Pension vs Mortgage

I currently have a tracker mortgage, so interest rates are steadily climbing. I also have money invested in an ISA which could cover my outstanding mortgage. I haven't paid off my mortgage yet because the return on my ISA was more than the interest on my mortgage. That is no longer the case.

Given that there are no limits on what you can have in a pension any longer, and contribution limits have gone up too, should I just pay off my mortgage and put the money that would free up in my pension instead? In fact, does it make sense to have an ISA at all when there is room in my pension for extra contributions? I am not likely to come up against the £60,000 annual contribution limit, plus contributing extra to my pension would mean we could keep child benefit payments.

Thoughts?
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Comments

  • MallyGirl
    MallyGirl Forumite, Senior Ambassador Posts: 6,318
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    the main benefit of an ISA is that withdrawal is tax free so there is a case for having a balance between pension and ISA. If you are benefiting from child benefit if you increase the pension contributions then that could swing the balance more that way until children reach age 12. I put the higher risk investments (with attendant potential higher gain although obviously nothing is certain) in the ISA where growth won't incur tax.
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  • penners324
    penners324 Forumite Posts: 2,239
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    Sounds a sensible plan.

    Maxing your pension contributions is sensible for later in life, though having a pot of money for emergencies and another for to enjoy life (holidays etc) is important.

    The tax advantages of a pension far outweigh those of an ISA
  • Pat38493
    Pat38493 Forumite Posts: 1,908
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    To me, paying off a tracker mortgage with existing savings doesn't seem like a bad thing to do right now.  If your ISA is heavily invested in equities, there is an argument that over the long term, the return will probably continue to exceed the mortgage interest.  Without knowing the amounts involved and remaining term, and other details about your situation and pension savings,  it's difficult to comment further.

    I've seen experts on here say that generally saving into a pension trumps saving into an ISA, especially if you are a 40% taxpayer and will be a 20% tax payer in retirement.  Personally FWIW, I am putting all my spare money into my pension - I have nothing in ISAs.  The child benefit topic makes it even more likely that putting it in the pension would be better.

    ISA would more be if you are hoping to retire earlier than the age you can access your pension. 
  • TeachersPensionNovice
    TeachersPensionNovice Forumite Posts: 36
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    Thanks for the comments. Yes, the plan is to pay 20% tax in retirement. Thanks for making that point as it just occurred to me that it makes sense to use the cash freed up to increase my wife's pension payments too. That would allow us to make better use of two tax allowances and reduce the chance of my paying 40% tax on my pension income.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Forumite Posts: 11,530
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    You don't say how many children the Child Benefit is paid for for but you might be surprised just now generous the tax breaks are for someone liable to higher rate tax and subject to HICBC.

    You can potentially get £10k into your pension for a real cost to you of ~£4k.
  • TeachersPensionNovice
    TeachersPensionNovice Forumite Posts: 36
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    Just one child, but my marginal rate of tax is 50%. This is starting to feel like a no brainer.
  • saucer
    saucer Forumite Posts: 377
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    Just one child, but my marginal rate of tax is 50%. This is starting to feel like a no brainer.
    It really is.
  • Pat38493
    Pat38493 Forumite Posts: 1,908
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    Hopefully you know this already but keep in mind that you can only put into your pension up to the amount you earned in any tax year.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Forumite Posts: 11,530
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    Just one child, but my marginal rate of tax is 50%. This is starting to feel like a no brainer.
    This is unlikely to match your exact situation and figures are very simple but if you went down the RAS route (usually personal pension or SIPP) then you could end up like this.

    Say your taxable earnings were exactly £60k and no other taxable income.

    You pay £8,000 net into a RAS scheme.  Pension company adds £2,000 in basic rate relief so a gross contribution of £10,000.

    That £10,000 saves you paying back £1,248 in HICBC.

    You get a higher rate relief tax refund of ~£1,944 from HMRC.

    Total net outlay is £4,808 for a £10,000 pension fund so pretty much 52% 😃
  • Albermarle
    Albermarle Forumite Posts: 18,781
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    OP- your forum name indicates you have a Teachers Pension. Is this current or an old one ?
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