Work place pension or mortgage overpayment

Baldyman1

Guys , I need advice on my work place pension , this will be upped to the higher amount next year and I’m wondering if I should continue or overpay my mortgages .

I’m 49.
Have qualified for my full state pension.

Have a small index linked pension that pays at 60 , about £2500 p/a.

3x BTL , one mortgage paid off , one with 75k and one with 97k ( both interest only ) . Both just fixed at 2.39 for 5 years .

Residential mortgage of £80,000 repayment at 1.94 , can overpay what I like .

40% Tax payer .

Obviously I have been using the 3x BTL to overpay the residential mortgage and this will be clear in about 4 years but I will then need to clear the 2 remaining BTL.

My question is my work place pension of £170 worth me paying into ? Yes I know the government and my employer top it up. But what wil it be worth in 5 or 10 years time ? A fund of maybe 40k , 25% draw down and a tiny annuity doesn’t seem worth it ?

What a ball park annuity of 40k after 25% draw down worth ? My pension is my 3btl , service pension and state pension.

Would it not have been better to put it to use overpaying the mortgages ?

HappyHarry

You should remain in the pension scheme and reprioritise your debt repayments.

Suggest you take a step back and reconsider a couple of your options.

The two main issues are;

1. Why are you prioritising overpaying a debt of 1.94% instead of debts at 2.39%?
2. Why are you considering turning down free money from your employer and free tax relief? You are turning down [STRIKE]potentially[/STRIKE] over a 100% short term increase on your contribution, to repay a debt at 2.39%. That's crazy talk.

N.b. You don't need to buy an annuity in retirement.

Baldyman1

HappyHarry wrote: »

You should remain in the pension scheme and reprioritise your debt repayments.

Suggest you take a step back and reconsider a couple of your options.

The two main issues are;

1. Why are you prioritising overpaying a debt of 1.94% instead of debts at 2.39%?
2. Why are you considering turning down free money from your employer and free tax relief? You are turning down [STRIKE]potentially[/STRIKE] over a 100% short term increase on your contribution, to repay a debt at 2.39%. That's crazy talk.

N.b. You don't need to buy an annuity in retirement.

Please enlighten me (not being sarcastic I don’t know )what can I do with the fund , if I can cash it all in happy days .

HappyHarry

Baldyman1 wrote: »

Please enlighten me (not being sarcastic I don’t know )what can I do with the fund , if I can cash it all in happy days .

Once you are 55, you can withdraw the monies. All in one go, or, spread over a number of years.

25% of the fund is tax free. The rest will be taxable as income in the year of withdrawal.

If you are a basic a taxpayer when you withdraw, and stay below the higher rate threshold, then you will pay basic rate tax on withdrawal.

So, you will have had your employers contribution going in, 40% tax relief going in, and the equivalent of 15% tax (20% tax on the 75% of your pension pot which is taxable) on withdrawal.

That's a massive uplift for your funds.

Baldyman1

HappyHarry wrote: »

Once you are 55, you can withdraw the monies. All in one go, or, spread over a number of years.

25% of the fund is tax free. The rest will be taxable as income in the year of withdrawal.

If you are a basic a taxpayer when you withdraw, and stay below the higher rate threshold, then you will pay basic rate tax on withdrawal.

So, you will have had your employers contribution going in, 40% tax relief going in, and the equivalent of 15% tax (20% tax on the 75% of your pension pot which is taxable) on withdrawal.

That's a massive uplift for your funds.

25% is Tax free and the remaining sum is taxed at 40%/ ?

This is what I’m trying to work out if it’s better to do this or downplay the mortgage , remember when the mortgages are paid I’m in far better profit than any fund would pay our .

I suppose 25% of free money is better than a poke in the eye .

AlanP_2

Baldyman1 wrote: »

25% is Tax free and the remaining sum is taxed at 40%/ ?

This is what I’m trying to work out if it’s better to do this or downplay the mortgage , remember when the mortgages are paid I’m in far better profit than any fund would pay our .

I suppose 25% of free money is better than a poke in the eye .

Not definitely taxed at 40%, but getting 40% tax relief on the way in and whatever rate of tax you are on in retirement on the way out. Is that likely to be HR based on what your old pension will pay, what SP will pay an what your BTLS will earn you?

At 49 how can you have qualified for a full state pension already as it needs 35 years of NI contributions to get the full rate?

As to whether funds or BTLs will earn you more over the next 20-50 years - WHO KNOWS?

Having the majority of your retirement funds in property may make sense until you want access to 20K cash to pay for a private health operation or something - What are you going to do, sell 1 bedroom?

A mixed portfolio of Property, Old Pension, SP and the current pension gives you more flexibility and spreads the risk. If your objective is to maximise "profit" then I can see how property looks attractive compared to pension. If your objective is to "live comfortably" when you retire a basket of assets and options looks attractive.

HappyHarry

Baldyman1 wrote: »

25% is Tax free and the remaining sum is taxed at 40%/ ?

This is what I’m trying to work out if it’s better to do this or downplay the mortgage , remember when the mortgages are paid I’m in far better profit than any fund would pay our .

I suppose 25% of free money is better than a poke in the eye .

Much better.

Let's assume you're a basic rate taxpayer in retirement.

So, you now contribute £800 (net) to a pension. Your pension gets tax relief of £200. Your employer adds £666. You get £200 tax relief via your tax return.

So, you've £1,666 in your pension, and it's cost you £600.

Let's assume the £1,666 grows at 5% per year for ten years before you withdraw any funds.

The fund is now worth £2,714.

25% tax free withdrawal of £678
75% taxed at 20% gives net withdrawal of £1,628

Total withdrawal £2,306.

So, net gain to you is £1,706. That's 284% return over ten years, equivalent of 14.4% per year.

So, you just need to decide if it is worth losing 14.4% per year to repay a debt of 2.39% per year. (the answer is, NO!)

HappyHarry

AlanP wrote: »

At 49 how can you have qualified for a full state pension already as it needs 35 years of NI contributions to get the full rate?

Easily done - the OP has enough SERPS contributions to take them above the level of the new state pension.

kidmugsy

Ignore all this fancy talk. You overpay the mortgages, boyo, and stop these crazy pension contributions.

The Treasury needs all the help it can get.

Terron

Baldyman1 wrote: »

This is what I’m trying to work out if it’s better to do this or downplay the mortgage , remember when the mortgages are paid I’m in far better profit than any fund would pay our .

Why do you think that?
The massive uplift the pension gets from your employer's contribution and tax relief would be very hard to beat
Anyway it is very easy to beat your mortgage rates, which is all that needs to be done,


Put it in the pension. When you are 55+ you can with draw the money and use it to pay down the mortgages if you still want to.

xylophone

Pay enough into your pension to reduce tax to basic rate?

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief