Pension vs Mortgage - am I right?

dunstonh

BennyBrownBoy wrote: »

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

You mentioned you were a higher rate taxpayer. So, assuming the whole amount qualifies under higher rate tax, you get 40% relief. To allow a like for like comparison with the mortgage over-payment, you have to use the net contribution figure on the pension. That is net of 40% relief. A gross contribution of £1667 will give you (as close as) a net contribution of £1000.

BennyBrownBoy

dunstonh wrote: »

You mentioned you were a higher rate taxpayer. So, assuming the whole amount qualifies under higher rate tax, you get 40% relief. To allow a like for like comparison with the mortgage over-payment, you have to use the net contribution figure on the pension. That is net of 40% relief. A gross contribution of £1667 will give you (as close as) a net contribution of £1000.

Thanks dunstonh - I understand now. So if I have this right - if I instruct my employer to sacrifice a further £1667 per month from my gross salary, all other things being equal, that would reduce my net salary by £1000 per month?

Triumph13

If you put the full £1,000 in and have HRT to cover it then you most definitely do have to worry about the LTA. You said your scheme is salary sacrifice so that's 42% tax and NI saved (plus possibly some of the employer's NI if they share it). Your £12k pa of after tax income therefore turns into £20,690 of pension contribution. 6 years at that rate with 3% growth would put more than £50k over the LTA and as you are definitely looking at a big risk of being a HRT payer in retirement that would be painful.


It's a seriously complicated decision as to what is best for you to do and it all comes down to where you think the higher rate tax band will be in a few years time. If it stayed where it is now, then your current level of pension contribution, plus your DB and State pensions are likely to use up all of your basic rate band. All my calculations below are on this basis.
You say that your scheme is salary sacrifice so the final 'profit' on any contributions below LTA will be a smidge over 20% (£58 of net pay forgone becomes £100 in the pension which becomes £25 of lump sum and £45 drawings (£75 less 40% tax). If you are over LTA that £58 turns into only £45 by the time you withdraw it so that is to be avoided! You need to sit down with a spreadsheet and work out how close to the LTA you feel you want to risk going.
Before you put anything extra into your DC funds though, you should be putting enough into a DC fund in your wife's name to cover her PA for the gap between retirement and drawing her DB. This gives you a 25% profit as £80 of net contribution turns into £100 taken out tax free.
She has no LTA issues and will be a basic rate payer in retirement so any extra you put in her name over what's needed for PA gets a 6.25% profit (£80 net in becomes £85 out ie £25 tax free and £75 taxed at 20%). That is better than a poke in the eye, but may not be enough to persuade Mrs BB not to repay the mortgage.


A quick calculation suggests that of your 'spare' £1,000 a month you should divert about a third to a DC for Mrs BB to give a fund which, after the 25% lump sum, would cover 2 years of PA. Tax saved roughly £6k
About half of it can probably be put into your salary sacrifice and just sneak in under the LTA. Tax saved roughly £7.5k.
The remaining sixth (£2k a year net) could be put in a pension for her to get another £750 of tax benefit, but may be better deployed by paying it off the mortgage as a compromise to keep Mrs BB happy!

AnotherJoe

ischofie1 wrote: »

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.

Absolutely !!! You see this all the time in the MFWannabee forum, where people are so [STRIKE]focussed[/STRIKE] blinkered on getting rid of mortgages that are at trivial interest rates they forgo the massive tax advantages of pension saving (especially for HR payers).

Its been drummed into so many for so long that they lose sight of the goal, to maximise their wealth, rather than the sub goal of minimising mortgage. OP's wife is like this it seems.

jimi_man

AnotherJoe wrote: »

Absolutely !!! You see this all the time in the MFWannabee forum, where people are so [STRIKE]focussed[/STRIKE] blinkered on getting rid of mortgages that are at trivial interest rates they forgo the massive tax advantages of pension saving (especially for HR payers).

Its been drummed into so many for so long that they lose sight of the goal, to maximise their wealth, rather than the sub goal of minimising mortgage. OP's wife is like this it seems.

I briefly looked at the MFW threads for the first time over Christmas and the first one I looked at showed the monthly outgoings for the OP of nearly £2300 a month. She paid an extra £778 on the mortgage but only £22 on the pension. Each to their own, but I'd probably be tempted to reverse those amounts.

Also the threads I looked at, everyone seemed to be pretty much living like a pauper on about £3 a week, in an attempt to clear the mortgage. I guess there must be something special about being mortgage free.

Having said that, whilst I was thinking of overpaying (slightly), I hadn't considered paying the extra into a pension and then using the 25% lump sum to pay it off. I'm 55 in 3 and half years, so that would work quite well for me.

RuleTheWorld

I've never made a mortgage overpayment despite being on the property ladder for 10+ years but I am considering to start. It's clearly an achievement kind of decision as it is not an investment decision

bowlhead99

RuleTheWorld wrote: »

I've never made a mortgage overpayment despite being on the property ladder for 10+ years but I am considering to start. It's clearly an achievement kind of decision as it is not an investment decision

Yes, clearly a heart-rather-than-head decision, given that mortgage interest rates are now lower than they have ever been during the 10+years during which you've been on the property ladder, so investments-wise it is perhaps the worst time to start making overpayments.

At the same time you're now 10yr+ closer to being able to access your pension investments than you were when you first went on the property ladder, and your salary is probably higher giving you more tax to save via pension contributions.

Still, as alluded to by others, some people prefer the psychological trick of having zero mortgage, to having savings and investments and pensions in excess of their mortgage and having greater total net wealth.

RuleTheWorld

like I say I've never done it before but considering a token gesture of £40-£50 extra a month to feel a warm feeling inside or something haha

i have been following a model of excess cash always goes to pension so far and like others on this thread struggle to understand the desire to pay down the mortgage overly quick*

*as long as someone has plans to pay it down while still working

BennyBrownBoy

Triumph13 wrote: »

If you put the full £1,000 in and have HRT to cover it then you most definitely do have to worry about the LTA. You said your scheme is salary sacrifice so that's 42% tax and NI saved (plus possibly some of the employer's NI if they share it). Your £12k pa of after tax income therefore turns into £20,690 of pension contribution. 6 years at that rate with 3% growth would put more than £50k over the LTA and as you are definitely looking at a big risk of being a HRT payer in retirement that would be painful.


It's a seriously complicated decision as to what is best for you to do and it all comes down to where you think the higher rate tax band will be in a few years time. If it stayed where it is now, then your current level of pension contribution, plus your DB and State pensions are likely to use up all of your basic rate band. All my calculations below are on this basis.
You say that your scheme is salary sacrifice so the final 'profit' on any contributions below LTA will be a smidge over 20% (£58 of net pay forgone becomes £100 in the pension which becomes £25 of lump sum and £45 drawings (£75 less 40% tax). If you are over LTA that £58 turns into only £45 by the time you withdraw it so that is to be avoided! You need to sit down with a spreadsheet and work out how close to the LTA you feel you want to risk going.
Before you put anything extra into your DC funds though, you should be putting enough into a DC fund in your wife's name to cover her PA for the gap between retirement and drawing her DB. This gives you a 25% profit as £80 of net contribution turns into £100 taken out tax free.
She has no LTA issues and will be a basic rate payer in retirement so any extra you put in her name over what's needed for PA gets a 6.25% profit (£80 net in becomes £85 out ie £25 tax free and £75 taxed at 20%). That is better than a poke in the eye, but may not be enough to persuade Mrs BB not to repay the mortgage.


A quick calculation suggests that of your 'spare' £1,000 a month you should divert about a third to a DC for Mrs BB to give a fund which, after the 25% lump sum, would cover 2 years of PA. Tax saved roughly £6k
About half of it can probably be put into your salary sacrifice and just sneak in under the LTA. Tax saved roughly £7.5k.
The remaining sixth (£2k a year net) could be put in a pension for her to get another £750 of tax benefit, but may be better deployed by paying it off the mortgage as a compromise to keep Mrs BB happy!

Thanks Triumph - I really hadn't considered the LTA. Is 20x the DB annual amount a safe estimate of its value for LTA purposes - is that how it would be calculated?

I mentioned that my DB schemes will pay £38K/annum from 60 - I get revised statements from the provider each year and have noticed that over approx 3 years the projected value at 60 has declined by about £1200/annum. I presume this is because of current/recent low inflation affecting the yearly revaluation of my pensions as I get closer to 60. Does this sound about right? I suppose if that trend continues (I hope not too much) this would diminish the LTA risk?

Hadn't really thought about a DC pension for my wife - why would this be more beneficial than using my HRT relief for my own DC scheme (other than the potential LTA risk)?

Thanks in advance for your help.

OldBeanz

RuleTheWorld wrote: »

like I say I've never done it before but considering a token gesture of £40-£50 extra a month to feel a warm feeling inside or something haha

i have been following a model of excess cash always goes to pension so far and like others on this thread struggle to understand the desire to pay down the mortgage overly quick*

*as long as someone has plans to pay it down while still working

Retired but my mortgage is fully flexible and effectively 0.62% pa. Mortgage free wannabee, you're having a giraffe.