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

moneymark2000

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!

Bravepants

As well as the, no doubt, excellent replies you will read here, see this recent thread:

https://forums.moneysavingexpert.com/discussion/6371458/24-and-wanting-to-retire-early#latest

dunstonh

Company directors should be paying from the company and not personally.   It is daft to draw money out of the company after paying corporation tax and dividend tax to then place it into savings or paying the mortgage (if the mortgage is affordable and will be repaid by retirement).

So, you wouldn't use the money you have personally to pay into a pension.  You would use it to reduce dividends to allow greater company contributions to the pension.

When it comes to pensions, confusingly there are a few calculators with different suggestions.

Calculations rely on the figures used in the calculation.  Different figures will give different outcomes.       If you put garbage figures in. you will get garbage figures out.   Some will use different defaults. Some will ask you to put a figure.  Some will use inflation adjustments.  others will not.

 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. 

You have 23 years of working life.   Your pension needs to pay for about 25-30 years.     So, its quite logical that the payments needed will be high.

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.

What interest rate is your mortgage?  Long term investing return for middle of the road is about 5.5% p.a.   

To pay £10k off the mortgage, would have cost you many thousands more in tax.    £10k into the pension saves you many thousands in tax.

DT2001

Is the £90,000 inside or outside your company? 

Just like to clarify as one man company owners sometimes understandably refer to the limited company as mine.

You are limited by your earned income that you can put into your pension outside of the company. So getting the £90k, if outside the company, may not be a straight forward option.