Over pay pension or mortgage?

Wrongers

Hi there,


I'm looking for advice on what would be the best option for me. I am 48 this year, with one wage coming into the house.


I currently have a private pension that I pay £102 a month but I have been looking on some pension calculators and it looks like I will only be getting approx. £1500 a year if I retire at 67.


My mortgage stands at £62k with 19 years to go. I make over payments on my mortgage usually on a regular basis of approx. £60 a month.


My question is should I pay more to my pension or keep over paying the mortgage? I have at low LTV of 55% but I don't really live in a house that I could sell and then downsize. Ideally I would like to be mortgage free by the time I was 55ish.

greenglide

So your current mortgage will end at age 67 if run to term?

Personally I wouldnt have taken out a mortgage which ran until that age, but it is easy to say these things!

Are you contributing at the levels the BBC says this morning - http://www.bbc.co.uk/news/business-35696981 ?

Personally 15% is still low unless you are in a generous employer scheme.

You probably need to pay the mortgage off and build a decent fund before retirement is viable?

jamesd

Investment returns typically are significantly higher than mortgage interest costs. On top of that advantage you get the pension tax relief. The two effects mean that it is usually going to put a person in a substantially better financial position by putting money in a pension than by mortgage overpaying.

At age 55 there is the right to take out 25% of a pension pot as a tax free lump sum. If you really want to reduce your likely wealth you can use that opportunity then or at any later age before age 75 to pay off a lump sum from your mortgage.

Because of the difference between investment returns and mortgage interest rates the ideal pension term is as long as possible. If death is included the ideal term to maximise wealth during your lifetime is one that ends at death.

Many people are happy having so much money that they could pay off the mortgage whenever they want. Many people are not comfortable with that and will pay the price of reduced wealth to get rid of it. It's an individual decision. Personally, I see no reason at all to just pay off my interest only mortgage when I could at any time from age 55 repay it six times over. Only three times over until then.

Assuming that inflation runs at 2% the value of £62k in today's money will be £42k in 19 years or £54k in 7 years when you reach 55. That's ignoring the effect of normal repayment mortgage repayments.

Don't place much faith in typical pension calculators. They do daft things like assuming you will blow half of your potential inflation-linked income by buying an inflation-linked annuity instead of deferring your state pension and using drawdown. They also normally make unduly pessimistic growth projections. Mortgage overpayment calculators tend to give amounts of interest saved but ignore the alternative uses for the money.

dunstonh

currently have a private pension that I pay £102 a month but I have been looking on some pension calculators and it looks like I will only be getting approx. £1500 a year if I retire at 67.

You are only paying £102pm at age 48. That is low. So, your reference to "only" reflects the amount you are paying. If you pay in peanuts, you get peanuts back.

Wrongers

Thanks for the reply's.


When I started my pension years ago I would have been advised on what to pay in order to get a liveable income at retirement. Therefore I have paid the increments of 5% yearly believing this to be correct. Now having taken stock of my financial situation I see that I need to make some changes.

kidmugsy

Wrongers wrote: »

I am 48 this year, with one wage coming into the house.

I currently have a private pension that I pay £102 a month but I have been looking on some pension calculators and it looks like I will only be getting approx. £1500 a year if I retire at 67.


... I make over payments on my mortgage usually on a regular basis of approx. £60 a month.

When you stop work at 67, suppose your state pension will be £8k p.a. and your personal allowance vs income tax £11k p.a. i.e. the same figures, presumably index-linked, as for 16/17. That means that you'll be able to draw £3k p.a. from a pension tax-free (in addition to the tax-free lump sum). So you really want to at least double your pension contribution.

If, in addition, you want be mortgage-free at 55, you're going to have to save at a much higher rate. Any chance of a second income appearing in the household soon?

Wrongers

Unfortunately the second income recently left, hence why I'm looking hard at finances etc. I am considering starting my own business that I can do evenings and weekends that will have very little outlay to start up.

atush

Indeed. If only one is working, and there are 2 of you, the other needs to go back to work.

That would mean you could pay into 2 pensions, and pay off the mtg early. And dare I say, maybe even retire before 67

Wrongers

There is only me, my partner who was contributing to the household left a few months ago so its down to me to provide the extra income needed.

kidmugsy

I can see two arguments for overpaying the mortgage now, and piling money into the pension later on rather than now.

(i) There's a chance that, in the Budget, the Chancellor will improve the tax relief on pension contributions for basic rate taxpayers for 17/18 onwards. If that happens there's a strong case for decreasing your 15/16 and 16/17 contributions to a minimum, with a view to increasing them later.

(ii) The price of putting money into a pension is its inflexibility. You can't get the money out until you are 55. So if you want the possibility of access to the money (e.g. because your mortgage is "flexible") you might prefer having it in the mortgage until you are 55, and then pile money into the pension. You never know: stock market performance might mean that you gain by that too. No one knows.

Mind you, unless your mortgage is unusually expensive, it might be even better to pile money into a regular saver that pays 5% or 6% p.a. while you wait to see what happens to pension tax relief. So
(a) What is the present interest rate on your mortgage?
(b) Is your mortgage flexible i.e. will they allow you to borrow back any repayments you've made?

Pinner_Ram

Pay off the mortgage as fast as you can without incurring charges for doing so. It's a great feeling to be mortgage free - no-one can take your house off you!


Then pile future spare cash into pensions and isas.