Pension v Mortgage

SR71

Hello all, I am 44 and have a pension pot of almost £50000. I now need to look into raising this.

I have 13 years left on my mortgage and the balance stands at £11000. I am paying that off at the rate of £600 per month overpaying around £500 per month.

My question is, should I reduce my mortgage payments to the minimum payment and pay into my pension?

What would work best for me? I calculate I can pay my mortgage off in under 2 years if I use some savings also.

bowlhead99

We have no idea of your mortgage rate, level of income or tax rate. All would have been relevant.

Still, on the face of it, it doesn't sound like you will have any problem whatsoever paying off your mortgage over its normal term at £100ish a month, it's not exactly a heavy millstone around your neck. So no particular desperate reason to pay it off unless it's a really high rate. At £13k it will be well under 50% loan to value so no reason for its interest rate to be more than 2-3% ; if it is, try to change your deal.

If you have a debt at 2-3% that you're considering paying off at £500 a month it's worth considering what interest you'd earn on a savings account for £500 a month instead. Personally I put £500 a month into Nationwide's regular saver account which pays 5%, so it would be ridiculous for me to pay off a debt at 2-3% instead of earning the 5% instead.

So basically there's no point in paying off the mortgage when you could instead put the money in a savings account and be better off even after tax if you pay tax on some of the interest.

So the choice is not mortgage vs pension, it's just straightforward high-interest savings versus pension.

Pension comes with the benefit of tax relief (which is either useful, or very useful, depending on your tax rate) and also likely better long term growth than savings (over a long enough time). The negative is you have to lock the money away until age 55/56+ so it won't function as an emergency fund like a big pile of cash would, but at least it's not like the lock-in is a long long 20-30 years.

So it depends on personal circumstances, but pension would win for a lot of people. If you're unsure, maybe do 50% pension and 50% high interest regular saver account.

ischofie1

I'd also add to what's been said above:-
If the pension payment is available via salary sac then this would be another factor in going the pension route.

justme111

What bowlhead said. Math wise it is better to put money into savings , S&s isa or pension . Paying mortgage quicker can be preferable only in some very peculiar circumstances :for example if you want to a career change so while your new venture takes off you do not have pressure of mortgage payments.

atush

Basically, you should not overpay your mtg unless you are paying a very high interest rate(mine is just over 1%).

So stop overpaying and put 400 into pension and 100 into accessible savings (could be used for mtg later if needed) unless you already have a large amt of savings.

If you have a decent amount of savings in cash, then put the extra 100 into S&S isas. Still could be used for mtg if need be

elantan

I agree with the others, but having just saw my pension drop below £10k I am going to carry on slushing some money away in there, whilst still hammering the pension... best of both worlds really.

I should be leaving the mortgage to just work away, but I do like the security of no one being able take my home off me should I not have the money to pay it,

xylophone

You do not say whether you are a basic or higher rate tax payer but remember that the Personal Savings Allowance could mean up to £1000 in tax free interest.

Assuming that your mortgage rate is lower than 5% (and with that LTV if not why not), you might look at opening a First Direct current account and a Flexdirect account with Nationwide and taking advantage of the regular savers offered. You could save £300 a month with FD (6%) and £200 a month with Nationwide (5%).

At the end of a year you would have £6000 plus the interest and could pay off over half the mortgage in a lump sum - one more year at the same rates ( if available) and you'd be mortgage free and able to contribute to your pension what you had been putting into the regular savers.

Have you checked on your new state pension situation?

https://www.gov.uk/government/publications/application-for-a-state-pension-statement