Pension contributions vs Mortgage overpayments

MizzPenniless

Like others on these boards, I am clueless about pensions

I've seen several threads discussing the benefits of pension contributions over mortgage overpayments, and the consensus seems to be that it's better to make pension contributions.

I've just started a new job and been automatically enrolled to the pension. I pay 3% and my employer contributes 6%, which seems like a good deal. However, as I'm on minimum wage and don't earn enough to pay tax, I am not getting any benefit from tax relief. Is it still worth staying in the pension in my case, or would paying my mortgage which has 10 years to run, (fixed at 1.99% for the next 3 years) be a better option?

Thanks for any wisdom anyone can offer :-).

kinger101

The employer match is worthwhile alone. Even without any tax relief, each £1 is costing you 33 pence.

MizzPenniless

kinger101 wrote: »

The employer match is worthwhile alone. Even without any tax relief, each £1 is costing you 33 pence.

Thanks, that does make sense. What happens to workplace pensions when you change jobs or take the money before the scheme retirement age (as far as I can tell it's 65 currently, though that could rise). It's defined contribution if that makes any difference.
Just noticed a thread entitled 'Auto-enrolment' on here, probably need to read that.

TN1984

MizzPenniless wrote: »

Thanks, that does make sense. What happens to workplace pensions when you change jobs or take the money before the scheme retirement age (as far as I can tell it's 65 currently, though that could rise). It's defined contribution if that makes any difference.
Just noticed a thread entitled 'Auto-enrolment' on here, probably need to read that.

Your workplace pension is essentially just a pot of money you (and your employer on your behalf) pay into that is subject to the relevant pension taxation rules on contributions (and money out in the future). If you change jobs, whatever value you have at that point remains, and will continue to go up/down depending on the investments. You can leave it there till retirement if you wish, or it is usually pretty easy to transfer it to your new workplace scheme if you prefer, which has the advantage of you not ending up with dozens of tiny pensions over the years (this won't have a detrimental impact as such, it is just a pain to monitor/manage).

The scheme retirement date is more of a guideline on the modern workplace pensions. Unlike defined benefit schemes where you would have a penalty for taking your money earlier than the normal scheme retirement age, as above, it is fundamentally just a pot of money and the only restriction is the minimum pension age, which is 55 at present and expected to rise to 57 in 2028 I believe.

MizzPenniless

TN1984 wrote: »

The scheme retirement date is more of a guideline on the modern workplace pensions. Unlike defined benefit schemes where you would have a penalty for taking your money earlier than the normal scheme retirement age, as above, it is fundamentally just a pot of money and the only restriction is the minimum pension age, which is 55 at present and expected to rise to 57 in 2028 I believe.

I have a defined benefit pension from my previous employer, but the reduction if I take it now (at 56) is huge. Good to know that in theory I could take the money out of the new pension, including the employer contribution, as soon as I leave. Seems like money for nothing :-)

Dazed_and_confused

However, as I'm on minimum wage and don't earn enough to pay tax, I am not getting any benefit from tax relief

There is pressure building for people in your situation (I'm assuming you have no other taxable income other than the minimum wage job) to be able to contribute your employment related contributions to a relief at source pension where you would get basic rate tax relief added to your fund.

atush

I am not getting any benefit from tax relief.

You do get TR, even if you dont pay tax. Even those who dont work and can pay in 2880, get 720 in tax relief added.

Dazed_and_confused

Not on a net pay contribution you don't.

Unless you have sufficient other taxable income

Zero_Sum

The extra money into pension instead of mortgage is only really worth it if you're either a higher rate tax payer or if your employer also matches your additional contribution which hardly any will pay in more than their standard contribution. So in your position I'd be looking more mortgage.

AlanP_2

Zero_Sum wrote: »

The extra money into pension instead of mortgage is only really worth it if you're either a higher rate tax payer or if your employer also matches your additional contribution which hardly any will pay in more than their standard contribution. So in your position I'd be looking more mortgage.

The OP wan't asking about "extra money" they were asking whther they should stay in the pension scheme at all so in their position I wouldn't be looking at extra mortgage I would be staying in the scheme.

AlanP_2

MizzPenniless wrote: »

I have a defined benefit pension from my previous employer, but the reduction if I take it now (at 56) is huge. Good to know that in theory I could take the money out of the new pension, including the employer contribution, as soon as I leave. Seems like money for nothing :-)

Be careful with "take the money out".

You can transfer it to an alternative scheme or you could take it as income as you are over 55.

If you take anything above the 25% tax free amount your future pension contributions (including employers contribution) is limited to £4k a year.

May not be a problem but something to be aware of.