Dilemma: Pay off mortgage or salary sacrifice into pension?

GazzaBloom

After further deliberation I am going to focus on clearing the mortgage first, then, once debt free from March 2022, I can focus on loading up S&S ISA & pension using my spare income to build wealth, I will be able to use the last 3 years annual allowance balance to top up over £40K if I needed to. 14.5% of my gross salary goes into my pension monthly between me and employers contributions anyway so it's not as if I'm short changing contributions.
Not paying the mortgage and paying extra into the pension would feel like I am borrowing money to invest which feels wrongs.

pensionpawn

GazzaBloom said:

After further deliberation I am going to focus on clearing the mortgage first, then, once debt free from March 2022, I can focus on loading up S&S ISA & pension using my spare income to build wealth, I will be able to use the last 3 years annual allowance balance to top up over £40K if I needed to. 14.5% of my gross salary goes into my pension monthly between me and employers contributions anyway so it's not as if I'm short changing contributions.
Not paying the mortgage and paying extra into the pension would feel like I am borrowing money to invest which feels wrongs.

Just a thought... If you could borrow £96000 fixed at 1.6% for 5 years and were able to invest a third of that amount each year for three years into an instant access (assuming you're pushing 55) savings account which would pay 20% on each deposit and has a variable (positive and negative) interest rate. The only catch being that if you withdraw more than 25% of your balance you may have to pay tax at 20%. Would you be interested?

Of course the gamble being that after turning £96000 into £120000 (£125400 after interest payments) you don't lose another £29400 to market downturns. Conversely if the market improves, say 5% pa, after 5 years you now have £153000.

I wouldn't borrow the money (though some might...) however if you're pushing 55 with an outstanding mortgage balance it's a compelling argument to put your money into your pension rather than the mortgage. Rates will never be this low again, mortgages never so affordable. Mine's less than our council tax!

GazzaBloom

pensionpawn said:

GazzaBloom said:

After further deliberation I am going to focus on clearing the mortgage first, then, once debt free from March 2022, I can focus on loading up S&S ISA & pension using my spare income to build wealth, I will be able to use the last 3 years annual allowance balance to top up over £40K if I needed to. 14.5% of my gross salary goes into my pension monthly between me and employers contributions anyway so it's not as if I'm short changing contributions.
Not paying the mortgage and paying extra into the pension would feel like I am borrowing money to invest which feels wrongs.

Just a thought... If you could borrow £96000 fixed at 1.6% for 5 years and were able to invest a third of that amount each year for three years into an instant access (assuming you're pushing 55) savings account which would pay 20% on each deposit and has a variable (positive and negative) interest rate. The only catch being that if you withdraw more than 25% of your balance you may have to pay tax at 20%. Would you be interested?

Of course the gamble being that after turning £96000 into £120000 (£125400 after interest payments) you don't lose another £29400 to market downturns. Conversely if the market improves, say 5% pa, after 5 years you now have £153000.

I wouldn't borrow the money (though some might...) however if you're pushing 55 with an outstanding mortgage balance it's a compelling argument to put your money into your pension rather than the mortgage. Rates will never be this low again, mortgages never so affordable. Mine's less than our council tax!

Yeah, I get it. Financially it makes far more sense but we're only looking at 18 months of overpayments to get this mortgage balance cleared that's all. I will be 1 week away from my 55th birthday when I make that final payment and be 100% debt free. I will then have plenty of time to pile in on the salary sacrifice and hoover up those tax benefits.

it's too close to not do it, especially with the current economic backdrop and uncertainty. I feel that my job is secure but you never now what's around the corner if we don't get this virus under control. It could put my job in jeopardy or see an extended slowing and prolonged downturn in the stock market.

pensionpawn

GazzaBloom said:

pensionpawn said:

GazzaBloom said:

After further deliberation I am going to focus on clearing the mortgage first, then, once debt free from March 2022, I can focus on loading up S&S ISA & pension using my spare income to build wealth, I will be able to use the last 3 years annual allowance balance to top up over £40K if I needed to. 14.5% of my gross salary goes into my pension monthly between me and employers contributions anyway so it's not as if I'm short changing contributions.
Not paying the mortgage and paying extra into the pension would feel like I am borrowing money to invest which feels wrongs.

Just a thought... If you could borrow £96000 fixed at 1.6% for 5 years and were able to invest a third of that amount each year for three years into an instant access (assuming you're pushing 55) savings account which would pay 20% on each deposit and has a variable (positive and negative) interest rate. The only catch being that if you withdraw more than 25% of your balance you may have to pay tax at 20%. Would you be interested?

Of course the gamble being that after turning £96000 into £120000 (£125400 after interest payments) you don't lose another £29400 to market downturns. Conversely if the market improves, say 5% pa, after 5 years you now have £153000.

I wouldn't borrow the money (though some might...) however if you're pushing 55 with an outstanding mortgage balance it's a compelling argument to put your money into your pension rather than the mortgage. Rates will never be this low again, mortgages never so affordable. Mine's less than our council tax!

Yeah, I get it. Financially it makes far more sense but we're only looking at 18 months of overpayments to get this mortgage balance cleared that's all. I will be 1 week away from my 55th birthday when I make that final payment and be 100% debt free. I will then have plenty of time to pile in on the salary sacrifice and hoover up those tax benefits.

it's too close to not do it, especially with the current economic backdrop and uncertainty. I feel that my job is secure but you never now what's around the corner if we don't get this virus under control. It could put my job in jeopardy or see an extended slowing and prolonged downturn in the stock market.

I also more than understand the peace of mind of being debt free, however in this era of minimal interest rates (they could rise by the time you're 55, do you remember the fun of interest rates rising 5%, to around 15%, in one day during the ERM fisaco? http://news.bbc.co.uk/onthisday/hi/dates/stories/september/16/newsid_2519000/2519013.stm) I believe there is an argument for not only resisting the urge to pay off the mortgage early, or to let it run it's natural term, but to let it run indefinitely. Some would argue increase it! If your pension is healthy enough to afford your current mortgage payments from 55, you have come to terms with the reality that you are continuing to pay interest that you could avoid, and you can fix your mortgage over the long term, then being mortgage free is just a psychological hurdle. If you take this strategy to the limit, you could arrange to never pay your mortgage off in your lifetime, with the loan eventually being paid out of your estate. Why would you do that? Well I've been in my house 22 years and it's worth 4 times what I paid for it. If I last as long as my parents it should be worth 5 times what it's worth now. Whilst I need to live in my house those values (other than to guarantee certain fiscal events) are worthless to me. Repaying the mortgage balance (which stays a constant unless you increase it) from 20 times the original value of the house will hardly register as a cost to my kids when the time comes. What is more beneficial (to me) is using as much of my money in the present to enjoy life in the present, help the kids when necessary, build the pension for future unexpected life events. As commented by others on this forum, dump as much as you can (without sacrificing the present) into your pension as early as possible (especially also while the market is so low) and let time do the rest. Yes the market could go lower, however if we're lucky enough to at least make it into our 80's then at 55 you have as many years in front of you as behind you, so it's not a short term gamble. I hoping to retire at 57 when youngest daughter finishes university, so I will not have the option (and nor do I want it) of maximising my salary sacrifice for much longer. Tomorrow isn't promised.

Just an alternative perspective that currently appeals to me!

Anonymous101

GazzaBloom said:

Yeah, I get it. Financially it makes far more sense but we're only looking at 18 months of overpayments to get this mortgage balance cleared that's all. I will be 1 week away from my 55th birthday when I make that final payment and be 100% debt free. I will then have plenty of time to pile in on the salary sacrifice and hoover up those tax benefits.

it's too close to not do it, especially with the current economic backdrop and uncertainty. I feel that my job is secure but you never now what's around the corner if we don't get this virus under control. It could put my job in jeopardy or see an extended slowing and prolonged downturn in the stock market.

I usually take a very aggressive stance on investing. Maximise pension savings, invest in 100% equities, no over payments on mortgage etc but I'm in my late 30's and have time to recover if things go South in the markets.
I think that its much more of a balance as you age, investing then has to have a defensive element to it too. Its not all about maximising returns, there is also an element of not letting go of the good position that you have worked so hard to put yourself in.
I therefore think that if I were in your shoes I'd be taking a defensive position. For me that might take the form of investing heavily into government bonds within the pension wrapper. I wouldn't be expecting any real terms growth but they are much less likely to suffer the volatility of the stock market and you would benefit from the SS tax and employer NI contribution benefits.
Since they are both essentially securities on debt, its often said that over paying mortgages and bond investing essentially do the same thing (hedge the stock market) so I don't think there's too much difference. Plus you're not too far away from being able to access the pension if needs be.
Personally I'd go for the pension route but a specific investment strategy, but it is a very personal choice and over paying the mortgage is an understandable strategy.

cloud_dog

We are doing option 1, SS, especially with interest rates soooo low and unlikely to rise significantly in the near term (5 years); but, no guarantee's on that.

We have a 5 year plan (or 6 depending on circumstances), and this plan (SIPPs) are targeted to both pay off the mortgage and also provide an income to cover the 5(ish) years of retirement before a DB scheme kicks in.  I am SS down to NMW and the DH is contributing the maximum allowed in to their pensions (workplace and SIPP).

With the relatively short timescales involved only a small(ish) percentage of these investments are exposed to the more volatile investments and some is left as cash (yes, I understand the downside risk associated with this), and the majority is just put in to fixed interest / bonds (that is not to underestimate my nervousness of holding bonds atm with the limited availability of options in the non-SIPP account).

Thrugelmir

Anonymous101 said:

GazzaBloom said:

Yeah, I get it. Financially it makes far more sense but we're only looking at 18 months of overpayments to get this mortgage balance cleared that's all. I will be 1 week away from my 55th birthday when I make that final payment and be 100% debt free. I will then have plenty of time to pile in on the salary sacrifice and hoover up those tax benefits.

it's too close to not do it, especially with the current economic backdrop and uncertainty. I feel that my job is secure but you never now what's around the corner if we don't get this virus under control. It could put my job in jeopardy or see an extended slowing and prolonged downturn in the stock market.

I think that its much more of a balance as you age, investing then has to have a defensive element to it too. 

Everybody has a different work career. Only with hindsight can you look back and say that you were fortunate to make the right decision at every crossroads. Going gung ho can be extremely rewarding. However like insuring your house against fire. One takes a balanced approach. Relationship breakdown soon puts paid to all those well laid plans.