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!

K_S

@moneymark2000 Very interesting question. This Monevator article covers a lot of the pros and cons of paying off mortgage vs investing. I use 'investing' as a proxy for Pension as I'm assuming here that you intend to use your pension contributions to invest.
https://monevator.com/pay-off-mortgage-or-invest/

There are other opinions on the internet which pay fall more firmly in one camp or the other.

tacpot12

I would suggest that you pay off your mortgage. It is probably not the optimal approach, but it will be good enough and you will have secured your home. There is something very reassuring to know that you cannot lose your home.


  

Seraphi

moneymark2000 said:

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!

Pension IMO.

A lot of people like the security and peace of mind of having the mortgage paid off. However for the last decade with interest rates at their historic lows, purely from a financial perspective, overpaying has been the wrong thing to do. They'd have been better off investing that overpayment money in a global tracker fund.

The longer you have money invested the greater the likelihood of a positive return. You'll have seen that this year most people have lost money on most investments made in Q1. However people that invested in say a S&P 500 tracker five years ago, will be down relative to last year, but up relative to when they first invested in 2018.

You rightly acknowledge that you don't have the luxury of time that, say, a 25 year old has. Also you don't know what life will bring you. You may not mind the idea of retiring at 67 now, but an issue related to your health, or finding a partner that you want to spend time with may mean that you want to retire earlier than 67. The earlier you start investing the more flexibility you will have in your 50s and 60s should your plans need to change.

Regarding the mortgage, you do have the option of lengthening the term to reduce your payments. At present it would be complete when you are age 58, you could extend when remortgaging by up to nine years to state retirement age with any provider without issue. You could extend to up to 70 with most lenders, provided you can show how you'd make those payments after state retirement age - usually just saying you're prepared to work for longer. That would reduce your payments even with a raised interest rate back to current levels. There is also an argument to lengthen simply to reduce your mortgage payments from where they are now, so that you can invest more into your SIPP at an early age.

None of this prevents you from overpaying your mortgage should you wish to if you have a bumper year of profit from your business.

There is also the option of half and half. Putting in say £45k into a pension the remainder into the mortgage. This would lower your mortgage payments, but you'd need to add a bigger monthly amount. The point about extending your term still applies here. You'd need to do some spreadsheeting for some sensitivity analysis as there may be a more optimal amount than 50%.

Hope this helps.

alligin

Pension.

Bear in mind that you will get tax relief on your contributions which can be significant at the higher rate: a 10k contribution means ~14k into your pension or ~12k plus a tax rebate. There is annual limit for tax relief however you can use up to 3 years' previous allowance. Speak to your pension provider to see where you are and your accountant about claiming the tax bac or you can look online.

simon_or

My main income is as a company director as well and of a similar age. I would go for the pension, mainly to take as much advantage of the pension tax relief as I can and because mortgage interest rates are still very low.

One word of warning though. If you are going to be paying into your SIPP through the company and thus reducing profits, keep in mind that if you ever need to get a mortgage later on, it can be a huge pain in the behind due to the reduced profit numbers.

Scorpio33

Pension. To me, compare the interest rate of the mortgage vs the potential returns in the pension.

If you are after peace of mind re your house. Lets assume you sold it today for market value, my guess would be that the equity would allow you to buy something else (all be it smaller) without a mortgage. In that case you don't need to pay off the mortgage to have the reassure of possibly living mortgage free, In effect, borrowing at mortgage rates (say 3%) in order to invest in a pension for a pension return (say 7-10%)