Mortgage or pension?

matstand

Hi everyone.

I am 51,  and would like to be in a position to retire at 60 (don't know if I want to- but I suspect my employment might be at risk when I turn 60).  I have a £500k mortgage (finishes at 67) currently fixed at 1.04% until September 2026 (I acknowledge I am very lucky)

 I currently have a £350k pension pot.  And am adding £12k a year (I have been away this level for years). And I figure I want about 700-800 to retire comfortably at 60 and be mortgage free.

I am about to inherit about £300k. It feels like I should probably put as much into pension as possible.  (40% tax relief). With a view to using  pension pot to clear mortgage when I am ready to retire. But I am obviously really concerned that my mortgage will go up by £20k a year in 2026 which will be impossible to pay.

So two questions. 
1) any comments about whether to just  split the payments or prioritise either mortgage/pension?
2) I have never got on with a financial adviser. But this is a complex decision should I try and find one?

Thanks

Dazed_and_C0nfused

With an interest rate that low and 40% tax still being paid personally I would prioritise the pension at the moment, at the very least too negate all higher rate tax liability and any HICBC which might otherwise be payable.

Is the mortgage interest only or is capital being paid off?

Marcon

matstand said:

Hi everyone.

I am 51,  and would like to be in a position to retire at 60 (don't know if I want to- but I suspect my employment might be at risk when I turn 60).  I have a £500k mortgage (finishes at 67) currently fixed at 1.04% until September 2026 (I acknowledge I am very lucky)

 I currently have a £350k pension pot.  And am adding £12k a year (I have been away this level for years). And I figure I want about 700-800 to retire comfortably at 60 and be mortgage free.

I am about to inherit about £300k. It feels like I should probably put as much into pension as possible.  (40% tax relief). With a view to using  pension pot to clear mortgage when I am ready to retire. But I am obviously really concerned that my mortgage will go up by £20k a year in 2026 which will be impossible to pay.

So two questions. 
1) any comments about whether to just  split the payments or prioritise either mortgage/pension?
2) I have never got on with a financial adviser. But this is a complex decision should I try and find one?

Thanks

See https://www.gov.uk/government/publications/rates-and-allowances-pension-schemes/pension-schemes-rates and read the section on member contributions. You don't say how much you earn, but remember you'll only get 40% tax relief to the extent you've actually paid 40% on the pension contributions you make to your scheme.

Nothing to stop you making higher contributions over a period of several years to maximise your tax relief, and that would also give you time to assess the affordability of your new mortgage payments.

matstand

Mortgage is 150k interest only and the rest repayment. I was always planning on paying the last £150 from pension.

I guess I am worried that interest rates will still be at 5-6% in 3  years time. Which suggests I prioritise mortgage.

WYSPECIAL

If you’ve got a £500k mortgage it suggests you are a high earner.

 How much could you afford to pay into a pension from your income and still have enough to live on? 

Do do you have any other savings you could move into a pension? Be nice to benefit from as much tax relief as you can for the next three years.

matstand

I am a relative high earner, but after mortgage payments and supporting kids through university, there is nothing extra to spend other than the lump sum. At least until the youngest graduates in 2026.

GunJack

what's the outstanding balance going to be on the mortgage by 2026? it may be prudent to pay off at least the interest-only part now, and keep payments the same to burn down the other 350k while your rate is still fixed. Or, will a sub-200k mortgage be more affordable after the fix ends? With total TFC being limited to £268k-(-ish, can't remember the exact figure) you'll need a £1.1M pension pot to generate that, and would that be enough to clear the mortgage in 9 years?? MAybe concentrate on getting the mortgage down as much as poss then move what you would pay on the mortgage into pension. One catastrophic event has a much bigger impact if there's still a mortgage outstanding... 

matstand

Thanks gunjack. I am leaning towards mortgage pay off. 

I am quite comfortable using mortgage calculators and compound interest calculators to plan my future.

I have my pension in medium risk tracker funds. Do people think that I would benefit from an ifa? I have never found one that I felt comfortable with...

QrizB

matstand said:

Mortgage is 150k interest only and the rest repayment. I was always planning on paying the last £150 from pension.

In which case, paying the £150k from your inheritance would (in effect) boost your final pension savings by £150k.

I'd be inclined to invest it at low risk (possibly in suitably dated gilts, but don't take my advice on this) until the end of your mortgage fix in September 2026, making the payment then.

matstand said:

I guess I am worried that interest rates will still be at 5-6% in 3  years time. Which suggests I prioritise mortgage.

I'm a couple of years older than you. A 5-6% interest rate is normal (my first mortgage was at almost 8%). there's every possibility that they will remain at that level.

dharm999

you’ll need to check, but I suspect you will have penalties on your mortgage if you pay more than 10% of the balance each year.

I’d set up three savings pots, roughly 50k, 45k, 40k, to mature in 1, 2, and 3 years time, at the highest rates you can find.  Use those to pay down the interest only elements.  That will still leave a bit owing.  I would also put the maximum into a pension I could over the next few years.  Assuming that’s another c48k a year, then over 3 years, in total you’ll have used up nearly all the 300k.  The balance I would fritter, nice holiday, something like that, as it doesn’t all have to be jam tomorrow

matstand

Thanks everyone. 

That has cleared things up.