Pension Contributions or Mortgage Overpayments?

palmtreebeach

I'm a member of my workplace pension and my employer matches my pension contributions. In light of this, do you think it's a better financial move for me to maximise what I pay into my work pension instead of making overpayments on my mortgage?

dunstonh

What rate are you paying on your mortgage?  1.5-3.0% typical ballpark.  And you would be paying it out of taxed money.
How much are you making on your pension? probably around 5-7% ballpark and you are not tax on the money paid in.
Employer matches but to how much?   They will usually have a cap but you should aim to maximise the free money.  Nothing beats free money.
How is your retirement planning? is it on track or are you behind?

Financially, overpaying the mortgage is usually the weaker option at this time due to low interest rates.   Pension is typically the better option financially by a long way.  If you are getting free money too from the employer then its a no brainer.
Once you hit the cap from the employer, then it can often be a combination of the things.  A bit of overpaying the mortgage.  I bit of extra in the pension and a bit into an S&S ISA.     

Albermarle

palmtreebeach said:

I'm a member of my workplace pension and my employer matches my pension contributions. In light of this, do you think it's a better financial move for me to maximise what I pay into my work pension instead of making overpayments on my mortgage?

FYI, this same question gets asked very regularly on this forum , so worth spending some time scrolling through the threads to find similar threads and read the answers,

Thrugelmir

Only you know your personal circumstances. Plans to move house, relationship breakdown, loss of job at some point are all factors. Unfortunately life has a habit of throwing curved balls when you least expect them too. A little bit of everything is an option if there's any uncertainties. Rather than a singular choice. 

vacheron

This decision will be significantly influenced by your age and tax band.

• If you are paying 40% tax and are 3 years from retirement (and your employer does indeed match AVC's 1:1), then you are potentially looking at giving up £200 in your pension in order to pay £60 off your mortgage!
• If you pay 20% tax and have a 30 year mortgage, it could be a completely different story!

 

palmtreebeach

Thanks, everyone.

I've just realised that my work pension is based on my average salary. I think my employer pays in 16% of my salary each month, so I was wrong about them matching my contributions. I can buy extra pension but I need to read more about how it works (it's something about buying extra 'blocks' of pension).

I can start accessing the pension from age 55 onwards, but it's reduced if I take it before my normal pension age. I'm currently 38.

My mortgage rate is 2.35% and I'm at the start of my mortgage.

barnstar2077

It may be an idea to add a stocks and shares ISA into the mix to give you a bit more flexibility later down the road.  I am not saying that you shouldn't pay a bit more into the pension however, just that pension money is locked away and you never know what the future holds.

Vespaboy

Why don’t you do a bit of both? I know others may say on a purely financial model pension wins but paying off the noose around your neck does give you a sense of freedom from the banks. Who knows where things are in 12 months time so bit of both is my vote 

atush

Pension....

pensionpawn

Pension every time (at these low rates)

Kynthia

Prnsion is usually the best choice when looking purely at which gets you the most money, however life is more complicated than that. At 38 you might want to consider the following:

1. How much of your money you want to lock away until retirement age? Do you need money for other things before then you should be saving for? Short term savings in a savings account, then medium/long term savings (5 years plus) in a S&S ISA, and retirement age income (including money to retire earlier than your state pension age) and savings go in a pension.

2. Are going to want to buy a more expensive house in the future? Therefore do you want to build equity i order to make a future house more affordable?

3. Do you only have only a DB pension (final salary or career average earnings) and are you likely to remain in one for much of your career? If yes then you might want to consider opening a DC personal pension pot as this will give you flexibility. DB pensions are fantastic for guaranteed risk-free lifetime annual income and these should be maximised. However a DC pot allows you to take lumps sums for paying off your mortgage, home renovations, more travel in early retirement, gifting children money for their weddings/house deposits, etc. So having a DC pot to draw from gives you flexibility. If you're likely to have work-based DC pots then you might want to maximise your DB pension while you have the chance and buy additional pension.