Put mortgage overpayments in S&S or pension?

pinknsparkly

Hi all,

Since buying our first house in December last year, I have been making small mortgage overpayments (usually around £300) throughout the month, such as by rounding down our bank balances on a daily basis and any cashback etc. £300 a month overpayment pretty much puts us on course to be mortgage free by 55. Due to the low interest rates we're currently experiencing, I am then investing the bulk of the money available for additional mortgage overpayments into S&S ISA. We are in our early 30s and I would like us to be able to retire early(ish) at 55 once any potential children have reached 18. Having the money invested in a S&S ISA appeals to me as it is accessible if we were to retire earlier than 55 (which I imagine will only be possible if we can't have children!). We also have a S&S LISA each. We are contributing sufficiently to our employer pensions and so don't need to open SIPPs for pension reasons.

I've been wondering about the possibility of instead investing the mortgage overpayments in a SIPP for tax savings and then using the 25% tax free lump sum to pay off the mortgage at 55. Are we missing a trick in not investing our mortgage overpayments in a SIPP rather than S&S ISA? My discomfort with this plan mainly stems from having all our investments tied up until retirement (in SIPPs and LISAs). We are both basic tax rate payers, so currently there is no tax advantage to use a SIPP in comparison to a LISA.

Also, is the 55 time point at which you can take your 25% tax free lump sum related to state pension age (as in, is it likely to be older than 55 in 20 years time as state pension age gradually increases)?

We have a healthy emergency fund, that would cover 9 months of living at our current expenses and we deliberately purchased a house that we can afford on a single salary if we tightened our belts (we earn virtually the same as each other) to ensure that we can afford to either have a stay at home parent or to spend the entirety of one salary on childcare.

What are your thoughts and suggestions as to what we should do? What would you guys do?

Thanks in advance

eskbanker

pinknsparkly wrote: »

is the 55 time point at which you can take your 25% tax free lump sum related to state pension age (as in, is it likely to be older than 55 in 20 years time as state pension age gradually increases)?

Yes, the declared intention is for there to be a ten-year gap between minimum access age and state pension age, so when the latter increases to 67 in 2028 the former should go to 57, but as yet this hasn't been formalised, as discussed at threads such as:

https://forums.moneysavingexpert.com/discussion/5969394/minimum-age-for-pension-benefits-rising-from-55-to-57

If you're in your early 30s now then there's presumably a chance that both pension ages will have increased again by the time you reach your mid to late 50s in the early 2040s.

The concept of a 25% tax-free lump sum may also have changed by then of course....

MaxiRobriguez

LISA's can't be accessed until 60 for retirement (unlike current SIPPs at 55, soon to be 57) and also count against eligibility for benefits.

Why not do a bit of both?

ruperts

A few weeks ago a Tory thinktank pushed out a report saying the state pension should be raised to 75. So if they do peg the private pension access age to ten years before state pension age like they've said they will then you can do the maths. I think 65 is a worst case scenario for someone in their early 30's today. Best case scenario 57. Realistic scenario 58-60.

Anything could happen though and in addition pension freedoms could easily be reversed. I think the best strategy when you're that age is to spread your money around in a few different pots with different tax regimes and access rules. In other words don't put all your eggs in one basket.

pinknsparkly

Thanks all. I hadn't quite got my head as far as realising that worst case scenario may be us being unable to access our SIPPs until 65! There's lots of food for thought here, I definitely need to go away and ponder

MaxiRobriguez wrote: »

LISA's can't be accessed until 60 for retirement (unlike current SIPPs at 55, soon to be 57) and also count against eligibility for benefits.

Why not do a bit of both?

Maxi - yes, I'm aware but thanks for checking! The intention of the LISAs is to help bridge the gap between 60 and 65 (or whenever we can access our work pensions). The intention of the S&S ISAs are to top-up income between 60 and pension age and provide all our required income between 55 and 60. Additionally, I like the comfort of knowing we can access the LISA funds in an absolute emergency! I also don't trust that there even will be a state pension by the time we get to pension age, or that the government won't have changed all the rules on accessing work/private pensions by then....

Novice_investor101

I have a LISA & a stocks & shares ISA, as well as my work pension.
Stocks ISA is to invest my spare money over & above my cash emergency fund over the long-term for real growth. I consider this as accessible should I ever need it but I would cover expenses such as work on the house, new car etc as things I'd save up for or put on 0% credit cards before dipping into the ISA. it's a long-term investment, after all.

LISA is purely for retirement, I'd have to be losing everything before I considered touching it & it's purpose is to get the free bonus money now & to be able to withdraw it tax free after 60, minimising how much tax I'd pay in retirement when drawing down before & after SPA age.

I'm 37 & aim to retire at 60, or earlier if my investments do particularly well & I want to. I currently overpay the mortgage & intend to pay it off before retiring. I don't see it as an either/or - do both so you will be mortgage free at retirement & have a nice lump sum of investments.