Work place pension or mortgage overpayment

Triumph13

HappyHarry wrote: »

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!)

It might be easier to understand if you look separately at the 'pure' gain from using the pension and the expected gain from a better rate of return.
With 5% EE contribution and 3% ER contribution You put in £1,000 and the employer puts in £600, but the cost to you is only £600 because you get 40% tax relief. Even if you are still a 40% tax payer in retirement that £1,600 in the pension would become £1,120 cash when you withdrew it (£400 tax free and £1,200 taxed). An instant 87% profit. If you are only a 20% taxpayer in retirement then you get £1,360 of cash for a 127% profit.

But what about all the time that it's tied up in the pension and you are paying your mortgage? If you invest the pension in equities there are no guarantees, but historically returns have tended to be in the region of 7% per year. The 'return' on your mortgage on the other hand is only 1.91% - the 2.39% BTL interest rate, less the tax relief you get on it.

So your options are:

1. Opt out and pay down BTL mortgage - compounded return after 15 years of 32.8%
2. Keep the pension in cash for a return of 87% or 127% (less any net fees)
3. Invest some of the pension in equities for a probable return double that of cash over 15 years

Option 1 does not look very attractive.

atush

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.

Totally agree, and was totally slammed here the other day by the MF wannabes.

Paying tax at 40% to overpay mtg of 2% is crazy talk. but lets think about it.

You pay off 100 of a mtg, it costs you 100. Pay 100 into pension when youa re paying HRT (you pay 80 and 20 gets added as TR and then you claim 20 from HMRC) means it cost you only 60. So you have 40 you could then pay into a mtg IF you wanted to- and STILL have 100 into the pension.

Win win.

AS for joining workplace add int hey will probs contribut 100 to yoru 200. So paying 80 into a pension then gets you 200 into a pension PLUS 40 overpayment to mtg. It's like magic.

atush

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

Well over the last 100 year plus, property has done worse than equities (but better than cash).

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

Well lets suppose you retire early at say 60. And have no employment income (but living on rental income plus maybe s&sisas- d you have any?). Rental income is say 6K per year, so you can draw from your pension additional money up to the PA for that year and there is 0 tax to pay.

So it can work out even better.

Do you have a spouse? Are the properties jointly owned? You are paying tax on income, the mtg interest is no longer going to be deductible, and you will pay CGT on disposal.

So shift half the owner shio to yoru spouse (for 2x CGT allowance) and consider selling one of the properties. Use the money for pension contributions for you both. you can pay your entire earned(not rental) income (up to 40K) or you can pay 2880 (which gets TR so becomes 3600) for a non earner.