Mortgage V Pension dilemma

klew356

I’m 36 and have a 22 year mortgage should I overpay the mortgage or put money away in my pension? Its all so confusing!
I have a work based pension its been on the go since around 2014?
Whatever the government is going to give me when I retire

I have it in my head I want to overpay and have it cleared by the time I am fifty but should I be concentrating on my pension instead? From April 2019 the minimum contribution was 8% - 5% employee/3% employer
:j

kuratowski

Check your state pension forecast at the gov.uk website.

Do you have an emergency fund saved in readily available cash?

Do you have adequate insurance cover?

Are you a higher rate taxpayer?

How much is currently in your pension pot?

If your mortgage is 22 years to redemption and you do not plan to retire until after age 58, then maybe overpaying is not the most rewarding use of your cash. Over 22 years you could expect a higher return if the money is invested.

Probably pension savings (but it depends on your full circumstances). Investing in Stocks & Shares ISA is also something to consider if you want to access it more than 10 years before SPA.

For many people it's not either/or but a combination.

klew356

Check your state pension forecast at the gov.uk website. What a depressing sight!

Do you have an emergency fund saved in readily available cash? No… but currently looking into a high interest account for this purpose – the money is there but not in the best place

Do you have adequate insurance cover? I have insurance

Are you a higher rate taxpayer? no

How much is currently in your pension pot? 5 ish years of contributions I have requested a total, in the scheme of things not much I think

If your mortgage is 22 years to redemption and you do not plan to retire until after age 58, then maybe overpaying is not the most rewarding use of your cash. Over 22 years you could expect a higher return if the money is invested. This is the kind of information I was looking for thank you!

Probably pension savings (but it depends on your full circumstances). Investing in Stocks & Shares ISA is also something to consider if you want to access it more than 10 years before SPA. i will look into this isa

Lomcevak

There are a lot of factors to consider, but generally I think you should make sure your pension savings are adequately funded before considering mortgage OPs, not least because the expected returns over the long-run are higher.

A couple of exceptions are when you are near a LTV boundary and will soon remortgage, so overpaying can secure you a better rate, and if you expect a drop in income in the near future (e.g. maternity leave, or job at risk with little chance of finding another at the same salary). In those cases it can be worth a sustained focus on the mortgage, at least for a short while, but for most of us mortgage rates are so low it is better to focus on other things. Overpay only with what's left after pension and other short-mid term saving is done (e.g. emergency funds, 'rainy day' funds, S&S ISA, etc.)

Tropically

Chances are good that you should pay into your pension, if you are having a debate about it, because of the tax benefits. You should save as much into your pension as you feel comfortable locking away until retirement.

* Both a pension and mortgage overpayments are not liquid at your age. However, a pension is less liquid because of the penalties from early withdrawal. Home equity is slightly more liquid because you can remortgage or sell the property to access the money.

* Overpaying your mortgage is guaranteed interest at your mortgage rate. Avoiding paying interest on an amount is as good as gaining interest on that same amount, on the balance sheet.

* Putting money into your pension will most likely get you 20% of your taxes back. It's not likely that your mortgage interest rate is more than 20%.

* The expected return on investments in your pension are likely more than your interest rate on your mortgage.

Mortgage overpayments, to me, are a 'low risk, low return' part of a person's financial situation.

Cornish_mum

I would second upping your pension contributions. A rough rule of thumb is that the contribution percentage should be half your age when you started the pension. Ie for someone who is 36 ~18% (including the employers part).

Also might be worth asking if your employer has a salary sacrifice option for pension contributions, as this can be arranged in such a way to avoid both you and the employer paying NI on the pension contributions which is a big saving if you are a lower rate tax payer and could help you up your pension contributions without much effect on your take home pay. Note salary sacrifice can effect employment related benefits so might not be the best solution for everyone.

I would hold off MOPs until you have your pension as you want it.

Good luck CM

edinburgher

Did you really only start paying into a pension 5 years ago? You don't have any other pension provision from previous jobs? If so, yes, you definitely need to increase your pension contributions significantly.

klew356

No pension provision from other jobs! just standard government - it was only when it kicked in with work that i got this one

Thank you for the information – looks like pension is to sort first, next question should I go and up my employee pension contribution, or look to take out another pension?

Cornish_mum

Hi that really depends on the your employers scheme and how up’d contributions might be managed and your long-term goals.

My top-up contributions go into in my employers AVC scheme (which is independent of the main scheme) and has an ethical investment strategy (which is important to me). My employer currently pays the management fees for this as a perk so I have not been able to find as easy to manage/good alternative.




I would really recommend popping these queries onto the pensions boards and getting some informed independent advice.

edinburgher

There are a few factors to consider.

1) Have you maximised any matched contributions that your employer is willing to make? If not, do so immediately, it's like a free pay rise

2) Is your pension a salary sacrifice pension? If you don't know, ask your employer. If yes, make additional payments into your workplace pension (the percentages suggested by Cornish_mum are reasonable for someone with very little pension provision)

3) If your workplace pension isn't a salary sacrifice pension, you should check the total fees for the pension. This will normally be something along the lines of a platform/account fee and sometimes additional fund specific fees. There may only be a platform/account/total fee listed. Again, if you don't know, ask your employer. If this fee is 0.5% or under, make additional payments into your workplace pension. If it's over 0.5%, you can find a cheaper private pension with low cost index tracking funds

klew356

edinburgher wrote: »

There are a few factors to consider.

1) Have you maximised any matched contributions that your employer is willing to make? If not, do so immediately, it's like a free pay rise

our employer will only give us 3% that is the minimum they have to give. i pay 5% at the moment which again is the minimum but i have been at 5% for longer than i needed to be - if that makes sense, i upped it a few years ago when it only needed to be 2 or 3%

this has been so helpful thank you! i will ask my boss at break about whether it is salary sacrifice and get back to you asap :money: