Adding to extra to SIPP or paying down mortgage

gordie82

Hi,

Since the increase the annual pension allowance to £60k i've been wondering if I should be making use of it or if i'm better off paying extra off my morgage with the recent increase in rates.

To add some figures to this i've been putting £40k/year into my pension for the last 4-5 years, I'm 40 years old and I have around £200k left on my mortgage which is fixed for another 4 years @ 2.6%.

My thoughts are to reduce my salary by £20k further to make total pension contributions of £60k/pa but i'm not sure if i'd be better off taking that £20k (before tax) and paying down my mortgage as i'm already putting a fair percentage of my salary into pension.

Has anyone else had any similar thoughts on this?

Pat38493

In my view, pension easily beats mortgage if you are on a 2.6% rate, especially if you are a higher rate taxpayer.

I am in a similar position but I'm on a 3.4% rate I think, and I am still going to max out my pension until the deal ends - I will then review the situation depending on what rates are available in a couple of years when my deal ends.  If I could continue the mortgage on that rate or less, I might not even pay it off at that time.

e.g. - you can put the same amount into a money market fund inside  the pension wrapper and easily beat your 2.6% mortgage rate with almost no risk. (subject to interest rates staying higher).    

gordie82

That's the way i'm swaying too, If my calulations are correct the £20k addition to my pension would cost me £12,125 take home pay and would also remove the personal allowance taper so it seems like a no brainer to me.

I was more thinking along the lines of interest rates being at the current rate (6%) or higher when my fixed rate comes to an end, so was wondering if I'm better off reducing my mortgage now whilst the rates are still low but I guess a lot can happen in 4 years.

sheslookinhot

One thing to bear in mind is that you will not be able to touch the pension, for whatever reason, until you are 57, probably older. An idea might be to split the difference and feel as though your pension is increasing and your mortgage coming down.

I assume you have a cash buffer to cover any big expenditure or employment issues.

MX5huggy

You’re clearly earning a a very good salary, if that continues then when the mortgage rate finishes you could pivot to paying off the mortgage fast, I see no reason to forgo the very generous tax relief of pension contributions to pay off the mortgage currently. 

Pat38493

gordie82 said:

That's the way i'm swaying too, If my calulations are correct the £20k addition to my pension would cost me £12,125 take home pay and would also remove the personal allowance taper so it seems like a no brainer to me.

I was more thinking along the lines of interest rates being at the current rate (6%) or higher when my fixed rate comes to an end, so was wondering if I'm better off reducing my mortgage now whilst the rates are still low but I guess a lot can happen in 4 years.

To be honest I had missed the part where you said you were 40, so you won’t have any access to your pension when the mortgage deal ends.  However, as MX5Huggy said, given the amount of salary you appear to be earning, I would still tend towards pension.  If you have 4 years to run, maybe take  another look in 3 years because we have no idea where interest rates will be even in 2 years let alone 4.

squirrelpie

It might be worth making sure there is some cash saved to reduce the mortgage in 4 years in case rates shoot up for some reason. Maybe the fabled low-coupon short duration gilts, or saved in an ISA.

gordie82

sheslookinhot said:

One thing to bear in mind is that you will not be able to touch the pension, for whatever reason, until you are 57, probably older. An idea might be to split the difference and feel as though your pension is increasing and your mortgage coming down.

I assume you have a cash buffer to cover any big expenditure or employment issues.

I have around 2 years expenditure in cash/isa savings at the moment.

With my current £40k addition to my SIPP I'm able to save around £30k a year, obviously that reduces to perhaps £15k if I increase contributions to £60k.

It hadn't occurred to me until just now but I suppose the other thing to consider is can you still use your unused pension allowance for the previous 3 years?

If you can as suggested it maybe sensible to take the middle ground of £50k for the next 3 years and if interest rates are lower at that time I can then make use of that £10k/year unused allowance if that makes sense.

That way it still leaves me with the option of full contributions in 3 years time so the best of both worlds.

Dazed_and_C0nfused

It hadn't occurred to me until just now but I suppose the other thing to consider is can you still use your unused pension allowance for the previous 3 years?

You can never make contributions for a different tax year to the one you are in but in some situations you can carry forward unused Annual Allowance to allow larger contributions in the current tax year.

MallyGirl

You must be earning enough in the year to be contributing that additional carry forward