those cases they were presented as options for interest only mortgages with lower monthly payments than a normal. In the case of the endowments the insurance premium cost was also deducted from the reduced monthly payment. The performance was fine, in general, just not the amount of money being paid in.

What's being discussed here is quite different. It's paying in the full amount that would have been used for overpayments, not just pay in a bit of it and spend the rest.

Thrugelmir wrote: »

These are best described as unusual economic times. Investments need to grow organically i.e. generate bigger profits. Not just perform well due to excess liquidity looking for a home due to the vast amounts of Central Bank intervention. Thereby inflating asset prices. I guess you've yet to experience a different type of market.

Among other things I look at past performance over the last 115 years and how those have varied on a year by year basis. The Barclays Equity Gilt Study among others gives those things for a range of different investments. The price/earnings ratios that compare the share price to profits are often not particularly high at the moment, though they are above average ins some places, notably the US. Bonds and gilts are a different matter, though, those are very high priced.