Mortgage V AVC - which is best

mr_ottermole

All

I wonder if anybody knows whether it is better to put all my spare cash into overpaying my mortgage or to put it into an AVC?

brief backgroud - my mortgage has 22 years to run but I am already overpaying and plan to be shut of it before I reach 60. The value of the house is increasing and with luck when I renegotiate my mortgage I will be in the 60% bracket.

I am currently in the civil service ALPHA pension and am looking at buying CSAVC's - the charge is 0.60%.

Sooooo - is it better to feed spare cash into the mortgage or the AVC or even spread it between the two?

I am aged 42 and only have about £50 - £100 spare each month.

Advice welcome!!

Thanks:T

RickyB2000

I would say it depends on your goals and risk tolerance. If you are looking only at maximum possible return after age 55 then pension should win. Devil is the detail of course - what rate your mortgage is, what rate of tax you pay now and likely to do in retirement, will you hit pension lifetime allowance, do you have emergency savings, can you accept the possible drop in value in bad years etc.

PensionTech

Pension, for me. You will get pretty much the lowest rate available on your mortgage and there is more money to be made on the interest (and tax relief) in pension savings, provided that you're happy locking the money up until 55. I don't see a problem with doing it through the AVCs though, unlike the previous poster - they are defined contribution, so you can separate them from your main pension should you want to draw on them between age 55 and Normal Retirement Age. No actuarial reduction will apply - wrong type of pension. You'll also probably benefit from salary sacrifice, and the management charge is almost certainly lower than you'll get elsewhere.

RickyB2000

PensionTech is quite right, I have removed the offended suggestion!

mr_ottermole

I don't think I will ever hit lifetime allowance!! Current salary 25000 no pay rise in last seven years nor likely to see one!!

However having looked at alpha I'm paying 5.45% of salary but only building up 2.32% pension can you tell me why this discrepancy? I'm sure there is a good reason for difference!!! Thanks all for replies!!

RickyB2000

Someone else will be able to confirm, but you pay a one off contribution of 5.45% and in return you get 2.32% every year for life once you hit the scheme retirement age.

On the face of it, that looks pretty generous......

mr_ottermole

Thanks Ricky it's 5.45 a month sorry if this wasn't clear! I pay 1700 a year for 540 a year pension. Not sure if thats good but don't understand the difference between the two amounts?

RickyB2000

You pay in £1700 once. In return you get £540 paid back every year if you retire at scheme retirement age. So it would take just over 3 years for the pension to return what you paid in. The next year you pay in another one off £1700 and get £540 paid back every year (so total is now £1080 a year on going).

It looks pretty good to me!

RickyB2000

Let me try adding a bit of colour with a basic explanation of the principle behind it. You turn up at the pension offices with a suitcase of £1700 in £50 notes. You ask the pension to take this money and in exchange offer you an income for life from age 67. Oh, and spouse and dependants income if you die. Having passed anti-laundering checks the scheme needs to work out how much it should pay you, so your £1700 won't run out before all those who could receive some stop (no one wants to give away money after all). So they run algorithms on investment growth rates, how long they think they will need to keep paying etc and come to a number that in all probability will mean no one 'loses out'. This is what they promise to pay you every year from 67.