Pay into pension or pay off mortgage

reggaethecat

I'll be 45 this year and have 22 years left on my mortgage which is very affordable and on a low interest rate. I now have a few hundred quid a month spare (maybe £500) so my question is: is it better to put a load more cash in my pension or pay off my mortgage quicker? I'm a higher rate taxpayer so I'm guessing it makes sense to put it in my pension direct from my salary to effectively get a 40% boost on it and have it earning me money, I could then use a lump sum at 57 to pay off the remainder of my mortgage in 13 years time. Or is it better to concentrate on being mortgage free and then bung a load more into my pension late on - bearing in mind I may be on a lower salary in my later career? I am hoping to retire earlier than 67/68 or at least be able to reduce hours and maybe do something less stressful after 60. Thanks in advance.

Bimbly

This gets asked a lot. Here's some good response from the same question only a couple of days ago:

https://forums.moneysavingexpert.com/discussion/6253472/upping-pension-contributions-vs-upping-mortgage-payments/p1

Not only does pension trump mortgage for tax relief, this is doubley so for someone paying higher rate tax. Also, the earlier you put money into a pension, the more time it has to grow. So doing mortgage first and pension second means you miss out on years of growth.

reggaethecat

Bimbly said:

This gets asked a lot. Here's some good response from the same question only a couple of days ago:

https://forums.moneysavingexpert.com/discussion/6253472/upping-pension-contributions-vs-upping-mortgage-payments/p1

Not only does pension trump mortgage for tax relief, this is doubley so for someone paying higher rate tax. Also, the earlier you put money into a pension, the more time it has to grow. So doing mortgage first and pension second means you miss out on years of growth.

Thanks, that pretty much confirms my thinking. I think I'll look to squirrel as much as I can away into my pension while I'm on decent money, plus enough for an emergency fund. Seems daft not to while the mortgage interest rates are so low. Cheers again.

IAMIAM

I agree wholeheartedly with this. Top up pension, retire when you like, pay little mortgage interest around 1.5%, retire, use lump sum to finalise mortgage, earn 40% tax relief, years of growth etc etc 

Thrugelmir

Do you plan to retire at 57?  With just 12 years ahead of you. Then de-risking should be born in mind. As you might find yourself drawing down in the midst's of a recession or other global economic event. 

If you use the tax free lump sum primarily to clear the mortgage. Then the money is gone for ever. You may well have another 30 years ahead of you to fund.

Sometimes it's wise to chart a middle course and do a bit of everything. Then all options remain fully open with maximum flexibility. As life generally is no different to investing. Only certainty is uncertainty. 

mark55man

All the above, but even more so if you can get extra company contributions by increasing your contributions to your company scheme and are Higher Rate now, but will be Basic Rate in retirement

If you go to the MFW (Mortgage Free Wannabe) board there are lots of people of the opinion that mortgage first - I believe them to mainly looking to be mortgage free by mid to late 40s which sounds like it isn't likely for you (or me either) - and also precludes any access to that cash for a decade.  Those extra years I think push the balance further into pension saving whilst I can see the attraction of being able to see the kids off to Uni and not have a cost in the world (touch melodramatic), but I think mid 50s is when you start to have a few more near term options.  You can learn from their commitment, I certainly have, just different payment mechanisms

By deciding my existing pot is large enough to sustain my retirement (mortgage excluded) when I hit the trigger I am now aggressively saving new money into my pension to grow a mortgage neutral pot, which will benefit from the differential between the HRT I pay now, and the BRT I will pay later + an extra 2% contribution from my employer.  Even though this means I won't be technically mortgage free,  having matching assets (my MN pot) and liabilities (the mortgage) will do for me and I can focus on everything else.