Mortgage Overpayment or Pension lump sum top up?

LW7

Afternoon all,

Sorry for the cross over in sub’s.

I’m wanting some guidance on either paying lump sums into my Pension, or as overpayment on my mortgage.

Mortgage:

£178k over 30 years. Currently on a 2 Year rate of 4%.
I’m only 8 months into my mortgage.
I understand I have limits in first 2 years of no more than 10% overpayment.

Pension:

Current pot £22k
Contributions are 9/14 (£231 & £363)
50% Medium to High Risk
50% High Risk
Min 37 years left working at my current age (32)

The Wife and I work for the same company and are on similar wages. As long as we’ve been at the company (15 years) we’ve received roughly 9% bonus each PA Pre-tax, at the end of March and will be due another Mar 2019.

Would it make sense at this stage to overpay the Mortgage as much as the allowance supports in the first two years , I know it’s not a lot, but should things remain as they are for another 10 years, we’re talking £50k+ off the mortgage, plus the repayments.

Or

Our employer offers the option to pay the bonus into our pension pot with the addition of a 10% top up to any bonus I sacrifice. This could be an additional £3000 each going into our pension, over ten years, an extra £30k as a minimum plus interests on investments etc.

Any thoughts or direction is greatly received.

xyz123

It very much depends on what your goal is and what you value in life. If you have a secure job and are not the type who worries about debt then pension makea see sense as you get tax relief at a high % than mortgage interest rate. On the other hand, who knows what the pensions and stock market will do in 30 plus years...

Personally I put as much as I can in mortgage (I have a deal without any overpayment limit). I like to be debt free so plan is to pay off mortgage in 10 years and then save for retirement in the following 15....

Thrugelmir

30 years is a long term for a mortgage. If interet rates remain at 4% for the remainder of the term. You are going to pay in the region of £128k in interest. That's out of taxable income.

There's certainly no harm in reducing the amount you owe while you are earning extra money through bonuses. There's no guarantee they'll last indefinately.

middleclassbutpoor

Difficult to say without more detail but you could working on the basis that you have £3k net to pay towards either a pension or a mortgage then you have to consider the following;

- Your mortgage overpayment will save you 2-3-4% of interest.
- Your pension will benefit from an uplift in tax relief of 20% (if a basic rate tax payer) so your your net contribution of £3k gets an uplift of 25% so gives you a gross contribution of £3750.

This ignores the 10% uplift you get which of course would only improve the pension contribution.

This benefit financially will be larger than any interest saving on your mortgage and as your interest decreases on your mortgage you are getting growth on your pension so you could get 4- 5% growth on that 750 for the next 30+ years.

Ultimately when you come to retire, you would have paid your mortgage off and have a larger pension pot.

You may pay off your mortgage sooner by overpaying but if you then just buy a bigger house and keep applying this approach to overpaying, you could end up asset rich, cash poor at retirement.

You may find that you could do a mixture of the 2 but if you are looking purely which is financially the best then i would say that with a medium/long term view, the pension would be more beneficial in the long run.

If you were to invest £3750 for next 30 years, which compounded at 4% each year then you would have over £280k in 30 years.