Overpay the mortgage or pay into pension pot via salary sacrifice 11 January at 11:49AM in Mortgages & endowments 8 replies 430 views

dwainwright252

I have a repayment mortgage with a term that finishes when I am 75 but I want to pay it off when I'm 65. I could make monthly overpayments on my mortgage to achieve this but it seems more efficient to put the extra money into my pension pot and build up a lump sum to pay off the mortgage when I am 65.  This is because the additional pension contributions are made by salary sacrifice, and as I'm in the higher tax bracket it means that 40% of those contributions would otherwise go to the tax man.

I've never had expert financial advice on this plan, so I'd be interested to know if it is really the best option.  Also, is it best to wait till I retire and then draw down the lump sum to pay off the mortgage fully, or should I draw down some of the lump sum incrementally to pay off the mortgage in stages?  When interest rates were low it didn't seem to matter much, but now they are creeping up it might make a difference?

Any advice gratefully received.

dimbo61

Without sitting down with you like a FA would do and go through everything to do with your life.
Age, job, pension, savings, mortgage debt and Interest rate, long term plans, kids, retirement age, ISA,s etc
No one can give clear advice.
Do you want a mortgage at 75 Hell  No
Should you draw your pension early maybe terrible advice and stop you saving more than £4,000 a year into your pension.
Am I a qualified FA or mortgage broker NO
PS we have overpaid several mortgages over the last 18 years and saved £££,£££ in Interest.
Will you reach the Lifetime pension pot £1,070,000  I think 🤔 
Will you get a good pension ?
Will you need the pension and lump sum to live on !
Debt is debt

saveallmymoney

There is a lot of detail missing in your question, not least of which is your current age. However it is likely to be very tax efficient to pay into your pension and then when available use the 25% tax free cash to withdraw and pay your mortgage.

Assuming you only take the cash free portion, you can continue to pay into your pension afterwards.

dwainwright252

dimbo61 said:

Without sitting down with you like a FA would do and go through everything to do with your life.
Age, job, pension, savings, mortgage debt and Interest rate, long term plans, kids, retirement age, ISA,s etc
No one can give clear advice.
Do you want a mortgage at 75 Hell  No
Should you draw your pension early maybe terrible advice and stop you saving more than £4,000 a year into your pension.
Am I a qualified FA or mortgage broker NO
PS we have overpaid several mortgages over the last 18 years and saved £££,£££ in Interest.
Will you reach the Lifetime pension pot £1,070,000  I think 🤔 
Will you get a good pension ?
Will you need the pension and lump sum to live on !
Debt is debt

I'm 58 and in a final salary pension scheme. I won't touch the standard pension and lump sum that the scheme provides, only the amount that I've paid in as Additional Voluntary Contributions (AVCs) as an alternative to overpaying the mortgage.  The bit I'm struggling with is whether it makes sense to continue paying into my pension (it's salary sacrifice so 40% of what I pay in would otherwise go in tax) or to use what I've already accumulated in AVCs to reduce the mortgage, and then switch to overpaying the mortgage rather than to continuing to put money into the AVCs.

Brie

how much if anything does your employer pay into your pension?  do they match everything or just a portion/minimum amount? Some employers will match up to a certain point but not all.  I would certainly try to ensure I had maxed that if it's available.  

Is there anyway you can pay enough to bring your tax rate down?  This might only be an option if you are borderline or willing to pop a big whack into your scheme.  If it's a possible I would consider that and then overpay on the mortgage anything available once you are in the lower tax bracket. 

Presumably you may be intending to retire at 65 but obviously won't be in receipt of SP for a year or two after that.  Will this effect your plans at all??  Taking your pension early wouldn't be a good idea if you are still working and in the 40% range.

For myself having my mortgage blasted off our financial spreadsheet was a massive relief not just for the breathing space it gave us but the idea of no longer paying interest every month.  So when you stop working and go to collect your pension that's when I would consider how big a lump you can throw at the mortgage.  I would in fact give up a bit of the DB pension to get a lump sum big enough to clear things quickly if I needed to.  

stueyhants

If your not near the 40k annual allowance or lifetime allowance surely its a no brainier if you don’t need the money now to top up the pension due to the 40% tax benefit or am I missing something 

Dazed_and_C0nfused

dwainwright252 said:

dimbo61 said:

Without sitting down with you like a FA would do and go through everything to do with your life.
Age, job, pension, savings, mortgage debt and Interest rate, long term plans, kids, retirement age, ISA,s etc
No one can give clear advice.
Do you want a mortgage at 75 Hell  No
Should you draw your pension early maybe terrible advice and stop you saving more than £4,000 a year into your pension.
Am I a qualified FA or mortgage broker NO
PS we have overpaid several mortgages over the last 18 years and saved £££,£££ in Interest.
Will you reach the Lifetime pension pot £1,070,000  I think 🤔 
Will you get a good pension ?
Will you need the pension and lump sum to live on !
Debt is debt

I'm 58 and in a final salary pension scheme. I won't touch the standard pension and lump sum that the scheme provides, only the amount that I've paid in as Additional Voluntary Contributions (AVCs) as an alternative to overpaying the mortgage.  The bit I'm struggling with is whether it makes sense to continue paying into my pension (it's salary sacrifice so 40% of what I pay in would otherwise go in tax) or to use what I've already accumulated in AVCs to reduce the mortgage, and then switch to overpaying the mortgage rather than to continuing to put money into the AVCs.

By sacrificing pay in return for additional employer pension contributions you wouldn't just be avoiding some 40% tax but also 2% National Insurance.

And if you have a generous employer they may add some or all of their own NI savings to your pension fund.

penners324

It would be a very sensible option to do what you suggest. Saving the extra tax gives you a far bigger pot of money (assuming your investment doesn't crash more than 40% in the next 7 years, which is unlikely)

fewcloudy

dwainwright252 said:

I've never had expert financial advice on this plan

It doesn't have to stay that way you know?

I mean, it sounds like you're doing alright but it would surely be nice to get advice from an expert? Plus there might be other things they would suggest you do to maximise your wealth in your situation.