Is it better to pay extra into pension or overpay mortgage?

samhartwell

So I have reached that age to start to look at all my pension paperwork (yes I know I should have been doing this earlier in life!), a bit of background:
As I have switched companies/jobs over my career I have various pension plans and just looking to review them at the moment and consolidate where possible
My current company has just closed its DB pension and opening a DC pension with a generous cash payment upfront and employer contributions which will mean paying in a total of 19% of pensionable salary each month.
I have 2 DB pensions and 2 other smaller DC pots at the moment and starting to think about the new pension being set up right now and whether I should pay more into it.
So I have 15 more years to work until reach old fashioned pension age of 65. The various pots I have mature at different times (60,65 and 68 for state pension)
I have used a pension calculator to work out what I will need at retirement age and everything seems on track at the mo.  We also have hubbies DB and DC pensions as well (he is 2 years ahead and a bigger 'pot' than me when we did the calculations). So assuming we are both in good health when we reach that age .....all looks OK on the pension side, in theory paying a decent lump sum and sufficient to live comfortably (based on todays calculations anyway)
So roughly we both have around 15 more years wish to work but we also have 15 years left on our mortgage.  Having overpaid on our previous mortgage I know how motivating it is to see that balance decreasing over time and taking years off the term and reducing the interest paid.  Our current house is our forever house so we are not considering moving until we need to downsize in later life but it is a big burden of mortgage to pay and not really had the funds to overpay recently really as we have 2 kids just at or starting uni who require extra maintenance payments to help them with living costs. 
Hubby thinks we should start to make overpayments on the mortgage whenever we can, I don't disagree with him but would it be better to put that money we could pay off the mortgage into our pension pots instead? Am thinking I probably need to put myself a new mortgage sheet together with options for overpayment to see how much we could save on interest, is that the right way to look it?  If we pay the mortgage off early then we are  still going to be close to retirement when we have the spare cash to save or retire earlier, whereas if we put extra in our pensions starting now for 15 years and keep working then we will definitely have more money in retirement. We are both higher rate tax payers so hence the question of whether its more sensible to make extra pension payments (it feels to me like this is the sensible option!!)
Sorry if there's not enough specific details on amounts (just a bit wary of posting that on a public forum!) if anyone can point me in the direction of some good calculators to do the maths on the options I would be really grateful.
Let the questions begin!
Sam

pjcox2005

Personally with you both being higher rate tax payers then I'd be increasing pension contributions and trying to get the term of the mortgage as long as possible. Not only do you get the 40% tax saving (which is often mentioned as possibly going given generosity) but I think the investments alone would typically get a higher return than the current mortgage interest rates. You're also not that far from retirement (although obviously still young :-) ) so you'd be able to access the money sooner.

The downsides of pension would be restriction on access compared with mortgage overpayment where should the worst happen (e.g. loss of job, ill health and expensive treatment outside NHS) then you could sell the house and take the money. You probably don't have the same emotional feeling as paying down mortgage and having a mortgage free house but I don't think that's particularly logical as you can see pension wealth increasing faster.

That's my personal opinion only though, you obviously have to decide.

Thrugelmir

How secure are your respective employments?  Not just a question of saving mortgage interest. Also a question as to what impact a sudden financial shock would have. When markets have been buoyant for a period of time it does draw people in. 

kuratowski

They aren't exclusive options.  If you have £100/month available, you can put £50 towards each option, if you like.

dunstonh

Financially at this time, the pension is an absolute no brainer.    Whether it is the best option overall based on your circumstances is unclear but when looking solely at the numbers, pension trumps overpayments.

jamesd

When you work out how much mortgage interest you save, what are you comparing it to as the amount you'd make or save by using the money for something else? The answer is usually nothing, so all people see is an impressively big amount of interest saved.

To get a better idea, try a regular savings calculator. For the mortgage put in 60 a month for twelve years, assuming overpayments clear it in twelve years. Assuming 2% interest that's 9755.83.

For the pension at higher rate start with 100 a month and use 4% interest for a medium risk/growth set of investments. That's 18,443.55 before tax. From age 55 you can take 25% as a tax free lump sum without it affecting future contributions, so 4,610.88. The remaining 13,832.66 needs to be left until you're about to retire or it cuts money purchase contributions to no more than 4k a year. Assuming basic rate tax that's 11,066 after tax. There is one exception: three times in your life you can take a small pot of up to 10k. You can transfer to create that size.75% of this is taxable so probably best not to do it at higher rate.


So to summarise, for each £60 of potential mortgage overpayment money you can have one of these two outcomes:

£9,755.83 in saved mortgage interest at 2% or

£4,610.88 towards the mortgage and £11,066 after tax for retirement, assuming you get 4% investment returns

That big difference in benefit is why overpaying the mortgage saves lots of interest but is still the least good option.

To maximise the benefit you'd look to extend the mortgage until a few years after age 55 then use the tax free lump sums from the pensions to clear it. The longer the better, since longer term means lower payments, more into the pension and a bigger lump to clear at the end, with more in the rest of the pension for retirement.

There is a limit on pension tax free lump sums of a bit over £250k per person, when the total pension pit value reaches a bit over a million, the pension lifetime allowance. So there's a limit to how far you can go when it comes to big mortgages.

The combination of really efficient mortgage repaying with really efficient pension accumulation for retirement tends to make this a fairly easy choice.

jamesd

A way to address the financial trouble before age 55 problem is the one I used for a while: higher rate money into pension, basic rate into S&S ISA, same investments. As 55 approaches increase the pension contributions and draw on the ISA for living. If you can't afford any ISA at basic rate you can use some higher rate money.

It can be a bit fiddly to ensure you'll have enough higher rate money for pension contributions when moving from one to the other and you also need to take care of staying withing the pension annual allowance. Still, it works, though you might be surprised by how far in advance you need to start the moving.

samhartwell

Thank you everyone thats great advice all round - fantastic thank you!!

samhartwell

Thrugelmir said:

How secure are your respective employments?  Not just a question of saving mortgage interest. Also a question as to what impact a sudden financial shock would have. When markets have been buoyant for a period of time it does draw people in. 

Very true, guess you never really know and time will tell - both companies been around for 100 or more years, both in a technical/professional role - its worth thinking about as I remember the scary feeling of being made redundant once when in a role at a start-up company, although I got a new job straight away.  

Thrugelmir

samhartwell said:

Thrugelmir said:

How secure are your respective employments?  Not just a question of saving mortgage interest. Also a question as to what impact a sudden financial shock would have. When markets have been buoyant for a period of time it does draw people in. 

Very true, guess you never really know and time will tell - both companies been around for 100 or more years, both in a technical/professional role - its worth thinking about as I remember the scary feeling of being made redundant once when in a role at a start-up company, although I got a new job straight away.  

My lifetime employment traced it's roots back to the 1600's. Eventually the dynasty came to an end. When the largest privately owned agricultural business in the world opened it's cheque book.  

samhartwell

Thrugelmir said:

samhartwell said:

Thrugelmir said:

How secure are your respective employments?  Not just a question of saving mortgage interest. Also a question as to what impact a sudden financial shock would have. When markets have been buoyant for a period of time it does draw people in. 

Very true, guess you never really know and time will tell - both companies been around for 100 or more years, both in a technical/professional role - its worth thinking about as I remember the scary feeling of being made redundant once when in a role at a start-up company, although I got a new job straight away.  

My lifetime employment traced it's roots back to the 1600's. Eventually the dynasty came to an end. When the largest privately owned agricultural business in the world opened it's cheque book.  

Very true - always a risk there!