Overpay mortgage or save into LISA or Pension?

parsnip88

Hi everyone I am stuck as to which is the better option. To overpay my mortgage or invest in a LISA or contribute more to my pension.
I currently have a £184,000 mortgage at 2.23% over 30 years. I have zero debt and 6 month emergency fund saved up. I am 32 years old. 
I currently contribute 10% into my pension which is matched by my employer into a medium risk fund via Legal and General.
Our collective household income is £60k so fairly average but we can afford to pay into only one of the above.
So do I invest into a cash LISA, pay more into my pension or overpay the mortgage. 

Any perspective would be greatly appreciated.
Thankyou

Another_Saver

parsnip88 said:

Hi everyone I am stuck as to which is the better option. To overpay my mortgage or invest in a LISA or contribute more to my pension.
I currently have a £184,000 mortgage at 2.23% over 30 years. I have zero debt and 6 month emergency fund saved up. I am 32 years old. 
I currently contribute 10% into my pension which is matched by my employer into a medium risk fund via Legal and General.
Our collective household income is £60k so fairly average but we can afford to pay into only one of the above.
So do I invest into a cash LISA, pay more into my pension or overpay the mortgage. 

Any perspective would be greatly appreciated.
Thankyou

National median household take home income is £30k so you're doing comfortably better than fairly average.
At 32 I think most people in the forum would agree that a higher risk fund, maybe even 100% equities would be a more appropriate choice for your pension as you have at least a quarter century to retirement.
If you're 6 month emergency fund is your total savings, my view would be to build up savings and investments you can access before retirement, such as starting a stocks & shares ISA, before you look at LISAs, SIPPs or additional pension contributions.

El_Torro

Why do you want to pay into a cash LISA? You already own a property so the only real benefit in a LISA is to wait until you’re at least 60 before taking any money out of it. Why do you want to hold cash for 28 years? If you’re going to hold a LISA go with a Stocks & Shares one.

In your position I would probably invest in a Stocks & Shares ISA, it’s more flexible on when you can access your money than a LISA is. It depends on your situation though. You may want to put some in your pension if the 20% of your salary which is already going in there isn’t enough.

I would avoid mortgage overpayments, simply because you can get better returns investing. However it might make sense to overpay in the next few years to get your Loan to Value ratio down to get a better mortgage interest rate. If you already have at least 40% equity in your property you won’t be getting a better interest rate though.

steampowered

I would go for a stocks & shares ISA in your situation. Perhaps investing into a diversified, low cost fund such as HSBC FTSE All Share Index.

It sounds like 20% of your salary is going into your pension each month. That is a good level of contribution so there is no immediate need to boost your retirement contributions at this time. Hopefully your partner is also making good pension contributions.

The advantage of pensions / LISA are tax relief / the government top-up, but you lose flexibility.

A normal stocks & shares ISA is more flexible, because you can withdraw your investment at any time without penalty. A stocks & shares ISA is still very likely to get you a better return than the interest you are paying on the mortgage. You might want to access the money at some point - perhaps to buy a bigger house; or fund care; or start a business. You've got a long time to go until retirement so who knows what will happen!

Alexland

Hard to comment without knowing your LTV, mortgage fix duration or if you intend to upgrade to a bigger property in future but generally it's a balance between paying off your mortgage while also accumulating via the most tax efficient Pension and/or S&S LISA wrapper while keeping some money accessible via ISAs, etc.

enthusiasticsaver

It depends what your financial objectives are.  Do you have children or will you be having them?  Are you intending to move and do you want to retire early or are you planning to work until normal retirement age? 

If you are not bothered about the psychological benefit of being mortgage free economically it makes more sense to invest.  At the present time though your mortgage is more than 3 times your income so if you plan on having children and your income may reduce or outgoings increase with childcare costs and it is not due to be repaid until the age of 62  then overpaying the mortgage may be more beneficial at this time.  If you already have children or don't plan on having them  and you are not bothered about still having a mortgage in your 60s then you could comfortably invest instead. 

fryderykchopin

Mortgage overpayments vs investing: If you can get a NET return on your investments greater than your mortgage interest, then invest. Making more than 2-3% should not be difficult. Let's say you make 7% net per year from investment, take 2% for mortgage interest, you keep 5% profit per year (just a rough estimation). However you should consider the risk involved and the possibility of losing money.

LISA vs S&S ISA: If you already have a decent pension scheme from your employer, I wouldn't bother with taking a private pension. Many people will argue that if you have good prospects for your retirement income from an existing pension scheme it may not make sense to take another pension-like investment such as a LISA, plus you also have the problem of not having access to that money until you are 60 or paying a penalty. However, something to take into account is that the money you put in a LISA will give you a NET performance of 25% per year - plus whatever additional performance you get if you hold a S&S LISA instead of a cash LISA. Not many investments will give you that level of return at no risk! If you can afford to invest let's say 20k per year, then putting 4k per year in a LISA may not be a bad option as you still have another 16k to put wherever you like, for example a S&S ISA, which will always be available should you need to take the money out. You won't have access to the LISA money anytime soon but if you have another 16k to invest every year, you shouldn't need it anyway and you may leave some nice inheritance to your offspring...

parsnip88

steampowered said:

I would go for a stocks & shares ISA in your situation. Perhaps investing into a diversified, low cost fund such as HSBC FTSE All Share Index.

It sounds like 20% of your salary is going into your pension each month. That is a good level of contribution so there is no immediate need to boost your retirement contributions at this time. Hopefully your partner is also making good pension contributions.

The advantage of pensions / LISA are tax relief / the government top-up, but you lose flexibility.

A normal stocks & shares ISA is more flexible, because you can withdraw your investment at any time without penalty. A stocks & shares ISA is still very likely to get you a better return than the interest you are paying on the mortgage. You might want to access the money at some point - perhaps to buy a bigger house; or fund care; or start a business. You've got a long time to go until retirement so who knows what will happen!

Thankyou yes my wife pays into a teacher pension at 9-10% (or there abouts) and this is doubled by her employer so she pays in around 30% into her pension.

JustAnotherSaver

Jeez. I wish I was average. I must be a pauper on a combined £40k-£45k.

Albermarle

Thankyou yes my wife pays into a teacher pension at 9-10% (or there abouts) and this is doubled by her employer so she pays in around 30% into her pension.

Presume you are aware that the Teachers pension is a Defined Benefit scheme, and what she is really building up is not a pot of money but the right to a guaranteed pension income , related to her salary and years of service.

Whilst your Defined Contribution scheme is the opposite . You are building up a pot of money , from which you hope to get an income from in retirement . Hers is much better !

parsnip88

Albermarle said:

Thankyou yes my wife pays into a teacher pension at 9-10% (or there abouts) and this is doubled by her employer so she pays in around 30% into her pension.

Presume you are aware that the Teachers pension is a Defined Benefit scheme, and what she is really building up is not a pot of money but the right to a guaranteed pension income , related to her salary and years of service.

Whilst your Defined Contribution scheme is the opposite . You are building up a pot of money , from which you hope to get an income from in retirement . Hers is much better !

Yes her's is way better. I was a teacher for 8 years so I have 8 years worth of the same scheme saved.