Mortgage v Pension

QueenJessQueenJess Forumite
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I bought my first house a year and a half ago and have already started overpaying as I hate being in debt. To be mortgage free is definitely a nice dream.

What does everyone do to balance paying down the mortgage versus paying into a pension? I am not suggesting anyone should not pay into a pension to pay down their mortgage - I am paying into my workplace pension at the max % my employer matches up to, but am not sure it will be quite enough for retirement and certainly not for early retirement (another dream!). In this case are people paying off the mortgage and then saving for early retirement or spending longer paying off the mortgage and saving for early retirement at the same time?

As I hate being in debt, my gut feel is that I would prefer to offload the debt whilst interest rates are low and then save for early retirement, but I have never had no savings (except for an emergency fund) before and it always makes me nervous as I am pretty risk adverse. If only I had a crystal ball!

Maybe it depends on how long it will take to offload the mortgage? I am 35 now and I could probably pay it off within another 8 years although the uncertainty is large since I may have another child, go part time etc etc..

A casual conversation with a financial advisor seemed to suggest I should pay down the mortgage first, but I got the impression it is all down to what you are comfortable with as an individual and clearly I am a bit torn! Hence just wondering what other folks are doing.
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  • edinburgheredinburgher Forumite
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    I am very surprised that a financial advisor suggested paying off your mortgage 1st, as you would be in your mid 40s before you focused on your pension and in your own words 'I am not sure it will be quite enough for retirement {your pension}', although they were probably just playing to your sense of risk aversion. You've also mentioned early retirement, probably not going to happen if you reach 43 and you don't have enough for even conventional retirement?

    Perhaps atypical of MFW, but Mrs E and I pay 30% of our salaries into pensions (6% of this is paid by our employers). We do this because we have access to salary sacrifice schemes, saving money on tax, NI and reduced student loan repayments.

    Having a paid off house in retirement would be nice, but we can't eat a house and a steady income stream from investments will be vital. We do make small OPs, but have an intentionally long mortgage so as to maximise investments in stocks and shares will maintaining a pleasant lifestyle with our young daughter.

    I find your argument re. mortgages to be counter intuitive - if the rate for borrowing money is low and I know that I'll be borrowing at this rate for 8-10 years regardless - I'd be willing to bet that my investments will outperform that.
  • QueenJessQueenJess Forumite
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    edinburgher - How did you figure out 30% was the right number for you? Did you use an online calculator (I find them very variable as the underlying assumptions are so different - part of the fun of predicting the future I guess!) or did you take professional financial advice?

    I remember thinking at the time I would ignore their comment as investing would be better to do now than later if I only have a short time to retirement. Not sure if it was a throwaway comment as I actually hired them not for that, but to get advice on where to invest a bit of cash I got from a will (I decided to split it between mortgage OP and investment at the time as I wanted to get the mortgage down a bit as we had stretched ourselves a bit and then it meant I was 60% LTV when my fixed deal came to an end and so I have great deals now!)

    Now thinking of the days ahead..
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  • janey_jjaney_j Forumite
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    Hi
    This is a very difficult dilemma, perhaps the best way is to look at the issue from lots of different angles, then find a compromise that you are happy with.

    I worry about security too, my job could easily go and i don't want to be in the situation where my fixed rate mortgage deal ends, I cannot remortgage (due to affordability rules) and rates go sky high. Also I do need access to emergency money.

    From a financial point of view there are good reasons to pay into a pension first and investments, especially if you have a good mortgage deal.

    My solution is doing both, still paying into my works pension and a private pension, but OP my mortgage to a point where I feel more comfortable, in an offset mortgage with YBS (so still have access).

    Hope that's a help
  • Hell would freeze before I put money into a pension. The tax benefit for me doesn't outweigh the lack of control I would have. I want to be able to move my money around in response to government changes.

    For the mainstream they seem to work well though. I focused on clearling my mortgage first, which we did in our early 30s.

    This then leaves us plenty of time to invest a substantial part of our income.

    Good luck with whatever you decide
  • KittenkirstKittenkirst Forumite
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    Hi, I have no formal advice but am someone who is quite risk averse too so thought I would share our general plans.

    I am 33 and have just got my mortgage so 24.5 years on the term.

    My focus is paying 4% of my salary into pension currently, employer doubles this so 8% goes in a month.

    I then am building separate savings pots for daily life- two regular savers and an instant access account for emergency fund. I have opened a lifetime isa-interest rate is low as only one on the market so stashing a nominal £10 a month in to start until rates increase.

    We then overpay our mortgage and focusing on trying to kill the term as much as possible with a view that as mortgage payments reduce, overpayments will naturally be easier and we can divert some of those funds into other investments for retirement.

    We both have sharesave schemes with our workplace to build savings pots up and hopefully make a good return. I also have a sip scheme where my employer gives one share for every two I buy.

    Gf and I keep our savings separate, but are very much a partnership :)

    I've tried to spread out my plans over a few platforms to give myself some comfort and also because like Moneyfacts I don't like the idea of having minimal Control over my retirement pot.

    N.B neither the gf or I want children so hoping to be able to work full time until retirement (health permitting)
    First home- Oct’16 until June’21: £170.995- Overpayments made £13,784 (25% extra!).
    New forever home- Sep’21 £309,449 @ 2.05%. Plan to clear it before 30 years!!!!!!
  • QueenJessQueenJess Forumite
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    Thanks all. I have been thinking about this some more.. I am currently paying into my employer pension scheme at the max % that they contribute to (it is quite generous, so I put in 6% and they put in 12%). I can put in more but they won't contribute anything to that.

    Re-running the figures as I was a bit too pessimistic before re: the economy, I will be ok for retirement, but hardly well off and so I would like to save more in my own S&S ISA as well to be more comfortable (again as some of you have said, it gives me flexibility to do what I want with the money, plus as my employer wouldn't contribute more the only potential difference is tax now). As my interest rate on my mortgage is v low (1.14%) and fixed until August 2019, as long as I think I can beat this in my S&S ISA in the short term (I would hope that is the case and seems to be based on my current investment to date), then I think I should do this as I can overpay the mortgage as much as I want come August 2019 if the interest rates suddenly rose significantly or got to a point where my S&S won't beat the mortgage.

    I don't like having the debt though so it feels a bit weird, but this way I can change my mind and put it back into the mortgage if needed for some reason and it can act as an emergency fund as well for all the things I like to worry about! I may put in a really small overpayment to the mortgage just as a token gesture to make myself feel better, although logically I think I would be better off all in a S&S ISA (I can't reach the ISA limit in a year for savings).

    It is so tricky to make all these pension decisions as it is a way away and I really have no idea what I may do at this point in my life. Everything is changing at the moment after having my first child in Feb so no idea what I may end up doing (although I will definitely be going back to work full time from Jan and will see how it goes). Ironically this is also why I am thinking more carefully about planning for the future now I have a dependant.
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  • lulabelle1lulabelle1 Forumite
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    Hi, just had a quick read through and it seems to me that you've made a very well balanced decision.

    As much as I'm all for pension contributions, I think it's good to spread the investments around as you never know whats round the corner. If life took a bad turn, a big fat pension fund that i can't access for 10/15/20 years wouldn't help me feed my children in the short term - so I think it's wise to also invest into a S&S ISA, have emergency cash funds and also chip away away at the mortgage too.

    I also think it's important to enjoy life whilst you can and make the most of the children whilst they're young too. None of us know whats around the corner, and whilst it's prudent to plan for old age, sadly many of of don't get there and it would have been a shame to put every spare penny in a pension and not enjoyed any of it whilst we could.

    Best of luck with your your decisions and financial planning :)
  • edinburgheredinburgher Forumite
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    QueenJess wrote: »
    edinburgher - How did you figure out 30% was the right number for you? Did you use an online calculator (I find them very variable as the underlying assumptions are so different - part of the fun of predicting the future I guess!) or did you take professional financial advice?

    I'm aiming to retire by 50. A bit ambitious, but the final salary pension scheme is dead for most of us, so a lot of investing is needed to fill the gap. I'd be a lot more comfortable with 40%, it will be going up to 35% in a year once DD finishes at her private nursery.
    moneyfacts wrote: »
    Hell would freeze before I put money into a pension. The tax benefit for me doesn't outweigh the lack of control I would have. I want to be able to move my money around in response to government changes.

    For the mainstream they seem to work well though. I focused on clearling my mortgage first, which we did in our early 30s.

    I don't understand this lack of trust when it comes to pensions. I get it, the government do a lot of things that hack people off, but it's worth remembering that they're omnicompetent (i.e. parliament could pass a law overnight that decides your ISA is no longer tax free, one form of investing isn't less prone to tampering)!

    You're either considerably better paid or considerably more frugal than me, I can't turn down the tax benefits. I pay approximately 67p for every £1, that's a fantastic return regardless of what the funds do.

    Glad you paid off your mortgage so early, but let's remember that you were extremely lucky. The average age of a FTB is 30 in the UK ;)
    lulabelle1 wrote: »
    As much as I'm all for pension contributions, I think it's good to spread the investments around as you never know whats round the corner. If life took a bad turn, a big fat pension fund that i can't access for 10/15/20 years wouldn't help me feed my children in the short term - so I think it's wise to also invest into a S&S ISA, have emergency cash funds and also chip away away at the mortgage too.

    Agreed re. S&S and emergency fund Lula, neither here nor there on the OPs. The bank can still repossess no matter how many TTs we have :rotfl:

    There's also benefits, credit (less than ideal) and family to think of in the case of an emergency. I've never received any benefits or borrowed money from my family, but the amount of people with large rotating family loans on these forums staggers me...
  • edited 24 June 2017 at 6:27AM
    LomcevakLomcevak Forumite
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    edited 24 June 2017 at 6:27AM
    The pension vs. mortgage discussion comes up quite a lot. It's a balance, but one that depends on personal needs and circumstances so there's no universal answer.

    For what it is worth, my thought process when I started on the journey four years ago was:

    - first, make sure that I have emergency funds available as both mortgage overpayments and pension contributions are long-term and no use if you need cash in a hurry. So I had three months household income stashed away before I did anything else.

    - as a higher-rate taxpayer, then make pension contributions to get my adjusted net income below £50k. At the time my income was a bit over £60k, and with three kids higher rate tax and loss of child benefit meant the marginal tax rate was approaching 70%, so it's clearly better to pay that money into a pension and claim tax relief than pay tax and then pay the mortgage

    - we had a large mortgage that needed both me and Mrs L to be working, so the next priority was to focus on overpayments to reduce it to the point where we could pay it on a single income if we ever had to. This includes possible future rate rises.

    - once the mortgage is affordable on a single income, focus on pension again with a view to early retirement but keep making mortgage overpayments in the background to be MF by 45.

    - As it happens, my income is now high enough that I utilize the full pension allowance each year, so the balance is swinging back to the mortgage again now

    Clearly that's a personal set of choices, but fairly standard for a higher-rate taxpayer with kids. Four years on and i've put a bit over £120k into a SIPP and taken about £90k off the mortgage, so as it happens the split has worked out at almost 60/40 for me.
    £40k-in-’23#18 £6896.94/40,000 (17.24%)
  • I'm aiming to retire by 50. A bit ambitious, but the final salary pension scheme is dead for most of us, so a lot of investing is needed to fill the gap. I'd be a lot more comfortable with 40%, it will be going up to 35% in a year once DD finishes at her private nursery.




    I don't understand this lack of trust when it comes to pensions. I get it, the government do a lot of things that hack people off, but it's worth remembering that they're omnicompetent (i.e. parliament could pass a law overnight that decides your ISA is no longer tax free, one form of investing isn't less prone to tampering)!

    You're either considerably better paid or considerably more frugal than me, I can't turn down the tax benefits. I pay approximately 67p for every £1, that's a fantastic return regardless of what the funds do.

    Glad you paid off your mortgage so early, but let's remember that you were extremely lucky. The average age of a FTB is 30 in the UK ;)



    Agreed re. S&S and emergency fund Lula, neither here nor there on the OPs. The bank can still repossess no matter how many TTs we have :rotfl:

    There's also benefits, credit (less than ideal) and family to think of in the case of an emergency. I've never received any benefits or borrowed money from my family, but the amount of people with large rotating family loans on these forums staggers me...

    The reason for me is that by law I couldn't take money out of my pension, if for example the state pension becomes means tested. I just don't trust the economy enough over the next 30 years.

    Anyway it's just a personal choice. I think regardless of whether your overpaying a mortgage, investing or paying into a pension, you can't really go much wrong.

    I suppose also financially we have been lucky, but mainly it's down to being frugle, oh and not having a kids help apparently.
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