Pension vs Mortgage - am I right?

BennyBrownBoy

Hi,

I suspect I already know the answer to this but would welcome the thoughts of the experts on here...

I have an outstanding mortgage balance of £32K and am currently paying £1500/month (overpayment of £1000/month). The interest rate is a very low 1.49%. My mortgage will therefore be paid off in approx. 21 months - which is my wife's psychological goal.

I am 52 years 6 months old and want to retire at 58. I have DB pensions totalling approx £38K/annum at 60 unreduced. My wife also has DB scheme of around £19K at the same age. We are lucky to be in what I think is a strong position for our needs.

I'd like to fund the 2 year gap from 58-60 potentially using savings and drawdown from a DC scheme I am now in at work. I have around £63K in that pot now and contribute approx £15K/year through salary sacrifice. I am a higher rate tax payer and am likely to be until I retire.

I think it would be better to reduce the mortgage payment to £500/month (minimum payment) and put an extra £1000/month into the DC scheme. This will delay our mortgage being paid for 64 months instead of 21 but I assume would put me in a better financial position overall by having a larger DC pot and access to a larger tax free sum from 55 onwards.

Am I on the right track with my thinking and if I am, can anyone work out a figure of "by how much better off I would be" at 58, so I can sell the idea to my wife?

Thanks in advance for your comments.

dunstonh

I think it would be better to reduce the mortgage payment to £500/month (minimum payment) and put an extra £1000/month into the DC scheme.

It would seem logical given the higher rate relief and the low interest rate on the mortgage (even bog standard default funds have exceeded 5% p.a. for the last 15 years.

Effectively you paying £1000 into the mortgage to reduce a debt at 1.49%. That is £14.90 a year in interest saved a year.
By paying £1000 into the pension (net of tax to equal mortgage) you get £1667 going into the pension. An immediate gain of £667.

It would take 44 years for that £1000 paid off the mortgage for the interest saved to match the immediate gain of £667 on the pension. However, it would never catch up as £1667 in the pension at 3% p.a. is £50.01 a year.

OldBeanz

Don't forget that you want to do something similar for your wife. A tax allowance of £12.5k which is due to happen by 2020 along with 25% tax free means she can have an income for the two years of 2x £16.6k and not pay any tax.

ischofie1

This is exactly what I did.
I was overpaying the mortgage but when I did the maths it didn't make sense so I flipped it to the pension.
The availability of salary sac is the icing on the cake.
I think it's often the psychology of paying off the mortgage off early that gets in the was of rational thinking.

michaels

With that much DB pension aren't you in danger of hitting the lifetime limit with your DC contributions?

atush

BennyBrownBoy wrote: »

Hi,

I suspect I already know the answer to this but would welcome the thoughts of the experts on here...

I have an outstanding mortgage balance of £32K and am currently paying £1500/month (overpayment of £1000/month). The interest rate is a very low 1.49%. My mortgage will therefore be paid off in approx. 21 months - which is my wife's psychological goal.

I am 52 years 6 months old and want to retire at 58. I have DB pensions totalling approx £38K/annum at 60 unreduced. My wife also has DB scheme of around £19K at the same age. We are lucky to be in what I think is a strong position for our needs.

I'd like to fund the 2 year gap from 58-60 potentially using savings and drawdown from a DC scheme I am now in at work. I have around £63K in that pot now and contribute approx £15K/year through salary sacrifice. I am a higher rate tax payer and am likely to be until I retire.

I think it would be better to reduce the mortgage payment to £500/month (minimum payment) and put an extra £1000/month into the DC scheme. This will delay our mortgage being paid for 64 months instead of 21 but I assume would put me in a better financial position overall by having a larger DC pot and access to a larger tax free sum from 55 onwards.

Am I on the right track with my thinking and if I am, can anyone work out a figure of "by how much better off I would be" at 58, so I can sell the idea to my wife?

Thanks in advance for your comments.

for me it is a no brainer. Cut back on mtg overpayments and step up pension contributions.

If you cut out overpayments completely, or just reduce them substantially I will leave to you and your wife's own negotiations.

I understand them in a way, as we overpay some when we shouldnt. We cut them back substantially, but not completely due to that feeling factor- in our place boosted by the fact that our mtg was due to finish after we wanted to retire (but not SPA).

So dont let your mtg tail wag your financial Dog. Take a more balanced, slightly less emotional approach.

atush

michaels wrote: »

With that much DB pension aren't you in danger of hitting the lifetime limit with your DC contributions?

Good point

jamesd

michaels wrote: »

With that much DB pension aren't you in danger of hitting the lifetime limit with your DC contributions?

Seems unlikely when twenty times the DB is 760k, DC is now 63k and planned contributions are 27k a year. Ignoring growth that is 6.5 years to get to the LTA level. Plan is 5.5 and the LTA liability can be reduced by taking some benefits in 2.5 years at age 55. With the LTA planned to increase with CPI inflation from 2018-19 tax year that will provide extra margin. Taking pension before NRA to get actuarial reduction and/or adjusting lump sum could provide more margin.


DB might increase faster than CPI to reduce margin. Even so, if it's affordable paying in more than just 27k early on looks like a good move.

jamesd

The mortgage delay wouldn't be 64 months vs 21. In just 30 months you hit 55 and can take 25% tax free lump sum. 63 + 2.5*27 = 130.5k in the pension pots. 25% of that is 32.6k so the mortgage can be cleared then. But after getting the benefit of pension tax relief and salary sacrifice NI savings on the money. Effectively getting tax relief on your mortgage capital pay off is a good deal.

Too slow? Then get some nice 0% for spending credit card deals, put all possible normal spending on them, use the unspent money for mortgage overpaying, then repay the cards from the pension lump sum.

Sometimes the kind people in financial services and HMRC let you both have your cake and eat it. This is one of those times. It would be a shame not to accept their generosity.

BennyBrownBoy

dunstonh wrote: »

It would seem logical given the higher rate relief and the low interest rate on the mortgage (even bog standard default funds have exceeded 5% p.a. for the last 15 years.

Effectively you paying £1000 into the mortgage to reduce a debt at 1.49%. That is £14.90 a year in interest saved a year.
By paying £1000 into the pension (net of tax to equal mortgage) you get £1667 going into the pension. An immediate gain of £667.

It would take 44 years for that £1000 paid off the mortgage for the interest saved to match the immediate gain of £667 on the pension. However, it would never catch up as £1667 in the pension at 3% p.a. is £50.01 a year.

Thanks dunstonh for the quick reply - forgive my ignorance but how did you calculate the £1667?

BennyBrownBoy

Thanks everyone for your quick responses - some real food for thought - hadn't considered the LTA but from what has been said it shouldn't be a problem.