AVC Pension Vs overpaying mortgage

gezitsme

Hi

I've been trying to work this out but struggling with the maths. I'd like to either contribute £75 extra into my pension, this would be AVC as I have reached the max at my workplace or over pay mortgage by £75. I'm 36.

Interest rate on mortgage is 2.45%. I have 33 years left.
The rate of return on my pensions is 1.52%

On the face of it overpaying mortgage seems like a no brainer. However I would actually contributed £94 into pension to take advantage of the tax break. So I pay £94 in but only see pay reduce by £74.

The MSE overpayment calculator shows I would save £13,409 over 33 years.

I've worked out that I would end up earning £17 interest a year on pension, so over 33 years £1,693 + the £19 extra I would put into pension that wouldn't go to tax would be £7.5k. So 9k total v £13k mortgage saving. I'm not sure my maths is correct though. All help appreciated.

MallyGirl

Why is your pension only 1.52% - have you chosen very low risk options or are you only looking at last year which was not a good one for investments

gezitsme

Hi

That's what was on my statement for the previous year. I chose the automatic investment option so higher risk now become more low risk as I get older. Pretty sure that is correct. Been a while since I set it up.

MallyGirl

Don't base decisions on last year - it was not a good one. Pensions are investments so they go up and down.
Take a look at https://www.theguardian.com/business/2018/dec/31/ftse-100-tumbles-by-125-in-2018-its-biggest-fall-in-a-decade

over time investments will outperform the 2.45% you are paying on your mortgage, plus you get tax relief and possibly NI relief on top too.

gezitsme

No NI relief on my AVC unfortunately. Didn't realise last year was particularly bad. Guess there is no way of knowing how it will perform so just a bit of a gamble. I hadn't taken into account in could change though, so thanks.

jamesd

Last year was just mediocre. You'll see 10% or 20% drops some years, but still average something like 3-4.5% a year gain long term, depending on how the money is invested. Getting out of default choices could switch it up from the 3% to 4.5% but the bad years would change to more like 20% or 40% down. Not everyone can handle those drops even though it's getting them 50% more growth...

You're not going to find a better mortgage deal than getting the pension tax relief and investment growth on your mortgage capital overpayments that the pension delivers. Come age 55 or whatever age it is when you get there you can use some pension tax free lump sum money for mortgage overpaying if you like.