Throw everything at my SIPP, or is there a better option?

Rogue828

Hi,

I'm after some advice for when I pay off my mortgage which will hopefully be in 5 years.

My company have me enrolled in a SIPP pension which I pay into via salary sacrifice.
On the face of it, it seems logical that if I can afford to, when I finish paying my mortgage, I should put the same payment directly into my SIPP via SS.
Is there any reason for me not to just put the whole amount straight into the SIPP, assuming I can carry on with my current net salary?

The only other viable option I'd seen was an ISA as it would give me easier access to the money, however, I'll be 51 by the time I pay off the mortgage, and I don't think I'd need to access it in the short term.


Thanks for the advice.
Steve

Marcon

Rogue828 said:

Hi,

I'm after some advice for when I pay off my mortgage which will hopefully be in 5 years.

My company have me enrolled in a SIPP pension which I pay into via salary sacrifice.
On the face of it, it seems logical that if I can afford to, when I finish paying my mortgage, I should put the same payment directly into my SIPP via SS.
Is there any reason for me not to just put the whole amount straight into the SIPP, assuming I can carry on with my current net salary?

The only other viable option I'd seen was an ISA as it would give me easier access to the money, however, I'll be 51 by the time I pay off the mortgage, and I don't think I'd need to access it in the short term.


Thanks for the advice.
Steve

Whether there's a 'better option' depends on what exactly you are hoping to achieve. The inability to access pension funds until your 50s can sometimes be an advantage, sometimes quite the reverse!

Asking for 'advice' 5 years before a situation arises shows admirable forward planning but is probably going to depend heavily on what your finances/expected cash needs look like closer to the time, especially with all the financial uncertainty likely to be with us for some considerable time yet.

Albermarle

If you have spare cash that you want to invest for the longer term/retirement, then pension usually wins out. Even more so if you can contribute via SS and/or are a higher rate taxpayer.

However always remember that your money is actually in investments within the pension, and that you should keep up to speed with how the pension is invested ( in case like many you have not give this much thought).

Rogue828

Thanks for the comments.

Guessing the future is an impossible task, and I hate the pension calculators that start by asking "how much do you want per year in your retirement?"
There's no way of knowing what would be a reasonable retirement sum in 5 years, let alone 20 years.

When the SIPP was set up by my company, all investments were added to a fund.
I don't think I'd trust myself to decide upon the investments myself, so for now, I'm keeping with the fund and hoping that they know what they're doing.

I suppose my main options are to put the money in the SIPP and benefit from SS as a higher rate taxpayer, or put it in an ISA if I expect to need access to it before I can get access to my SIPP.
Are they the 2 main options for medium / long term savings / investments?

Thanks

dunstonh

The only other viable option I'd seen was an ISA as it would give me easier access to the money, however, I'll be 51 by the time I pay off the mortgage, and I don't think I'd need to access it in the short term.

Pension trumps ISA for basic rate taxpayers (and massively so for higher rate).   So, whilst ISA has its place, when the money isn't needed until your retirement years, pension would be best.   Higher rate relief makes pension better than overpaying a mortgage too unless there is a specific justification focusing on mortgage  (the risk of higher rate relief being removed in future means that delaying until later may not be a good idea.   Moving to single rate relief has been muted as a possible future change).

When the SIPP was set up by my company, all investments were added to a fund.
I don't think I'd trust myself to decide upon the investments myself, so for now, I'm keeping with the fund and hoping that they know what they're doing

It is unusual for a company to offer a SIPP.  Mainly as they worry that employees would be confused with having 30,000 odd different investment options.  Plus, most SIPPs are unable to comply with auto-enrolment regulations.   They normally stick to auto-enrolment schemes, occupational pensions, group personal pensions or group stakeholder pensions.

I suppose my main options are to put the money in the SIPP and benefit from SS as a higher rate taxpayer, or put it in an ISA if I expect to need access to it before I can get access to my SIPP.
Are they the 2 main options for medium / long term savings / investments?

There are the two mainstream options for the average person.    Some move onto other wrappers/options depending on the amounts involved.

Rogue828

Thanks everyone for the comments.

I definitely see that it would probably be beneficial to pay into SIPP for tax relief now, rather than overpaying the mortgage, however it's very satisfying seeing the mortgage balance reduce appreciably and knowing that the debt will be cleared soon.

Simon11

Rogue828 said:

Thanks everyone for the comments.

I definitely see that it would probably be beneficial to pay into SIPP for tax relief now, rather than overpaying the mortgage, however it's very satisfying seeing the mortgage balance reduce appreciably and knowing that the debt will be cleared soon.

You haven't provided much information on your current pension pots, current salary, mortgage information and retirement plans, however from what we know you aren't being very money savvy!

Rather than get excited by your mortgage balance reducing, focus that on seeing your pension pot grow through contributions as well as through investment.

Otherwise there is a risk that when you hit your mid 50's you could be suddenly disappointed and realise that had you focused more on pension rather than the mortgage, you may have been able to retire earlier or have more money to spend in retirement without having to make much financial sacrifices.

dunstonh

I definitely see that it would probably be beneficial to pay into SIPP for tax relief now, rather than overpaying the mortgage, however it's very satisfying seeing the mortgage balance reduce appreciably and knowing that the debt will be cleared soon.

On the other hand, you are missing out on that 40% relief plus reduction in NI.

ignoring the NI reduction, £10,000 going into the pension would cost you £6,000.    So, whilst its nice to see the mortgage balance go down, it is at the expense of the pension balance going up at a higher rate.

Because 2022 was a negative year for investments, you have got away with it somewhat (not totally as values are typically down 10-15% which is still a lot less than the 40% relief you would have got).

overpaying the mortgage for affordability reasons (fear of interest rate rises making it unaffordable later) is fair enough but if its affordable and would still be with a significant rate increase, then the pension is the far better financial option.      That said, going 100% into one of the three options (ISA, pension or overpay mortgage) is rarely a good idea.   Going 100% into the wrong option even more so.    However, whilst a combo across the options may not be the best financial option in monetary terms it is often a sensible compromise.  

Albermarle

When the SIPP was set up by my company, all investments were added to a fund.
I don't think I'd trust myself to decide upon the investments myself, so for now, I'm keeping with the fund and hoping that they know what they're doing.

Normally with a workplace pension, if you do not choose an investment fund(s) your money goes to a default fund.

Typically they are a medium risk, middle of the road type fund. Sometimes they change as you get older. However be clear that the SIPP provider is not managing your pension, and will never move you out of this fund unless you request it.

We have a lot of posters come on the forum approaching retirement complaining that their pension provider did not do this or that, in response to changing market conditions/age. Unless you employ a financial advisor it is the clients responsibility to manage the pension. Even if they never do anything that is also their responsibility, even if most are blissfully unaware of it.

Some basic knowledge of investing can come in useful.

squirrelpie

Rogue828 said:

Guessing the future is an impossible task, and I hate the pension calculators that start by asking "how much do you want per year in your retirement?"
There's no way of knowing what would be a reasonable retirement sum in 5 years, let alone 20 years.

It makes it easier if you think in terms of today's money. How much would you want if you retired now? Then you 'just' have an inflation-prediction problem, but you have that anyway when thinking about anything in the future.

When the SIPP was set up by my company, all investments were added to a fund.
I don't think I'd trust myself to decide upon the investments myself, so for now, I'm keeping with the fund and hoping that they know what they're doing.

Keeping the default choice is often a sensible choice, but it is still worth keeping an eye on its performance over the years to make sure that they DO know what they are doing.

atush

If you have a large amount of savings built up already, concentrate on the Pension.  If you have no savings, concentrate on an ISA.  If you are in between, split the extra money into them both.