How quick is quick? Pension vs mortgage?

Pat38493

Just to be clear I don't work in finance and I am no adviser - however there are a few IFAs on these boards and I'm pretty sure that if I say something completely wrong or that they don't agree with they will jump in and comment as well.

It's more that my situation is not that dissimilar to yours and I am maxing out my pension and leaving my mortgage to take care of itself over time as it seemed like the rational choice.  The other point to remember is that your mortgage debt effectively shrank by 14% since the start of 2022 in real terms, given that the nominal debt remains the same, whereas there has been 14% inflation in most of your other costs.  If your income increases in future, your mortgage shrinks in reference to your actual income and other spending.

That said - I have seen people state that they are taking a middle path and they will pay off their mortgage quicker with taxed income, because it's more important to their wellbeing to see their mortgage going down quickly than to optimise their long term tax planning.  However mostly those people aren't paying marginal 60% tax rates on income above £100K

I am not sure what you mean by the 5% versus 12% comment, but if you mean that there are youtubers claiming you can expect 12% ongoing returns from your investments, for sure you can do that in some years - some years you might see 25% or more.  However if you look at it as a long term investor, a typical assumption by IFAs I think would probably be inflation +2% - this takes into account that you could will have negative years where your investments fell.

This does raise another point though which is that since you are aggressively funding your pension scheme, you should review the investments that your pension is being put into and make sure it matches your risk appetitve and long term objectives.  

artyboy

I do get the psychological draw towards paying off the mortgage, so that you can say you own "every brick" - the sense of security that provides can easily outstrip the opportunity cost of investing elsewhere. 10 years ago, Mrs Arty and I were "guilty" of doing just that and don't regret it, even if we could have made a better return on our cash.

BUT - if you do decide to balance things out, and based on your own stated (taxable?) earning of £140k, then it would be sensible to as a minimum be contributing £40k into the pension - because you're effectively being taxed at 60% on £25,140 of that, and 45% on the rest. 

So keeping your taxable income to no more than £100k really is a no-brainer. Even more so if your pension works via salary sacrifice because you'll save the additional 2% NI.

In my last job, through additional rate avoidance and matching employer contributions, I got about £40k into my pension for an effective cost to me of only about £12k - it really can be that good...

Mutton_Geoff

You say you earn £140k. Is that taxable pay after you've made your £60k pension contributions?

greyflanneltrousers

Pat38493 said:

Just to be clear I don't work in finance and I am no adviser - however there are a few IFAs on these boards and I'm pretty sure that if I say something completely wrong or that they don't agree with they will jump in and comment as well.

It's more that my situation is not that dissimilar to yours and I am maxing out my pension and leaving my mortgage to take care of itself over time as it seemed like the rational choice.  The other point to remember is that your mortgage debt effectively shrank by 14% since the start of 2022 in real terms, given that the nominal debt remains the same, whereas there has been 14% inflation in most of your other costs.  If your income increases in future, your mortgage shrinks in reference to your actual income and other spending.

That said - I have seen people state that they are taking a middle path and they will pay off their mortgage quicker with taxed income, because it's more important to their wellbeing to see their mortgage going down quickly than to optimise their long term tax planning.  However mostly those people aren't paying marginal 60% tax rates on income above £100K

I am not sure what you mean by the 5% versus 12% comment, but if you mean that there are youtubers claiming you can expect 12% ongoing returns from your investments, for sure you can do that in some years - some years you might see 25% or more.  However if you look at it as a long term investor, a typical assumption by IFAs I think would probably be inflation +2% - this takes into account that you could will have negative years where your investments fell.

This does raise another point though which is that since you are aggressively funding your pension scheme, you should review the investments that your pension is being put into and make sure it matches your risk appetitve and long term objectives.  

Yes very clear about your role here, I am not expecting to find you on the IFA register haha :-)

It's great that your situation is similar, that really does help to know. I think paying my mortgage off in 5 years - which is nearly 10 years early suits me. My current payment is £1,400 and is a bit high for my liking. In three years I'll have £70k to essentially half what remains, so I may choose to still borrow the remainder of the same years remaining. Even at 5% mortgage rate this will lower it and may make me happier to just keep paying it.

With my current situation every penny is accounted for - my family feel like we are poor :-) I quite like us not having spare money to waste, it makes me feel like we are doing the right thing. At least for the nect three years.

Yes, the 5% vs 12% was the pension growth rate.

One of the IFA's I met with did actually review the pension I was in and told me it's almost as good as it get and reflects my risk appetite.

It's an interesting way to look at the debt, having reduced because of inflation. If only my wage had increased to make this a reality!!

Thanks again Pat, really insightful, cheers.

Albermarle

This does raise another point though which is that since you are aggressively funding your pension scheme, you should review the investments that your pension is being put into and make sure it matches your risk appetitve and long term objectives.  

OP I would just add to the above that you should start to give some more detailed thought ( if not done already) as to when you might want to retire, what your current expenditure is and what you retirement expenditure could be.
One problem sometimes can be that high earners can be high spenders, and you really need a very large pension pot /war chest to maintain a similar level of expenditure in retirement.
Also it is worth noting that as a generalisation, decumulating/withdrawing from a pension in a sensible and tax efficient way is a bit more complicated than just adding to it.

greyflanneltrousers

artyboy said:

I do get the psychological draw towards paying off the mortgage, so that you can say you own "every brick" - the sense of security that provides can easily outstrip the opportunity cost of investing elsewhere. 10 years ago, Mrs Arty and I were "guilty" of doing just that and don't regret it, even if we could have made a better return on our cash.

BUT - if you do decide to balance things out, and based on your own stated (taxable?) earning of £140k, then it would be sensible to as a minimum be contributing £40k into the pension - because you're effectively being taxed at 60% on £25,140 of that, and 45% on the rest. 

So keeping your taxable income to no more than £100k really is a no-brainer. Even more so if your pension works via salary sacrifice because you'll save the additional 2% NI.

In my last job, through additional rate avoidance and matching employer contributions, I got about £40k into my pension for an effective cost to me of only about £12k - it really can be that good...

Thank  you artyboy, yes, precisely, during my self-education I realised quite quickly that I need to earn/take home under £100k and I am hovering around that right now. I keep an eye on it each month.

Yes £140k is my gross and I pay normal tax.

That £12k to £60k is fantastic, and when I first considered paying the full £60k into my pension I considered it like an investment and the fact I'd never get those types of returns anywhere else. Mine is not quite as sweet, I pay in around £25k a year (the net that I would have) for my £60k But it's still a 'return' of over 50% which is amazing. ALthough I'll pay tax when I withdraw obviously. But it will grow with that gross cash, and of course there is the 25%/£250K I can withdraw tax free.

So did you and your wife actually pay off your mortgage early?

greyflanneltrousers

Mutton_Geoff said:

You say you earn £140k. Is that taxable pay after you've made your £60k pension contributions?

No, £140k is my gross taxable wage. So the £60k costs me approx £25k (loss of my net).

Once my pension comes out my gross is around £100k, it's tracking ever so slightly over just at the minute so I will have some tax to pay or I will change my code, depending on if it's under £3k owed.

greyflanneltrousers

Albermarle said:

This does raise another point though which is that since you are aggressively funding your pension scheme, you should review the investments that your pension is being put into and make sure it matches your risk appetitve and long term objectives.  

OP I would just add to the above that you should start to give some more detailed thought ( if not done already) as to when you might want to retire, what your current expenditure is and what you retirement expenditure could be.
One problem sometimes can be that high earners can be high spenders, and you really need a very large pension pot /war chest to maintain a similar level of expenditure in retirement.
Also it is worth noting that as a generalisation, decumulating/withdrawing from a pension in a sensible and tax efficient way is a bit more complicated than just adding to it.

Thank you Albermarle. We were a HENRY. We had debts, paid interest-only on our mortgage for too long and were generally terrible with money. I was a rich broke guy! I won't bore you with all the details, but creating a budget, paying off all our debt and simply not wasting money I 'generated' (ie: we put it to better use) £4,000 a month! And that's not taking into account the pension conbribs of £3,000pm that is generated by tax/NI/employee contribs into my pension. So a bottom line of £7k is generated each month. It's not truly that figure, but I can see £7k when I do the maths. But certainly we were easily wasting £2k a month. And probably wasting more when I look at how we'd spend my bonuses.

We've been through a lot. A business loss. And some other heartstring stuff

I say all that because our expedature is relatively quite low compared to my wage. And I've removed everything from our life that was an excess - costly hobbies, etc, etc. It's been quite brutal if I am honest. It took two years but we as a family are now used to it and better for it. If I were to remove my mortgage and reduced some of the bills to cater for just my wife and I we'd need £2k a month to live on. Probably a little less depending on if we stayed in the same house.

My wife also has a semi-passive income of £2k that she/we both can continue into retirement.

I'd just like to build a good pot to make up for lost time, and so we have more choices essentially.

Absolute stonker of a question thanks again Albermarle.

I love being 'tested' like this, it's making me think back to when I originally made this plan and so far I am really pleased I appeared to make decisions that are inline with what others are saying. Which doesn't mean it's technically correct, but it sure is helping me relax.

artyboy

greyflanneltrousers said:

artyboy said:

I do get the psychological draw towards paying off the mortgage, so that you can say you own "every brick" - the sense of security that provides can easily outstrip the opportunity cost of investing elsewhere. 10 years ago, Mrs Arty and I were "guilty" of doing just that and don't regret it, even if we could have made a better return on our cash.

BUT - if you do decide to balance things out, and based on your own stated (taxable?) earning of £140k, then it would be sensible to as a minimum be contributing £40k into the pension - because you're effectively being taxed at 60% on £25,140 of that, and 45% on the rest. 

So keeping your taxable income to no more than £100k really is a no-brainer. Even more so if your pension works via salary sacrifice because you'll save the additional 2% NI.

In my last job, through additional rate avoidance and matching employer contributions, I got about £40k into my pension for an effective cost to me of only about £12k - it really can be that good...

Thank  you artyboy, yes, precisely, during my self-education I realised quite quickly that I need to earn/take home under £100k and I am hovering around that right now. I keep an eye on it each month.

Yes £140k is my gross and I pay normal tax.

That £12k to £60k is fantastic, and when I first considered paying the full £60k into my pension I considered it like an investment and the fact I'd never get those types of returns anywhere else. Mine is not quite as sweet, I pay in around £25k a year (the net that I would have) for my £60k But it's still a 'return' of over 50% which is amazing. ALthough I'll pay tax when I withdraw obviously. But it will grow with that gross cash, and of course there is the 25%/£250K I can withdraw tax free.

So did you and your wife actually pay off your mortgage early?

It was 12k to 40k, rather than to 60k, but even so, getting an >3x multiple on the way in, for several years, was great. Even if I were to end up as a HR taxpayer in retirement (and I won't, Mrs Arty and I both have big pension pots so we'll be able to make the most of our respective allowances), I'd be well up on the deal.

And yes we paid the mortgage off after about 7 years - in fairness it was very low LTV and at a rock bottom interest rate, albeit in absolute terms somewhat larger than your number. But we had the benefit of a run of decent bonuses, and a mindset that we only budgeted to our base salaries. So the extra we got was free to allocate as we wanted. We went for psychological security...