Upping pension contributions vs upping mortgage payments

bournejason7629

Hoping someone might be able to give me some thoughts on what to do here. First of all a little context, I'm 40 years old in full employment and a higher rate tax payer. I was working out of the country for around 10 years and so only have seven years of pensions contributions saved up (I do have some personal savings but not invested in investments or ISAs currently). I have a wife without employment but no children at this time. I'm getting some figures together from brokers for remortgaging the house (18 years left at current rate), and am also about to change job to one with a higher salary, but lower employer pension contributions.

One broker has come back with a mortgage payment £80 less than I am currently paying per month with the 18-year repayment plan, and the way I see it I have three options:
1. Go for the lower mortgage payment and use that extra plus some from the salary increase to invest more into the new employer pension scheme
2. Up the mortgage payment to where it currently sits and reduce the term, so I can have it paid off quickly
3. Do a combination of the two

I may have missed out something vital here in terms of helping people understand my situation so if so please do let me know. But if anyone can provide any thoughts it would be massively appreciated.

penners324

1. With pension contributions you'll be adding an additional 40% being a higher rate tax payer. Then the investment returns over the years should far outstrip the mortgage interest over the same period.

dunstonh

This is a bit of an FAQ.  Been asked about twice a week roughly.

Any overpayments to the mortgage come out of your salary after tax and NI.     And you get to save 2%ish in interest.   So, financially, not very attractive.
A mortgage pension gets tax relief (and possibly NI reductions depending on type).   As a higher rate taxpayer that means, ignoring any potential NI reductions, a £100 into a pension only costs your £60.  And the average return of middle of the road investments is around 5.5% a year.

So, financially, you are looking at the pension costing you £60 to get £100 and earning around 5.5% p.a. vs £60 coming off the mortgage saving you around 2% p.a.
Financially, its a no brainer to pay into the pension and not make overpayments.   However, there are can other influences that mean a bit of both can be best.

Linton

Purely financially, paying the minimum mortgage repayment and paying extra into your pension is very likely to be the more lucrative option.

You havent stated the mortgage interest rate but unless you are a special case it will be less than the expected return from sensible investing in your employers pension scheme, especially taking into acount the tax advantages of a pension. So investing in a pension is probably better than investing in your home.

However the decision is not purely financial.  It depends what you feel about "very likely" and "probably".   Some people would be happier paying off their mortgage quickly just like some people are happier with the safety of a savings account than taking any risk with share based investments no matter what the potential gains could be.

ewaste

As everyone else has already pointed out, pension contributions are realistically always the better option for income above the 40% tax threshold. Especially if you also benefit from matching contributions or salary sacrifice. Furthermore the earlier and larger your pension contributions the more you benefit later in life.

What can you afford to save? considering 40% tax relief and any employer matching. What are your aspirations for retirement? once you figure that out you can work backwards to work out how much you need to save.

Croeso69

dunstonh said:

A mortgage gets tax relief (and possibly NI reductions depending on type).   As a higher rate taxpayer that means, ignoring any potential NI reductions, a £100 into a pension only costs your £60.  And the average return of middle of the road investments is around 5.5% a year.

A pension gets tax relief, @dunstonh, not a mortgage.

dunstonh

Croeso69 said:

dunstonh said:

A mortgage gets tax relief (and possibly NI reductions depending on type).   As a higher rate taxpayer that means, ignoring any potential NI reductions, a £100 into a pension only costs your £60.  And the average return of middle of the road investments is around 5.5% a year.

A pension gets tax relief, @dunstonh, not a mortgage.

Actually, I was right. I just popped in the TARDIS back the to 80s when MIRAS existed and typed the response 
I have corrected the typo - thanks. 

Croeso69

dunstonh said:

Croeso69 said:

dunstonh said:

A mortgage gets tax relief (and possibly NI reductions depending on type).   As a higher rate taxpayer that means, ignoring any potential NI reductions, a £100 into a pension only costs your £60.  And the average return of middle of the road investments is around 5.5% a year.

A pension gets tax relief, @dunstonh, not a mortgage.

Actually, I was right. I just popped in the TARDIS back the to 80s when MIRAS existed and typed the response 
I have corrected the typo - thanks. 

Ah yes. Music was not the only good thing about the 1980's.

AnotherJoe

OP, apart from the financial no-brainer of getting the tax relief via pension, current mortgage rates, being pretty low mean that inflation is likely also chipping away at your mortgage for you. So let that take on some of the hard work. You can pay off a pound off your mortgage now with a pound thats worth a pound, or pay off the same pound in 20 years with a pound thats likely only worth 50p.

Now, for peace of mind you may wish to pay off some or your mortgage quicker and theres a whole forum dedicated to people doing that, but many of those people, especially high tax rate payers like you, will be losing multiple tens of thousands for that peace of mind.

Also, it seems unlikely to me at least that high rate tax relief will carry on indefinitely. So if you go in thinking for example you'll up the mortgage payments for the next ten years and then up the pension when thats done, apart from losing out on ten years pension growth, you may find the extra tax relief has been taken away by then. As they say, "prediction, especially of the future, is difficult", but one thing that you do know is that 40% relief is available right now.

bournejason7629

Thanks for the responses, all. One remortgage offer a broker has provided me with so far is at 1.56% for 5 years.
Current pension contribution from me is 6.65% and my employer 6.35%. When I move into my new role I believe maximum employer contributions will be 3% so I'll need to up my contributions to make up for that shortfall.

Albermarle

soldave said:

Thanks for the responses, all. One remortgage offer a broker has provided me with so far is at 1.56% for 5 years.
Current pension contribution from me is 6.65% and my employer 6.35%. When I move into my new role I believe maximum employer contributions will be 3% so I'll need to up my contributions to make up for that shortfall.

Be aware that 13% total contribution is not high . When the above posters were all recommending more pension contributions , especially as you are a higher rate taxpayer, I think they were probably thinking about a higher level than that .