Cant get our heads round this one...

kmate

Ok, To all of you experts this is probably an obvious one, but we have been thinking about this for a few days, and have NO clue what is best so please help!

We have always paid into employers company non-contributary pension scheme, was 5%. Company has changed this to a different scheme where they contribute 2.5% and we pay 2 or 3 % (the choice is ours). We also have the choice to opt out altogether.

We have been discussing the idea of opting out of pension, and simply overpaying that amount to our mortgage.

We quite simply dont know if this is sensible. We see our property as a home whilst we have family to raise, but plan to sell up on retirement.

How can we work out if this is an option? Any views on this?
thankyou.

CLAPTON

as your employer is contributing and bearing in m ind you get tax relief on your contibution, I would say contribute to the pension.
So for every 100 you contribute, the tax man contibutes another 28, and your employer pays another 128 i.e you get 256 invested for only 100.

EdInvestor

Since there is free money on offer it makes sense to go for the pension.The tax relief is not such an incentive as pensions are taxed in retirement,unless you are on HRT and can get 40% going in and then pay 20% BRT when you retire.

dunstonh

Free money and potentially better returns vs no free money and saving an amount likely to be less than the investment returns.

Pension wins every time.

kmate

Thanks alot. That now makes sense. Pension it is then! Yes it is HRT, and it hadnt occured to us that has an impact. (duh!!)

It would have been nice to watch the mortgage coming down a tiny bit quicker though! Its just a more "visible" pot isnt it?!

Dithering_Dad

If you want to make overpayment on your mortgage, why not try looking at your outgoings and see if you can trim anything off and then pay this onto your mortgage?

Check you are getting the best deals on your utilities (electricity, phones & gas) and insurance (life, building & contents), go freeview instead of having sky, take a packed lunch to work, etc., etc. There are loads of ways to reduce your outgoings. When I did a review of my finances, I managed to reduce my outgoings by a couple of hundred quid a month (all of which now goes onto my mortgage).

You can then look at increasing your income. Can you get a better paid job elsewhere or could you do bar/weekend work or overtime or ebay sales, etc. When I looked at increasing my income I decided to work for myself as an I.T. contractor and almost doubled my income (I earn more, but I also pay a lot less tax!).

Even by paying just £50 a month extra on your mortgage, you can make significant savings on the mortgage interest.

Here is an interesting article about paying into a pension or overpaying the mortgage that pretty much comes to the conclusion that you should 'hedge your bets' and pay into both (this is what I am currently doing):

http://www.guardian.co.uk/money/2002/nov/10/savingforretirement.observercashsection3

kmate

Thanks DD. We are just in the process of a budget overhaul, as we are moving this month, and as you say, we have shaved off a fair amount that we neednt pay.
Other half would envy your working for yourself, he is also in IT, and has been trying to pluck up the courage to go it alone for a while!

Dithering_Dad

I was 'plucking up courage' for about 7 years before I did it

Still, better late than never. Tell your other half to put 3 months worth of his salary away, find a client who is willing to wait out his notice period and leave his current employment in good graces so he can go back if things go belly up. That's what I did and I've never looked back. My company has made over 100k so far and I'm not even at the 1 yr stage!!