How quick is quick? Pension vs mortgage?

greyflanneltrousers

Should I continue to max out my pension contributions in an effort to catch up with what I’d like in retirement? Or should I double down on paying my mortgage off?

TLDR; I can’t even summarise sorry it’s so long

I earn around £140k.

My pension pot is £200k

I am 50.

I have no debt.

I’ve tried IFAs but they’re just not interested because I don’t have a lump of cash they can manage.

I spent two years educating myself and I got my finances sorted, paid off debts, started saving, fixed my relationship with money and shiny things that I do not need.

I am very aware of the tax implications and the fact that I’d be firmly sat in the new 45% (aka 60%) tax trap if I make the change I’ll outline below.

I realise it’s a common question and mine of all questions is extremely lengthy so I appreciate it’s a lot to expect anyone to read this guff in all honesty.

From what I have found, answer often comes down to ones appetite for risk, something there isn’t a formula for :-)

I am looking for opinions rather than an actual answer. I’d appreciate a sanity check that I am not missing something. And I am interested to know what others would/have done/doing in similar situations.

History: I’ve been pretty bad at paying into my pension over the years and have a pot of £200k. I am currently maxing out the £60k per year limit to address this.

The choice:

I am currently saving to pay off my mortgage early, in 5 years instead of 15. I can choose to boost these savings to pay it off in 3 years. To do this I’d use most of the money that is currently going into my pension.

OPTION 1: Reduce pension contribs, pay mortgage off in 3 years

I have a choice whether to pay off my mortgage in three years when I will be 53 by redirecting most of my current £60k pension contributions to my mortgage (albeit the net of £60k), leaving a pension contribution of around £13k/year (the cut off for my employers max contribution) until my mortgage is paid. At which point I can resume the pension max out.

OPTION 2: Max our pension and pay mortgage off in 5 years

I continue to max out my pension with the £60k and continue to save to pay the mortgage off two years later then the previous option, when I am 55.

The spreadsheet:



This is just the totals, I’ve used some very simple compounding based on my pension and savings/investments growing by a nominal 3%. I did originally have them not show any interest at all just so I can see the pure figures. I don’t really want to get too much into the projected growth because a) it’s largely unknown of course and b) over such a short period of time the interest rate doesn’t effect my spreadsheet too much as to the core decision.

Risk: I am in a secure job with a large multinational. But the current climate and my age I am slightly nervous how long I can secure my current salary. I’d get a good pay off if I was laid off though. So whilst I am usually middle of the road when it comes to risk, of late I am more on the risk averse side. Which is why I’ve been thinking of ramping up even further the mortgage payments.

The answers I have found so far are that paying off your mortgage is often a heart decision, rather than a financial head decision. 

As you can see in the spreadsheet, broadly speaking I’d lose out on £100k if I pay my mortgage off instead of pay the max into my pension. This difference is largely the tax. This depends to a degree on the growth of my pension and savings/investments but even when I change the compounding interest rates it still hovers around this £100k difference.

That’s me in a large nutshell. Am I missing something? Or is it as simple as asking myself whether losing £100k is worth having my mortgage paid off early.

The two main scenarios I ask myself are..

At 53 will I be ‘more pleased’ with a paid off mortgage and a £260k pension - which I consider small - compared to a £400k pension and 2 years left on my mortgage.

At 55 will I be ‘more pleased’ with a paid off mortgage and a £428k pension with £100k in savings/investments compared to a paid off mortgage and a £566k pension with £17k savings (these savings just come from £200pm I put away for a rainy day).

The closest I’ve come to a preference is at age 57 where the pension of £730k and £108k in savings could allow me to retire if I wanted to. I refer to this as ‘the dream’ scenario.

But equally at 55 with a pension of £418k and savings of £100k I can’t help but think the savings here may well reflect some milestones that my kids will have such as university/cars etc where I can see a need to use some of that cash. I refer to this as ‘the reality’ scenario.

Having spent two years fixing my finances I am starting to come to the decision that life isn’t like a spreadsheet. Real life has some crazy formulas that Excel just doesn’t support

Perhaps in these last two statements I’ve answered my own question!

If you’ve read this far thank you.

Simon11

You haven't mentioned what mortgage rate you are currently on (or are likely to have in the future). Is this mortgage rate higher than 45%? If no, shove all your money into the pension! And at the moment, your £200k won't stretch so far if you are wanting a comfortable retirement.

You are also forgetting that while you are putting in £60k into your pension each year (well done!), it isn't actually costing you £60k. With tax saving and employer payments, I would guess it is only costing you less than £30k in tax home pay each year?

Have you thought about a third option, where you maximise your pension contributions and then when you retire, use the 25% tax free element to pay off anything left on the mortgage?

Marcon

As you so rightly say, life isn't a spreadsheet. It's clear from your post that like most people there is a strong 'emotional' attachment to certain courses of action, and as you are the only person who can assess how important that attachment is, nobody here is better placed to decide which route you would be more comfortable following.

I think you have indeed answered your own question!

Pat38493

I may have missed it but:

- How much is the outstanding balance on your mortgage?
- What is the term end date on your mortgage and current monthly payments?
- What is your current mortgage interest rate?
- What type of mortgage (interest only / repayment etc)?

In your situation with earnings over £100K, there is really only going to be one answer which is that you are much better off in the long run financially by maximising your pension contributions.  

Are you aware that you can also use carryover of your annual allowance to contribute more than £60K if you have it available?  

You can use your tax free cash to pay off your mortgage when you retire (or even before you retire).

What tax rate are you expecting to be paying when you are retired?  If you will be paying 20% tax (or mainly 20% tax) in retirement, you will be making an instant one time 26% gain on everything you pay into the pension.  Further, the investment returns you get on your pension will likely be larger than your mortgage interest rate in the long run.

If it's really psychologically important to you to feel like you are paying the mortgage off quicker, maybe do a combination of the two, but the logical financial case is massively in favour of putting the money in the pension.

As you yourself said - why would you want to give £100K to HMRC that would otherwise be your money in your pension?

Also I would question that IFAs are not interested in advising people in your position - look for an IFA who is also a chartered financial planner - there are plenty of IFAs around who will offer assistance on a fee basis rather than % of pot basis for this type of case.

greyflanneltrousers

Simon11 said:

You haven't mentioned what mortgage rate you are currently on (or are likely to have in the future). Is this mortgage rate higher than 45%? If no, shove all your money into the pension! And at the moment, your £200k won't stretch so far if you are wanting a comfortable retirement.

You are also forgetting that while you are putting in £60k into your pension each year (well done!), it isn't actually costing you £60k. With tax saving and employer payments, I would guess it is only costing you less than £30k in tax home pay each year?

Have you thought about a third option, where you maximise your pension contributions and then when you retire, use the 25% tax free element to pay off anything left on the mortgage?

Thanks Simon, it's a good point about the tax and I definately haven't forgotten the £60k isn't costing me £60k ..it's why I took the decision to maximise my pension. You're bang on the money, it probably costs me £2,500 a month so your £30k is spot on.

My mortgage is 1.6% and ends in three years - part of the motivation to get it paid off in three years.

I did consider the 25% tax free but I am just below the cut off so I won't be able to do that until I am 57.

I appreciate that from a purely numbers point of view, the spreadsheet says to keep paying into my pension. I just have this niggle to want to get rid of the pension asap. I am probably waiting for some to tell me it's a silly idea if it 'loses' me £100k.

greyflanneltrousers

Marcon said:

As you so rightly say, life isn't a spreadsheet. It's clear from your post that like most people there is a strong 'emotional' attachment to certain courses of action, and as you are the only person who can assess how important that attachment is, nobody here is better placed to decide which route you would be more comfortable following.

I think you have indeed answered your own question!

Thanks Marcon heh yes, perhaps typing the message was the help I needed. Damn it

Your answer really has helped me see that, thank you.

greyflanneltrousers

Pat38493 said:

I may have missed it but:

- How much is the outstanding balance on your mortgage?
- What is the term end date on your mortgage and current monthly payments?
- What is your current mortgage interest rate?
- What type of mortgage (interest only / repayment etc)?

In your situation with earnings over £100K, there is really only going to be one answer which is that you are much better off in the long run financially by maximising your pension contributions.  

Are you aware that you can also use carryover of your annual allowance to contribute more than £60K if you have it available?  

You can use your tax free cash to pay off your mortgage when you retire (or even before you retire).

What tax rate are you expecting to be paying when you are retired?  If you will be paying 20% tax (or mainly 20% tax) in retirement, you will be making an instant one time 26% gain on everything you pay into the pension.  Further, the investment returns you get on your pension will likely be larger than your mortgage interest rate in the long run.

If it's really psychologically important to you to feel like you are paying the mortgage off quicker, maybe do a combination of the two, but the logical financial case is massively in favour of putting the money in the pension.

As you yourself said - why would you want to give £100K to HMRC that would otherwise be your money in your pension?

Also I would question that IFAs are not interested in advising people in your position - look for an IFA who is also a chartered financial planner - there are plenty of IFAs around who will offer assistance on a fee basis rather than % of pot basis for this type of case.

Thank you Pat that's exactly the sort of opinions I really wanted to hear. And thank you for asking for more details, I was so affraid I'd gone into too much whaffle as it was

- How much is the outstanding balance on your mortgage?
£190k as of today - it will be £152k in 3 years time when the current deal ends. By then I will have saved £80k to pay off it. And another £80k if I were to redirect my pension contributions to saving them net.

- What is the term end date on your mortgage and current monthly payments?
Term is another 12 years. £1,400 per month.

- What is your current mortgage interest rate?
1.6% for the next three years. It was a five year deal (that my brocker advised against at the time :-)

- What type of mortgage (interest only / repayment etc)?
Repayment.

I wasn't quite sure how the carry over worked and if you still get the tax back at the higher rate, or if you just get it as a reduction on my salary?

I've no real idea on the tax band I would be in at retirement, I am still in the mode of doing all I can to save after years of neglect so to speak.

I did consider trying the IFAs again, but after several failed attempts as I've said I spent the past two years educating myself and I have read a lot on MSE and so for this 'big decision' thought I'd get some opinions. And I have proved myself right in that decision haha.

I suppose I am just suffering from a lack of confidence in the jobs market, which is making me doubt my original decision to 'overpay' the pension. Just two years ago I didn't even know what I had in my pension, I barely knew what pension were. So I made a plan and stuck to it.

On paper (Excel) and as you say, everything is shouting at me to continue as I am.

Mutton_Geoff

I'd forget the mortgage overpayments at a rate of 1.6% (peanuts) and increase pension contributions to get yourself out of the those nasty 60/45% tax bands. Does your employer offer salary sacrifice contributions? If so, you'll get even more of a leg up with NI savings.

greyflanneltrousers

Mutton_Geoff said:

I'd forget the mortgage overpayments at a rate of 1.6% (peanuts) and increase pension contributions to get yourself out of the those nasty 60/45% tax bands. Does your employer offer salary sacrifice contributions? If so, you'll get even more of a leg up with NI savings.

Yes employer is essentially pays into my pension 'at source' (from my gross wage) unsure what the correct term is. But it's a company run pension scheme with a big provider.

As I am already dumping in £60k I can't add any more unless I fullfill previous years top ups, but I don't really have the cash to actually do that.

I am not overpaying my mortgage, but instead saving £1550 per month into a 4% savings account. If I kept my pension contributions to 15% I would have an additional £2k net to add to the £1550 to save towards paying off the mortgage early. But as you say Mutton_Geoff I'd then be paying silly amounts in tax, which is why I ended up going the route of putting £60k into my pension.

I must admit having asked this question and received yours and others replies it's helped me realise that at the start of this year when I upped my pension contribs I had a plan and everyone seems to agree with that plan. It's funny, during the past two years when I have been educating myself about money, one of the core learnings was to create a plan and stick to it. The biggest failing of a financial plan I remember reading is constantly changing/withdrawing/overthinking.

Perhaps I am doing too much of that overthinking.

Thank you Geoff, really appreciate you help.

Pat38493

greyflanneltrousers said:

Pat38493 said:

I may have missed it but:

- How much is the outstanding balance on your mortgage?
- What is the term end date on your mortgage and current monthly payments?
- What is your current mortgage interest rate?
- What type of mortgage (interest only / repayment etc)?

In your situation with earnings over £100K, there is really only going to be one answer which is that you are much better off in the long run financially by maximising your pension contributions.  

Are you aware that you can also use carryover of your annual allowance to contribute more than £60K if you have it available?  

You can use your tax free cash to pay off your mortgage when you retire (or even before you retire).

What tax rate are you expecting to be paying when you are retired?  If you will be paying 20% tax (or mainly 20% tax) in retirement, you will be making an instant one time 26% gain on everything you pay into the pension.  Further, the investment returns you get on your pension will likely be larger than your mortgage interest rate in the long run.

If it's really psychologically important to you to feel like you are paying the mortgage off quicker, maybe do a combination of the two, but the logical financial case is massively in favour of putting the money in the pension.

As you yourself said - why would you want to give £100K to HMRC that would otherwise be your money in your pension?

Also I would question that IFAs are not interested in advising people in your position - look for an IFA who is also a chartered financial planner - there are plenty of IFAs around who will offer assistance on a fee basis rather than % of pot basis for this type of case.

Thank you Pat that's exactly the sort of opinions I really wanted to hear. And thank you for asking for more details, I was so affraid I'd gone into too much whaffle as it was

- How much is the outstanding balance on your mortgage?
£190k as of today - it will be £152k in 3 years time when the current deal ends. By then I will have saved £80k to pay off it. And another £80k if I were to redirect my pension contributions to saving them net.

- What is the term end date on your mortgage and current monthly payments?
Term is another 12 years. £1,400 per month.

- What is your current mortgage interest rate?
1.6% for the next three years. It was a five year deal (that my brocker advised against at the time :-)

- What type of mortgage (interest only / repayment etc)?
Repayment.

I wasn't quite sure how the carry over worked and if you still get the tax back at the higher rate, or if you just get it as a reduction on my salary?

I've no real idea on the tax band I would be in at retirement, I am still in the mode of doing all I can to save after years of neglect so to speak.

I did consider trying the IFAs again, but after several failed attempts as I've said I spent the past two years educating myself and I have read a lot on MSE and so for this 'big decision' thought I'd get some opinions. And I have proved myself right in that decision haha.

I suppose I am just suffering from a lack of confidence in the jobs market, which is making me doubt my original decision to 'overpay' the pension. Just two years ago I didn't even know what I had in my pension, I barely knew what pension were. So I made a plan and stuck to it.

On paper (Excel) and as you say, everything is shouting at me to continue as I am.

If I was in your situation I would pay into the pension and take care of the mortgage later.

How long have you been with your current employer?  If it's a long time, you would presumably get some kind of severance package if you were made redundant which could go against the mortgage and/or pension?

Piling money into your pension you will easily have enough tax free cash available from the pension at age 57 to pay off the mortgage.

Two points in bold
- Carry over - once you've used up your 60K allowance from this year, you can then consume any unused allowance from the previous 3 tax years, and yes you will get full tax relief at your marginal rate.  Note that you must also have enough earned income in that year to cover the total contributions you make but it doesn't seem like that would be an issue for you.
- Tax rate in retirement - when paying tax at 40% or above and expecting to be a 20% taxpayer in retirement, the case is very strong to continue with pension, especially as you are only 7 years from being able to access pension assets.  Someone in your situation, as a very general statement, is unlikely to end up paying a huge amount of tax at 40%, if any at all, in retirement but this is something you should think about based on your expected spending needs in retirement.   Even if you were a heavy 40% taxpayer in retirement, the case for putting into pension is still better than mortgage overpayments, especially for the part over 100K, but the difference is significantly less.

Another thing to think about - even if you have to re-mortgage at 5%, typical investment returns if your pension is sensibly invested are on average above 5% per year.  That's on top of the tax relief advantages already discussed.

greyflanneltrousers

Pat38493 said:

greyflanneltrousers said:

Pat38493 said:

I may have missed it but:

- How much is the outstanding balance on your mortgage?
- What is the term end date on your mortgage and current monthly payments?
- What is your current mortgage interest rate?
- What type of mortgage (interest only / repayment etc)?

In your situation with earnings over £100K, there is really only going to be one answer which is that you are much better off in the long run financially by maximising your pension contributions.  

Are you aware that you can also use carryover of your annual allowance to contribute more than £60K if you have it available?  

You can use your tax free cash to pay off your mortgage when you retire (or even before you retire).

What tax rate are you expecting to be paying when you are retired?  If you will be paying 20% tax (or mainly 20% tax) in retirement, you will be making an instant one time 26% gain on everything you pay into the pension.  Further, the investment returns you get on your pension will likely be larger than your mortgage interest rate in the long run.

If it's really psychologically important to you to feel like you are paying the mortgage off quicker, maybe do a combination of the two, but the logical financial case is massively in favour of putting the money in the pension.

As you yourself said - why would you want to give £100K to HMRC that would otherwise be your money in your pension?

Also I would question that IFAs are not interested in advising people in your position - look for an IFA who is also a chartered financial planner - there are plenty of IFAs around who will offer assistance on a fee basis rather than % of pot basis for this type of case.

Thank you Pat that's exactly the sort of opinions I really wanted to hear. And thank you for asking for more details, I was so affraid I'd gone into too much whaffle as it was

- How much is the outstanding balance on your mortgage?
£190k as of today - it will be £152k in 3 years time when the current deal ends. By then I will have saved £80k to pay off it. And another £80k if I were to redirect my pension contributions to saving them net.

- What is the term end date on your mortgage and current monthly payments?
Term is another 12 years. £1,400 per month.

- What is your current mortgage interest rate?
1.6% for the next three years. It was a five year deal (that my brocker advised against at the time :-)

- What type of mortgage (interest only / repayment etc)?
Repayment.

I wasn't quite sure how the carry over worked and if you still get the tax back at the higher rate, or if you just get it as a reduction on my salary?

I've no real idea on the tax band I would be in at retirement, I am still in the mode of doing all I can to save after years of neglect so to speak.

I did consider trying the IFAs again, but after several failed attempts as I've said I spent the past two years educating myself and I have read a lot on MSE and so for this 'big decision' thought I'd get some opinions. And I have proved myself right in that decision haha.

I suppose I am just suffering from a lack of confidence in the jobs market, which is making me doubt my original decision to 'overpay' the pension. Just two years ago I didn't even know what I had in my pension, I barely knew what pension were. So I made a plan and stuck to it.

On paper (Excel) and as you say, everything is shouting at me to continue as I am.

If I was in your situation I would pay into the pension and take care of the mortgage later.

How long have you been with your current employer?  If it's a long time, you would presumably get some kind of severance package if you were made redundant which could go against the mortgage and/or pension?

Piling money into your pension you will easily have enough tax free cash available from the pension at age 57 to pay off the mortgage.

Two points in bold
- Carry over - once you've used up your 60K allowance from this year, you can then consume any unused allowance from the previous 3 tax years, and yes you will get full tax relief at your marginal rate.  Note that you must also have enough earned income in that year to cover the total contributions you make but it doesn't seem like that would be an issue for you.
- Tax rate in retirement - when paying tax at 40% or above and expecting to be a 20% taxpayer in retirement, the case is very strong to continue with pension, especially as you are only 7 years from being able to access pension assets.  Someone in your situation, as a very general statement, is unlikely to end up paying a huge amount of tax at 40%, if any at all, in retirement but this is something you should think about based on your expected spending needs in retirement.   Even if you were a heavy 40% taxpayer in retirement, the case for putting into pension is still better than mortgage overpayments, especially for the part over 100K, but the difference is significantly less.

Another thing to think about - even if you have to re-mortgage at 5%, typical investment returns if your pension is sensibly invested are on average above 5% per year.  That's on top of the tax relief advantages already discussed.

Thank you Pat. I can't express the sense of ease to read your opinion. It's like afirmation that when I made the decision to plow the full £60k into my pension it was the right thing to do and still is - my plan was right so to speak.

Of course I am not seeing this as advice etc etc etc but it makes logic sense.

As you say, looking at my spreadsheet sticking with my plan it gives me some comfort that I can kind of relax from 57 onwards. And maybe use this as a reason to reduce my hours. But if nothing else know that I will be ok. Because as I said, just two years ago I had next to nothing, and even less of a clue.

I have been with my employer for 10 years. They have been very generous with previous lay offs.

It's always so disappointing to see 5% as a mortgage growth rate. Many of the 'experts' I see on YouTube throw rates of 10% and 12% around.

As I've said I've no real expectations for retirement, it wasn't something I even thought of up until 2 years ago. At least now I have the potential for options. One of the hardest things I am finding oddly is having spent 48 years not thinking about money/pensions, is now I have become a little consumed by it. I recently took the steps to uninstall all the savings/investment and pension apps I had on my phone because I reckonised it wasn't healthy looking at the balance every day. It had become a habbit. I need to practise some mindfulness I think and live in the present rather than wish away the next 15 years!

Thanks again for your reply, it's been extremely useful thank you.