Debt vs Savings vs Pension

enthusiasticsaver

In our early years - up to late 40s early 50s we prioritised overpayments on the mortgage and overpayments on our pensions as that gives the longest period of time and has a larger impact on your income in retirement. We had emergency savings and saved for holidays, home improvements etc but our largest outgoings were overpayments on the mortgage and that was repaid when my husband was 48 and I was 47. Overpayments on our pensions started in our 20s so we got used to that and we are on track to retire in 3 years time when my husband is 60 and I am 58.


The ratios of how much you opt to repay on your mortgage or overpay into your pension depends on the size of your mortgage and interest rate and your tax status so you probably need to get more specific advice rather than a general question on this forum. I would agree with others it is important to do all three but in your position I think I would opt to prioritise pension provision and mortgage overpayments over your S and S isa which is less tax efficient than your pension. You can always opt to prioritise that after your mortgage is paid off.

saver861

I've not read all the posts on the thread but, I've had a flexible mortgage over the years and I overpaid significantly whilst still having access to the money should I have needed it. However, the rates are higher and thus it would require a good rate and a high overpayment to benefit.

Assuming you have at least 12 months funds on the ready to cover unexpected circumstances, such situations will never be either or. In addition, future policy changes etc, will scupper some well laid plans. Flexibility in all areas is key.

racing_blue

The question is complicated because there are many variables, but I suspect it can be simplified if you look ahead to year 2032. You'll be 55 then- which is in your early retirement envelope.

In order for retirement to be a realistic goal, what would you hope to have accrued in terms of housing, capital, and pension?

For example, your goal might be to have paid off the mortgage on your current house, amassed £500K of investments, and have pension income of £30K per year.

Have you thought in these terms? It can lead to three parallel streams of activity: mortgage repayment, investment and pension saving. A strong and well diversified position.

justme111

If calculating it that way the starting with what they need in retirement would be logical. Now they have 66000 . They have spare 2 000 a month after mortgage of 1000. It means to keep current lifestyle they will need 66000-24000-12000=30 000. State pension probably will be there as well so assuming it is about 5 grand for each they would need 20 000 more between them plus money to last from 55 till they draw all those pensions - lets say 70. I am sure there are drawdown calculators which will tell them how much they need in ISA to last for 15 years. I think it will be far less than 500 000.

Snakey

I'm overpaying on my mortgage because I want to go part-time freelance at some point and I don't want to be stuck on the SVR if I can't meet the required income multiplier. Since this is not your situation, with interest rates so low you can probably get a better return by investing those overpayments (you have spare ISA capacity, so no extra tax) and repaying a lump sum in 20 years' time.

If your concern about the mortgage is a hike in interest rates, why are you only fixing for two years? Surely your logical worry is that with a soaring interest rate there won't be any good deals around in the future? Fix the thing for ten years and there's one risk that you can forget about until 2026.

I'm 43 and for the last 16 years have been sinking as much as I can into my pension. The rules have changed a thousand times but right now I get salary sacrifice with an employers NIC uplift, so it's been an easy choice between 58 in my hand or 113.8 in my pension. I assume you can do something similar, although since it's your company it's all coming from your pocket in the end I suppose.

If they move the retirement age again I might find myself up against the lifetime allowance and no way of avoiding it - as well as having to fund a larger gap - but the withdrawal of higher rate tax relief and/or salary sacrifice is expected within the next couple of years so I'm keen to make hay while the sun shines.

I also max out my ISA each year, although it's been sitting in cash because I might have needed it to buy a flat and is still in cash twenty months after completion due to job issues followed by laziness (which worked in my favour, the job issues were sorted out in April when the FTSE was at 7,100 - had I been more on the ball, I'd be sitting on a capital loss now). It's going into stocks and shares as soon as I pull my finger out/stop being twitchy about the market. This is the money that is going to fund the gap between 50, when I want to mostly retire, and 55/56/57/later - whatever the pension access rules are by then.

I will be surprised if the State pension is not means-tested by the time I get there, so I'm not factoring that in to my plans at all (although maintaining qualifying years will be part of my plan just in case).