Another "mortgage vs pension" post...

dlevene

Hello all

So after buying my first home just over a year ago, my finances have stabilised and I'm starting to think about the medium and long term.

I'm 34 and earn £80k/year. I generally have £1000/month to save(/invest), which is currently split between two top-rate regular savers. The idea is that after 12 months I have that c£12k plus interest to play with; this year's went in a top rate easy access account (being careful not to go over my PSA) as an emergency fund. My question is, for subsequent savings, do I keep them in a high-interest account which I could then use to pay down the mortgage when my fix ends, or, do I put more into my pension.

My mortgage is fixed for five years (four left) at 1.44%, with the remaining balance at the end of the fix being £130k. My current pension is a workplace pension where I and my employer are both paying 4% (the most they will match to); pension pot built up so far slightly underwhelming (have been focused on saving to buy).

My slightly obvious, and non-expert, expectations are that in the short term interest rates will outpace growth, but over the next 30 years growth will beat interest rates!

What should I focus on, the mortgage, or my pension?

Thanks!

pjcox2005

Personally i wouldn't pay down a mortgage early, but instead put some in pensions and then other investments.

The pension will outperform the mortgage payment as you'll get the significant tax saving plus likely earn more than the 1.44% interest rate saved on the mortgage. 

The only two things which would stop me putting it in pension is a) if you need the funds built up to buy a bigger home (i.e. need greater savings as can't borrow as much as you want) or you think that you need to access savings early for a career break. 

There is no issue letting your mortgage run into your 60s (and over) as long as you've got a good pension to then pay it off when the time comes.

GazzaBloom

I paid my mortgage off first and then piled on with the pension contributions regardless of interest rates. Having been made redundant twice over the years while I had a mortgage wasn't a nice feeling as main earner with a young family.

In Dave Ramsey baby steps style, I would always go with get rid of the mortgage as long as you are putting a fair amount into the pension.

It's a lovely feeling having no mortgage and to have no real care at the interest rate rises, and an even better feeling seeing that money now go into salary sacrifice into the pension. 

r6mile

Remember that as a higher-rate taxpayer you will get 40% tax relief on pension contributions. My suggestion would be to split this £1000k between savings and pension contributions. Putting up your pension contributions by as much as 12% (to 16%) would lead to an extra £800pcm into your pension but only cost you £480pcm. And you can then put the remaining £500ish into a good savings account so as to have a cash buffer.

Not saying that you necessarily should split this 50/50, but this is just to illustrate the tax benefit of pension contributions as a higher-rate taxpayer.

Albermarle

 My current pension is a workplace pension where I and my employer are both paying 4% (the most they will match to)

As a general point 8% is not enough to build up a good pot, even considering your age and that it is 8% of a good salary. Nothing to stop you adding more, even if the employer will not.

The fact you can take advantage of very generous 40% tax relief ( which may not be available forever as it is very costly for the Treasury ) for me swings the argument firmly into the 'add more to pension camp' 

Simon11

I am in your exact position in terms of age and salary. Its fantastic that the light bulb has gone off but you will be kicking yourself for the money you have given up.

Based on what you have said:

1. You must be in the lucky few percent in the UK households who have a small mortgage but also have a really low rate for four years. Hopefully by then, the current rates will be lower. Thus I wouldn't be worried about paying off the mortgage any more than you have to.
2. So build and maintain a healthy amount of savings easily accessible for a rainy day and emergency pot (like being made redundant, replacing washing machine ect)
3.  Then throw everything spare at the pension, there is no where else where you will save 40% instantly. If possible, it would make financial sense to throw £30k at your pension to bring your income under £50k. Additionally if you have children, then you are eligible for child benefit making it even more financially savvy to do this. It isn't a challenge, but I am currently putting in 29% of my salary into my pension plus 5% from the employer and I throw in the bonus too. You never know where you career will take you and you could end up earning far less, making it more challenging to put money into a pension. Plus at our young ages, it will have at least 20 years to grow giving you much more opportunities to retire early or take it easier later in life!

However there are several big pieces of the puzzle that you haven't mentioned is the size of your pension pots, your aspirations for retiring, whether you have a partner and you also haven't mentioned if this is your long term home or you have plans to purchase a larger property.

vacheron

It will take many years of regular saver interest to reach the 40% uplift that any contributions made to your pension on your salary will immeditately return you, and that is without assuming any growth in the pension fund.

If you have a salary sacrifice scheme you will also save the 2% NI and possibly recieve back some of your employers NI savings on any voluntary contributions. Also, if you have kids, salsac pension contributions could help you recover some (or all) of your high income benefit charge (providing your partner also earns less than 50-60K).

Also, as others have said, the tax relief on pensions (and its permissable use under salary sacrifice (if applicable) is not guaranteed. So if you can take advantage of it while you can... do it, or you may be kicking yourself later!

af1963

It will take many years of regular saver interest to reach the 40% uplift that any contributions made to your pension on your salary will immeditately return you, and that is without assuming any growth in the pension fund.

It's an even better deal than that: if you're paying 40% tax, £80 paid into a pension will turn into £100 in the pension fund and a further tax saving of £20. ( Or by salary sacrifice, £100 goes into the pension and you avoid £40 of tax on that amount, and possibly also some NI.)  So you effectively pay £60 or less to get £100 in the pension. That's a 67% uplift right away. 

Some of the pension fund is likely to be taxed later, but possibly not at 40%. 

Albermarle

Some of the pension fund is likely to be taxed later, but possibly not at 40%

The % of retired people paying 40% tax is quite low, compared to the % of working people paying it. Even if your retirement income is quite high, with a mixture of a DC pension pot( with 25% tax free cash) cash savings/ISA investments etc you can manage your taxable income to keep under the threshold. 

So the most likely scenario in most cases is gaining 40% tax relief when contributing, and paying 15% tax when taking the pension.

dlevene

Thanks for everyone's responses so far - very helpful. I suppose given the tax benefit the consensus isn't surprising, but I was just mindful of the likely jump in interest rates when my mortgage fix is over.

To respond to some of the questions/specifics that have been raised: currently unmarried with no kids though that may or may not change! Ditto whether I'll be getting a bigger house at some point down the line. So flexibility is of some value. My current pension pot is pretty small - a couple of thousand a year from a DB local government pension and about £30k in my current workplace pension; less of a case of "missing out" the last few years, more just prioritising other things, including getting on the housing ladder, but it's smaller than it should be and getting to grips now.

I think a split between additional pension contributions, and savings towards paying down when I remortgage, skewed towards the former, makes sense. Something like a 60/40 split of the £1000/month (keeps it simple!) would mean ~17% of salary into pension - in line with the "half your age" rule of thumb - while maxing out my very best savers...

I'll have a proper look at options for additional pension contributions, whether through my existing workplace pension if they allow salary sacrifice (Nest, which has a 1.8% fee), or starting a private stakeholder pension. 

Again, any general thoughts very welcome!

vacheron

dlevene said:

Thanks for everyone's responses so far - very helpful. I suppose given the tax benefit the consensus isn't surprising, but I was just mindful of the likely jump in interest rates when my mortgage fix is over.

To respond to some of the questions/specifics that have been raised: currently unmarried with no kids though that may or may not change! Ditto whether I'll be getting a bigger house at some point down the line. So flexibility is of some value. My current pension pot is pretty small - a couple of thousand a year from a DB local government pension and about £30k in my current workplace pension; less of a case of "missing out" the last few years, more just prioritising other things, including getting on the housing ladder, but it's smaller than it should be and getting to grips now.

I think a split between additional pension contributions, and savings towards paying down when I remortgage, skewed towards the former, makes sense. Something like a 60/40 split of the £1000/month (keeps it simple!) would mean ~17% of salary into pension - in line with the "half your age" rule of thumb - while maxing out my very best savers...

I'll have a proper look at options for additional pension contributions, whether through my existing workplace pension if they allow salary sacrifice (Nest, which has a 1.8% fee), or starting a private stakeholder pension. 

Again, any general thoughts very welcome!

As you say, interest rates could jump when you come out of your fix, but remember that 18 months ago the interest rate was 0.1% and you have 4 years to go, though admittedly they were historically low. 

I don't know your other outgoings, but I would have thought that a 130k mortgage on an 80k salary should be quite manageable even if the rate is still highish.