Additional pension vs mortgage overpayments.

Sir_Stanley_Hubris

Hopefully a simple question to answer and I realise it's probably a personal decision but can I ask the question - what's the general consensus on paying extra into a pension fund as opposed to overpaying a mortgage?

Specifically I'm 55 next month, have a £58k mortgage with 10 years left to run and also have a DC pot that I predict will give me enough income to maintain my current lifestyle should I retire from about the age of 62 (if the mortgage was paid off). In addition I have a small DB pension set to pay around £500 / month from the age of 65. My state pension of around £166 is payable at age 67. I currently earn around £49k. I've just remortgaged to a better rate on a 3 year fix with max 10% overpayments so at some stage my overpayment money will have to go into a savings pot instead, to be paid off the mortgage at the end of the 3 year fix.

I've been overpaying the mortgage by £500 a month for the past 2 years and hope to continue this meaning I'll be mortgage free by the time I'm 60; I then plan to work for as long as I want / can at my current level to top up my pension pot and build my nest egg.

My big motivator is being mortgage free - I desperately want to wake up knowing that if the world fell apart they couldn't take my house off me but I'm wondering if this is potentially costing me £1000s as I'm not benefitting from the 40% tax benefit for additional pension contributions. What's the feeling? Put £500 a month extra into my pension pot and then take it out at age 60 to pay off the mortgage or just carry on overpaying £500 off the mortgage as I do now? (accepting it won't be £500 every month because of the fixed rate penalty but any I can't overpay will be put aside until I can).

Alexland

I don't see why you would want to pay 40% tax to overpay a mortgage especially as you are near an age where you can withdraw from a pension (including the tax free lump sum) if you needed to. Still the limit is £50k next tax year.

I was once obsessive about clearing mortgage debt and there were several tax years that I stupidly paid 40% tax.

Alex

westv

£49k annual salary will be basic rate come April.

Sir_Stanley_Hubris

Thanks both. Looks like I've missed out on the 40% benefit and I should have paid into pension instead - with the tax benefit now only 25% does that give the same answer, ie pay into pension? I suspect it does.

kinger101

Pay into a pension because

(a) 25% can be taken out tax free.
(b) The likelihood is that pension will outperform the the mortgage overpayment.

But, if your salary is likely to increase before retirement such that you're pushed back into 40%, you might consider putting the money into regular savings account or ISA for now, and deferring pension investment until then.

Johnnyboy11

westv wrote: »

£49k annual salary will be basic rate come April.

Not in the People's Republic of Scotland...

MallyGirl

Alexland wrote: »

I don't see why you would want to pay 40% tax to overpay a mortgage especially as you are near an age where you can withdraw from a pension (including the tax free lump sum) if you needed to. Still the limit is £50k next tax year.

I was once obsessive about clearing mortgage debt and there were several tax years that I stupidly paid 40% tax.

Alex

Same here - I saw the light quite late.

pensionpawn

Money in the pension every time, even more so the closer you get to 55. You have the tax relief and NI salary sacrifice benefits that mortgage over payments can not benefit from. If you have a plus one, distribute all the spare money you have to ensure that you can both safely take your personal allowance out of your pension each year. £25k tax free has to be a fairly comfortable standard of living in retirement for most people, unless you're used to an extravagant lifestyle whilst employed. Also, barring a massive hike in interest rates your monthly mortgage payments are eroded by inflation every year. From 55 you can take your 25% to repay the mortgage / the clear the debts and start the party, or give it to the kids so that they can get on the property ladder and you convert to a RIO mortgage (worth looking into!)

GingerJim

I can sympathise with the desire to pay the mortgage off asap. At times, the psychological relief of doing something can outweigh the financial savviness of an alternative - well for me at least. This is all about individuals acceptance and tolerance of risk. I'm risk-averse.

If your goal is to retire at 62, then ideally you want to be mortgage free by then. You are now in a 3 year fixed, I'm guessing on about 1.7% and you make £500 per month overpayments, which means you'll be mortgage free at 60. If you dropped overpayments to £200 per month, you'd be mortgage free at 62 ish, and the remaining £300 per month you could put elsewhere (pension / ISA). If you put it in an ISA you'd have £25,200 (before interest), less the extra you had paid in interest on the mortgage for having it for 7 years and not 5 (this is about £1000). So just doing that alone would mean you would be 25200 - 1000 = £24,200 better off at age 62 if using an ISA and still then be mortgage free.

If you are making fixed £500 overpayments per month at present, you are exceeding 10% of the £58,000 mortgage so be careful you don't encounter early repayment charges there with your overpayments, unless the 10% is based on an earlier [larger] mortgage loan amount.

planteria

great post GingerJim..

GingerJim wrote: »

If you are making fixed £500 overpayments per month at present, you are exceeding 10% of the £58,000 mortgage so be careful you don't encounter early repayment charges there with your overpayments, unless the 10% is based on an earlier [larger] mortgage loan amount.

is it?

westv

10% maximum mortgage overpayments are normally based on the original loan amount.