Increase DC pension contribution vs overpay mortgage?

AllyMac

Long time reader, first time poster - thanks in advance to anyone taking the time to read or comment!
Not sure if I should have put this in pensions or mortgages!

I'd like to sense check my thinking on this please!

I am 41, with a DB (CARE) work pension. I also have a private pension set up - not AVC with company pension because scheme rules are AVC only paid out with main scheme retirement and my aim for the DC pension is to use it to retire a couple of years early before I take my work pension. I already have £50K in the DC pot. I'm a HRT payer so 40% relief on DC pension contributions - all good!

Now the mortgage! 100,000 over next 22 years - currently remortgaging and now just at 65% LTV so should get a good rate.
I also have £40K in an offset against that - which I don't want to change for various reasons. It's partly my "instant access" money, and partly my back up in case life goes pear shaped - so I want it immediately available and low risk.

Twist to my mortgage: in 5 years time I will receive enough money to pay it off. I have a divorce related legal charge on a property. So any savings that I make by overpaying my mortgage are only for that 5 year period not the life of the mortgage.

I'm now in a position to have £500 a month extra.
Do I:
- over pay the mortgage
- contribute to my DC pension

My thinking is that I should over pay my mortgage but into the offset account, so that I can get the money back if I need it.
I will lose out on 40% tax relief, and gain on interest savings.
Then after 5 years when I have the money coming to pay the mortgage off, I lift the £30K (5 years of £500 a month) from my offset account and stick it straight into my pension. If I'm over the annual limit of £40K with my work pension included, I think I can rely on rules of last 3 years allowance.
So I then get the 40% relief as well as having banked the interest saving.
I lose any potential growth in stock market, but it's not my only pension and that's not guaranteed anyway.
Because the overpayment sits in the offset, if the rules on 40% tax relief change I can transfer it immediately, first.

Sorry it's long but I was trying not to leave anything important out!
I don't have other debts, and my appetite for risk on this is quite low so I'm not wanting to ditch both ideas and get a BTL!

If anyone has got to the end and has a view, I'd be very grateful for your opinions

kidmugsy

If you're earning much more than the 40% threshold, I suppose your proposed gamble on being able to get more 40% relief by acting quickly in the future is pretty reasonable. But if a Chancellor brought in anti-forestalling rules along with an announced end to the 40% relief, you might be frustrated.

Otherwise, I see that you would feel happier with more cash in the offset than with more money tied up in the DC pension for 14 (or more) years. So be it.

AllyMac

Thanks for your reply. I hadn't thought about forestalling rules - I had assumed there'd be a notice period, so definitely something to consider!

Something I may have wrong... With the rule about using previous 3 years annual allowance, I was assuming that I could get the 40% tax relief on the full amount that I pay in - £40K. But actually, now you have me wondering - is it only against 40% have paid in the *current* year? I earn £50K so in any one current year I wouldn't pay tax at 40% on £40K.

Thrugelmir

What's the plan when you sell the property ? (asked rhetorically). You'll still need a home. Maybe a different interest environment then.
Tying capital up in your inaccessible pension has to be a consideration.

Nor should tax alone be the driver of investment decisions.

justme111

I read it as there are two properties - main residence and another one in which op has beneficial interest.
Your plan sounds very sensible to me. Just in case - from what age will you be able to access your dc pension?

greenglide

But actually, now you have me wondering - is it only against 40% have paid in the *current* year? I earn £50K so in any one current year I wouldn't pay tax at 40% on £40K.

Yes, it is only the 40% paid in the current year.

The carry forward from previous years only increases the amount you are allowed to contribute (the annual allowance) you must have earnings in the current year to cover all of this and you get tax relief against this.

AllyMac

Thanks for your replies.

57 for the DC pension, so it does mean locking money away for 16 years. I know that will pass all too quickly, but I think it's still quite a time for an irreversible decision.

Re property - you're right, 2 properties. I live in one now with a mortgage of 100K. I have a legal charge on my old marital home (I'm divorced) which has to be paid back to me in another 5 years time. I was very lucky to buy a flat in greater London some years ago and then sell to move to a house in the north, hence having equity in the house my ex husband currently lives in. That's a 1/3 of value share so I can't say exactly what it will be worth, but today it would be £120K so it should certainly pay off my current mortgage. I'm not waiting around for that though - the more I can get paid off the mortgage where I live now, the more I'll have in 5 years time when I'd definitely be talking to an IFA about options!

AllyMac

Greenglide, thank you for explaining that - it's pretty critical to my plan!

And it was only in posting this that I wondered. I'd just been reading about it on gov.uk and it wasn't clear to me from that - which is a criticism of my reading more than their writing, perhaps!

I'll have to do the maths on emptying the offset in annual or bi-annual chunks to get more tax relief. Another spreadsheet required ��

justme111

Curious - how much more would you need to contribute to pension to remove you from higher rate band?

AllyMac

I earn £60K so approx £17K in the 40% band. (quite approx: less because I have childcare vouchers on salary sacrifice and have just been offered to start £100 a month in a share save scheme also salary sacrifice)

I couldn't afford to put that amount into my DC pension currently - although I'd like to in my 50s when my child is grown and I'm going full pelt at saving for retirement!

justme111

Suppose you already contribute about £6000 to your NHS care scheme plus some money to dc one , some is in childcare vouchers so not that much left in 40%bracket..