Savings, Pension or Mortgage Overpayment?

twicebittennotshy

Hi,

I'd like the benefit of your collective wisdom please.

My partner and I have recently moved home, taking out a new 26 year mortgage, and managed to clear all debts, other than the mortgage, in the process.

After all bills have been paid and living expenses, including treats such as eating out occasionally etc, have been taken into account I have approximately £400 per month surplus.

I am 42 years old, have a pension pot currently worth around £100k to which mine and my employer's monthly joint contribution totals 8.5% of my gross salary. I have around £2k in savings currently.

So, my question is - what should I do with the £400 per month surplus. My current thinking is that I should put around half of that, £200 per month, into a rainy day easy access account and then split the remaining £200 equally between mortgage overpayment and increased pension contributions. Does this sound sensible, or do you recommend something different?

Many thanks.

DrEskimo

Not sure I have much wisdom, but will impart what I have learnt so far...!

I would say that you are maybe a little light on 'rainy day' funds. Most advocate that you should aim to have about 3-6months of living expenses. If the £2k doesn't quite cover that, then I would focus the whole £400pm on building that up first.

Once that's up to a healthy amount, then you can start dividing it up as you see fit. Mortgage overpayments is quite a personal issue. Given the very low rates (I imagine yours is in the 2% region), many would say you could achieve much better returns on that money using other investments. However others like the idea of being mortgage free earlier, and that has inherent value to them as well.

Perhaps it's worth thinking about what you would ultimately like this £400pm to be used for? If it's for retirement, then it would make sense to use all of it towards pension. Generally 15% is used as a good rule of thumb, but its also advisable to work out how much you would like to retire on, and see how far you are from achieving that goal?

If you have more immediate purchases in mind, then work out how much you need for those in the immediate future and set aside that in a high interest savings account. If it's to be mortgage free, then put towards the mortgage.

I don't think there is a wrong or right answer, just whatever suits you and achieves the goals you want really...

Personally, I overpay on our mortgage as I have a higher mortgage term (30yrs) and would like to overpay to reduce it. I then put a bit away in savings for immediate purchases, a bit away in S&S ISA to build up wealth in the future, but prior to retirement, and eventually I will look at additional contributions towards my DB pension in a investment builder to take advantage of employer matches and reduce tax bill.