Pension or Mortgage?

JillyC8

Please could I have some opinions on whether it's more sensible to pay more into a Defined Contribution Pension or pay down my mortgage?
I'd love to be mortgage free and am inclined to focus on that, but I keep reading on here that building up a pension is the most sensible approach.
However, given that the payout from a DC pension is so uncertain, wouldn't overpaying be a risk, whereas paying off the mortgage asap has a clear benefit?
Sorry if this is a naive question!

hugheskevi

Please could I have some opinions on whether it's more sensible to pay more into a Defined Contribution Pension or pay down my mortgage?

The pension has an overwhelming probability of being the better value over any reasonable time period (5+ years, preferably 10+), but is inaccessible until age 55-58 which could be an issue. This means it is less good at protecting against financial shocks than other forms of savings and investments such as ISAs and paying down mortgage.

Extra money into a pension would also not help if you plan to move to a larger house in future for which you would be wanting extra funds.

I'd love to be mortgage free and am inclined to focus on that, but I keep reading on here that building up a pension is the most sensible approach.

You have multiple financial goals, why prioritise one to the detriment of other goals, or to overall financial efficiency?

What would you be planning on doing when the mortgage is paid off? Is treating each financial goal (mortgage, financial independence, retirement, etc) in isolation and in sequence the most efficient plan for your circumstances?

However, given that the payout from a DC pension is so uncertain, wouldn't overpaying be a risk, whereas paying off the mortgage asap has a clear benefit?

The payout from a DC pension is uncertain, but is extremely likely to exceed, and probably far exceed, the interest rate on a mortgage.

Even if you were to invest cautiously in a pension you would expect to see at least 3% p/a return over time (with volatility in returns each year). Returns of around 5-7% would be more expected investing in more typical pension portfolios.

Paying extra into a mortgage may be sensible at higher loan-to-value levels, but once access to low rate mortgages is readily available at somewhere around the 2% p/a interest rate, pensions are going to win out not just in expected return but also tax benefit. You do however want to ensure you have sufficient liquid assets to cover financial shocks before tying up money in an pension you cannot access for many years. This is less of a consideration the closer you get to age 55.

Sorry if this is a naive question!

House purchase, mortgages and pensions are the largest financial commitments most people make in their lives. Sadly many people completely fail to even begin to optimise their financial arrangements to take advantage of the best features of these commitments.

Ensuring sensible timing and balance between pensions and mortgages so that you benefit from the best features of a pension (maximum employer matching, salary sacrifice, higher rate tax relief, avoiding child benefit taper, etc) should be the least which is considered.

More complicated planning, such as planning to use a pension commencement lump sum to pay off a mortgage is very sensible and likely to be a significant financial benefit.

crv1963

JillyC8 wrote: »

Please could I have some opinions on whether it's more sensible to pay more into a Defined Contribution Pension or pay down my mortgage?
I'd love to be mortgage free and am inclined to focus on that, but I keep reading on here that building up a pension is the most sensible approach.
However, given that the payout from a DC pension is so uncertain, wouldn't overpaying be a risk, whereas paying off the mortgage asap has a clear benefit?
Sorry if this is a naive question!

A lot depends on the circumstances- age, amount of money available monthly, expected retirement date and income needs.

Rather than focus being on one thing is it possible to do a bit of both? For instance round up the monthly mortgage payment so you get the psychological "feel good factor" knowing it's being paid down faster whilst also boosting pension, which will hopefully grow over time.

dunstonh

However, given that the payout from a DC pension is so uncertain, wouldn't overpaying be a risk, whereas paying off the mortgage asap has a clear benefit?

When you say "overpaying" the pension is a risk, are you suggesting that your current provision is more than sufficient to meet your income needs in retirement?

Not paying enough into your pension is a risk. Paying more into your pension is not a risk as your pension will be higher because of it.

whereas paying off the mortgage asap has a clear benefit?

Yes, mortgage overpayments are more easy to quantify. You will save 2-3% interest on the amount you repay. Whereas the pension is a bit more unknown but will earn around 5-6% as well as get tax relief.

If you do not save enough for retirement and overpay your mortgage, you may then have to use equity release and that makes all the effort of overpaying your mortgage a complete waste of time.

Albermarle

If we assume that you are earning a salary /have a job , then the attractiveness of paying into a pension depends on the circumstances :
1) If your employer is contributing but only if you contribute a certain amount , then you should do this .
2) If you are a higher rate taxpayer then contributing more to a pension is usually a good idea, due to the generous tax relief

As mentioned already I would not worry too much about investment performance of a pension. If you use medium risk funds and pay some money every month , you would be very unlucky not to see decent growth over a 10 year time frame .

JillyC8

Hi, a bit more info regarding my situation:
My age: 52 (single parent)
- DC pension currently at £15000 (forecast to be £40000+ at 67)
- Two deferred DB pensions: £5200 and £1200 a year (latest statement)
- Two years left to reach full contributions for full state pension (if nothing changes)

Mortgage £97000 on house valued £200,000 and term till age 70 so would like to bring it down as much as I can, however I can ... I'm currently paying off extra but want to consider using a lump sum in two years to help this along if I can. However this will obviously be detrimental to the pension fund...

JillyC8

I work full time and earn £32000 p/a

jonnygee2

Hi, a bit more info regarding my situation:
My age: 52 (single parent)
- DC pension currently at £15000 (forecast to be £40000+ at 67)
- Two deferred DB pensions: £5200 and £1200 a year (latest statement)
- Two years left to reach full contributions for full state pension (if nothing changes)

Mortgage £97000 on house valued £200,000 and term till age 70 so would like to bring it down as much as I can, however I can ... I'm currently paying off extra but want to consider using a lump sum in two years to help this along if I can. However this will obviously be detrimental to the pension fund...

Just to be clear, is your choice about whether to;

a) Stop paying into, or reduce, your DC contributions, and pay more into your mortgage, or
b) Keep paying your DC contributions, and then you have some excess money which you'd like to put into either the pension or the mortgage and you don't know which.

To me, it looks like your current pension contributions are very favourable. You are set to retire on more income than you earn! I'd definitely be keeping up the DC contributions at all costs.

But, if there's excess, reducing the mortgage term wouldn't hurt either. It doesn't actually matter that much in that you pension will clearly cover your mortgage payments anyway. Having a mortgage payment of, say, £400 a month for a couple of years an income of £2300 for your whole retirement is clearly better than having no mortgage payment and an income of £1500 (roughly what you'd get if you stopped contributing to the pension now).


So basically don't do a) but do do b) if it's possible would be my advice.

JillyC8

Hi Jonny gee, How have you calculated? These figures give me around £17000 at retirement if I stay in my job till 67 according to the online pension calculator ...?

I intend to continue working and paying into current DC pension although not sure I'll make it till 67 as it's a stressful job so may do something different in a few years although I have no intention of fully retiring until I have to.

My dilemma is whether to try to overpay mortgage or overpay pension ... ideally I'd like to pay off my mortgage with the help of one of the pensions in a couple of years if I can but obviously that would be to the detriment of the pension .... although I would save around £13000 interest and would continue to save each month.

jonnygee2

Hi Jonny gee, How have you calculated?

Sorry, I was using monthly income figures, derived from your statement that your DB schemes are worth £6400 a year and DC scheme £15,000 a year, producing a 21k / year income, about £1500 a month.

My dilemma is whether to try to overpay mortgage or overpay pension

This, in your situation I think overpaying the mortgage would be fine. Your pension seems enough, even to retire a bit earlier (it's already pretty much to live off, if your outgoings are reasonable).

ideally I'd like to pay off my mortgage with the help of one of the pensions in a couple of years

That's unlikely to be a good idea though. You would almost certainly would lose much more interest than you would save. For example if you spend £30,000 repaying your mortgage with your pension, this potentially costs you a further £15,000 in interest (if you kept the money invested over 15 years in relatively safe investments you'd make about this).

hugheskevi

My dilemma is whether to try to overpay mortgage or overpay pension ... ideally I'd like to pay off my mortgage with the help of one of the pensions in a couple of years if I can but obviously that would be to the detriment of the pension .... although I would save around £13000 interest and would continue to save each month.

Let's say you had £8000 for the sake of illustration. You can choose to overpay your mortgage or put it into your pension. If you put it toward your mortgage the balance decreases by £8,000 so it is simple.

If you put it into a pension you get tax relief to boost it to £10,000 immediately.

Ignoring growth, in a few years you could withdraw all of the £10,000 taking 25% tax free and paying £1,500 tax on the rest, leaving you with £8,500. [caveat: research Money Purchase Annual Allowance if considering something like this]

If you have access to salary sacrifice through your work pension or are in receipt of means-tested benefits (eg Tax Credits or Universal Credit) which are increased if you make pension contributions the gain would be greater, potentially significantly greater.