Salary Sacrifice V Opaying Mortgage

cambs1999

Hi,

My husbands work are in the process of changing to salary sacrifice with his employee uplifting his contribution by their full NI savings which they have advised is 13.8%.

We currently overpay our mortgage by around £500, so pay total each month of £1000, our current rate for approx another year is 1.74% then may revert back to 3.69%.
We have an interest only mortgage that doesn't need paying until my husband is 65 (in 20 years).

Therefore it seems that it may be a very good idea to pay interest only on the mortgage and pay the other £900 we normally pay plus his current 6% contributions into his pension. Therefore paying £1060pm into his pension - am I right in thinking that the company uplifting on NI alone being added to his pension would be £146pm? Or have I got this wrong? If this is correct plus the savings on his tax/Nino contributions make this seem like it's an opportunity that we can't refuse! I'm aware that we can't let his earnings go below national living wage.

However, I'm used to overpaying the mortgage and whilst it makes great financial sense it still leaves me feeling a bit uneasy not reducing my mortgage. We have up to 20 years left on the mortgage - he currently has around £100,000 in this pension (couple of other smaller pensions) so would the compound interest over 20 years be enough to help generate a 25% lump sum to clear the mortgage - we owe around £97,000.

As we would still be better off by his tax/Nino savings I suppose this could be used to continue to pay something towards the capital on the mortgage.

Anyone currently do something similar?

Thanks

edinburgher

I make additional salary sacrifice payments into my pension instead of overpaying the mortgage and I don't even get any uplift - that setup sounds like a no brainer to me

A couple of things to consider - an additional £900/month is a very significant contribution:

1) Have you looked at the likelihood of him hitting the lifetime pension allowance?
2) Whether the size of those payments will take him down to lower than minimum wage (you can only sal sac to minimum wage)? By my calculations, he makes £32k or so, shouldn't be an issue

kidmugsy

I am inclined to think that's it's best to seize an opportunity such as salary sacrifice while it's still available. Some day a government will presumably put a stop to it.

In a year's time you might reasonably remortgage anyway; be sure to keep some capital back in case it's useful then. You might be wise to consider remortgaging for 25 or 30 years, so that State Retirement Pension will be available to help with the last few years of clearing it off. There would be nothing to stop you clearing it earlier if the chance arose.


P.S. "with his employee uplifting his contribution by their full NI savings": you mean 'employer' I'd think?

webnibbler

A generous salary sacrifice scheme that offers the full 13.8% employer saving is definitely worth taking advantage of. My employer offers this and so I sacrifice over 40% of my salary to take full advantage because it beats ISA saving hands down.

Often the best answer to these type of questions is to do a bit of both, if you can - ie. increase the salary sacrifice and also continue to overpay the mortgage.

Triumph13

A quick calc might give you an idea of the numbers involved.
If your husband is a basic rate taxpayer, then the £900 of post-tax income you are thinking of diverting from the mortgage to the pension would be £1,300 of pre-tax and pre NI income being sacrificed which the Employer's NI would bump up to £1,500. Ignore the fact that investment growth in the pension is likely to be higher than the interest on the mortgage and assume both just match RPI. When he comes to take that £1,500 out it becomes £1125 taxed at 20% which is £900 so he gets his money back, but he also gets a £375 tax free lump sum.

jamesd

As Triumph has illustrated by using the pension that £900 can become £900 plus £375 off the mortgage once your husband reaches 55. That makes the pension use a far better deal than making avoidable mortgage payments now.

The company may be further sweetening the deal by adding some of their own saved NI.

While I mentioned age 55 a better plan would be something like paying off 20% of the mortgage each year starting at sixty. This is because the investments inside the pension are likely on average to grow faster than the mortgage, so leaving the money invested for longer is a better plan. The 20% a year is because investments do have down years and it would be unfortunate if there was a big one at 65 when the mortgage had to be repaid. Doing it gradually with an earlier start protects against this risk.

I could repay my own interest only mortgage off at any time but I don't do it because I know that it would make me worse off long term. I stick with the make me better off approach of leaving the money invested.

jamesd

If your mortgage also has an offset feature there's something else you can do that is a good deal: get 0% for spending credit cards and put much as possible of your normal day to day spending on the cards. Pay the amount spent into the mortgage offset account and ensure that it always matches. When the deal comes to its end you repay the card from the offset account. In the meantime you will have made yourselves a gain of your mortgage interest rate on the money, without having taken any investment risk.

These days credit cards normally tell you the amount at each promotional rate and when the deals end on every statement so it's easy to keep track.

If you like you could keep the saved mortgage interest in the offset account as well, building up a nice reserve over time.

cambs1999

Thanks for all your replies. I think I'm going to start another thread as what I think I really meant to ask was actually whether I should pay interest only on my mortgage and pay everything into my husbands pension.

Mikey1985

It's a good idea! Interests rates are low currently and your pension investment is likely to increase faster! Go for it, unless you'll hit the life time limit.

I already max out pension with 30% contributions so I could hit the life time limit. There I will just have to invest the rest on a Shares ISA but I won't get the salary sacrifice benefit.

I guess your risk is, pension value could fall due to poor investments, lack of access to capital should you need it and mortgage interests could rise above your pension rates.

Mikey1985

P.s. When you get to retire, your cash free lump some will more than pay your mortgage capital (probably) and it will have contributed from the tax you would have paid to HMRC!