44-year-old with savings but no pension: pay off mortgage in full, or start a pension...

Hi,

I'm 44 years old, director of my small limited company, and single with no dependents.

I'd not been in a position to pay into a pension when I was younger, and focussed on getting a mortgage.

I currently have 14 years and £90,000 left on my mortgage, but no pension beyond the State provision.

As I've now managed to accrue savings of £90,000, and my current mortgage deal is about to expire, I could pay off my remaining mortgage without penalty.

However, if I remortgage, due to the latest interest rate rises, my monthly payments will go from £635 to £705. There may also be costs in the future, if I want to change the mortgage in order to rent my home out, or if I want to sell.

When it comes to pensions, confusingly there are a few calculators with different suggestions. At an average, it looks like if I want to have an annual pension of £25,200 on retirement at 67, I need to start paying in either around £860/month, or, £520/month plus my £90,000 savings. 

As a company director, these pension payments can reduce the company's tax bill, which ultimately saves me money. So I could in theory pay off my mortgage, and then use the money I would have spent on the mortgage, to pay into a pension.

So my question is: should I pay off my mortgage in full, or use my savings to jump start a pension?

What are the pros and cons of each? Is there another option that I'm overlooking?

Thanks!




Comments

  • edinburgher
    edinburgher Posts: 13,423
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    edited 12 July 2022 at 7:39PM
    You can pay up to £40,000 a year into a pension, I'd be focusing on that unless you are planning on a very meagre retirement.

    Unfortunately you have missed a very positive decade or so for stock market returns, "time in the market" is an important consideration. The mind boggles that you've missed out on that while saving up £90,000 during a period of incredibly low savings interest!

    If I were you, I would be shovelling as much money into a pension as quickly as I could and the mortgage would be a secondary concern. Without meaning to scaremonger, I don't really think you have time to be pound cost averaging into a pension from zero, you probably only have another 16 years or so of work in you ;)
  • Look to knock £20,000 off the CAPITAKL of your mortgage, and make the bank recalculate your term left. This will give you an idea of how many years left.
    Swap  life insurance to TERM Insurance so a policy for a sum of bucks to kill off the loan left. 
    Keep a few bucks for that unplanned disaster, like fridge freezer replacement, got the idea. But you never know these things happen. The rest find a pension plan, and invest. For you will need to be diligent and pay in regular. But good luck and a go for a spread of guilts (UK & Overseas) and Northern Hemisphere stocks. HM Gov have a free pension chat you can book with an advisor.

  • savingholmes
    savingholmes Posts: 26,851
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    You can pay up to £40K a year inclusive of tax relief into pensions - plus go back up to 3 year's worth if needed - so you could if you haven't been - potentially put all/most of your savings into pensions if you wanted. On which you would then get tax relief. You perhaps need to post this question on the pensions board as well - as I am not an IFA - just a participant.

    I would prioritise your pension if you want a decent amount to live on later in life. Have you checked what your state pension entitlement is and how many years you need to work to get it in full? Do you have any missing years that you need to make up?

    Another way you could achieve your pension increase is to pay everything above NMW into your pension via your company and live off your savings a while to compensate. This would lower your tax burden too.

    You haven't said what your current income is and how likely that is to continue as you get older. A lot of people who plan to work until later in life are not healthy enough to do so - which is why it's potentially urgent to resolve.
    Achieve FIRE/Mortgage Neutrality by mid 2030
    1) MFW Nov 21 £201,999 with 237 payments to go - now £184,341 Equity 26.26% (lower post move compensated by EF)
    2) Mortgage neutral by June 2030 AVC £7,613/£127,466 AVC target 5.97%
    3) FI Age 60 annual income target £12,500/30,000 41.66%
    Achievements: CC free since April 22. 1 year EF from Jan 24 & dedicated pot for home improvements
  • edinburgher
    edinburgher Posts: 13,423
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    @savingholmes - I believe carry forward only works if you've been a member of a registered pension scheme - don't think that applies here?
  • savingholmes
    savingholmes Posts: 26,851
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    @savingholmes - I believe carry forward only works if you've been a member of a registered pension scheme - don't think that applies here?
    In which case you've taught me something - thank you
    Achieve FIRE/Mortgage Neutrality by mid 2030
    1) MFW Nov 21 £201,999 with 237 payments to go - now £184,341 Equity 26.26% (lower post move compensated by EF)
    2) Mortgage neutral by June 2030 AVC £7,613/£127,466 AVC target 5.97%
    3) FI Age 60 annual income target £12,500/30,000 41.66%
    Achievements: CC free since April 22. 1 year EF from Jan 24 & dedicated pot for home improvements
  • IndiJonesi
    IndiJonesi Posts: 505
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    This is what I would do:
    1) Pay the mortgage off in full
    2) Take in a lodger(s)
    3) Then pay into a pension
    Using the pension payments as a tax deduction via your company sounds like a great option to me.  Income from lodger(s) goes straight to the deposit for another property.
    Personally, I am part of a company pension scheme but this didn't start until I was 40 years old.  I'm a higher rate tax payer but do not make AVC's as I throw everything at the mortgage.  How long will it be before the tax rules change with regard to pension lump sum payments?  Not long the way things are going.  Are pension payment amounts guaranteed after retirement and do they rise in line with inflation?  How safe would your 90k have been had you invested it?  Hindsight is a wonderful thing.  I'm quite sure I have read on investment policies that "you may get back less than you put in".  Bricks and mortar is always my first choice as the place to invest.  It is home at the end of the day.
  • L9XSS
    L9XSS Posts: 438
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    You can pay up to £40K a year inclusive of tax relief into pensions - plus go back up to 3 year's worth if needed - so you could if you haven't been - potentially put all/most of your savings into pensions if you wanted. On which you would then get tax relief. You perhaps need to post this question on the pensions board as well - as I am not an IFA - just a participant.

    I would prioritise your pension if you want a decent amount to live on later in life. Have you checked what your state pension entitlement is and how many years you need to work to get it in full? Do you have any missing years that you need to make up?

    Another way you could achieve your pension increase is to pay everything above NMW into your pension via your company and live off your savings a while to compensate. This would lower your tax burden too.

    You haven't said what your current income is and how likely that is to continue as you get older. A lot of people who plan to work until later in life are not healthy enough to do so - which is why it's potentially urgent to resolve.
    Very informative answer to the OP.
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