Investing vs Pension Contributions

SpreadsheetWarrior

Dear All,

Extremely long time lurker, first time poster. Hoping for any feedback you may have (or point me in the right direction). Please be gentle!

What I’m trying to figure out is should I be investing, increasing pension contributions or to a lesser extent overpay the mortgage with excess cash from my salary. (I’m aware the last option is less financially beneficial, but I guess that’s more psychological to chop that liability down).

A little about me: 30, single (aka on Tinder!), young professional (HR tax band) in London. Recently purchased a one bed flat in central London.

• DC Pension is currently £37k (7% employer vs 6% personal). I can increase my contribution, but employer is fixed.
• Outstanding Mortgage £270k @ 1.19% (25-year MTG, 2 year fix). LTV approx 50:50.
• Cash buffer (6 months + emergency savings via all the usual suspect high interest CA/ reg. savers).
• No other assets/ investments. – risk appetite medium
• Monthly Net Income £1k.

Any advice much appreciated
/SW

ColdIron

With the essentials addressed, as a higher rate taxpayer the pension is a natural contender if you can put your spare cash away for a few decades. That tax relief may not last forever. Are you using salary sacrifice?

MallyGirl

I am 50 not 30 and I wish I had been in as good a place as you are back when I was 30.
For what its worth I do the following:
- salary sacrifice into my pension to bring me down below HRT boundary. This also then gives me £1000 allowance for tax free interest (I have some P2P and regular savers)
- contribute £20k each year into S&S ISA. This will provide the option of funding for early retirement and will be used to keep the income drawdown from pensions mostly tax free.
- mortgage is an offset so, if anything, it might be rising a bit at the moment but as it is sub £60k and 10% LTV that is fine.

SpreadsheetWarrior

ColdIron wrote: »

With the essentials addressed, as a higher rate taxpayer the pension is a natural contender if you can put your spare cash away for a few decades. That tax relief may not last forever. Are you using salary sacrifice?

@coldIron - thanks for your prompt reply. I believe my employer offers SS. I will look into this in more detail (It may become more beneficial once my mortgage is lower, as currently my life insurance/death in service currently ties in nicely with the outstanding debt - should anything happen). Is there any other considerations?

Many Thanks

SpreadsheetWarrior

MallyGirl wrote: »

I am 50 not 30 and I wish I had been in as good a place as you are back when I was 30.
For what its worth I do the following:
- salary sacrifice into my pension to bring me down below HRT boundary. This also then gives me £1000 allowance for tax free interest (I have some P2P and regular savers)
- contribute £20k each year into S&S ISA. This will provide the option of funding for early retirement and will be used to keep the income drawdown from pensions mostly tax free.
- mortgage is an offset so, if anything, it might be rising a bit at the moment but as it is sub £60k and 10% LTV that is fine.

@MallyGirl Thanks for the prompt reply and for sharing your thoughts.
-Two votes for SS is always a winner:T
-S&S appears to be a solid choice after the emergency buffer cash pools. As the options are not mutually exclusive, Maybe i should portion a small amount towards a S&S ISA instead of a pension. Plus, never know - may need an engagement ring one day :rotfl:

/SW

ColdIron

If your employer offers salary sacrifice it makes sense to use it. It's not clear to me how this would affect your life insurance/death in service benefits. All your contributions go straight into your pension and saves you having to reclaim the higher rate portion of your tax back via self assessment or change of tax code, I assume you are doing this already? It reduces your National Insurance Contributions and as it reduces your employer NI some will split this with you, mine did, might be worth an ask

AnotherJoe

If you don’t put at least some excess money into a pension you might as well set fire to it, especially given that HR tax relief is unlikely to last indefinitely so take it whilst it’s going.

Overpaying the mortage might make you feel good now but you’ll probably feel sick when in the future you find out how much money you lost doing that compared to the alternatives.

dunstonh

Financially, the pension thrashes overpaying the mortgage by a long way. Higher rate relief and lower NI give it a significant headstart. Then investment returns at typically double to triple the interest you are paying on the mortgage in interest.

Pension beats ISA as well in this scenario. Providing funds not needed before age 58.

MallyGirl

ColdIron wrote: »

If your employer offers salary sacrifice it makes sense to use it. It's not clear to me how this would affect your life insurance/death in service benefits.

It depends on whether the life insurance is x times full salary or x times salary after sacrifice. Sometimes bonuses can be calculated on the reduced salary too - a simple calc of x percent of gross pay for example. Depending on how the company calculates these things it could make quite a big difference

jimjames

Just to be clear on the title, Investing vs Pension Contributions.

It's not generally an either or, pension contributions are investing (unless you still have a DB scheme)

ColdIron

MallyGirl wrote: »

It depends on whether the life insurance is x times full salary or x times salary after sacrifice. Sometimes bonuses can be calculated on the reduced salary too - a simple calc of x percent of gross pay for example. Depending on how the company calculates these things it could make quite a big difference

That makes sense. Having no dependants you can tell that I glossed over that bit of my pension