Pension salary sacrifice OR mortgage overpayments??

Mean_mr_mustard

I have recently moved house, and have a mortgage at 5.72% fixed for 2 years. I have been making a £2,000 per month pension contribution through salary sacrifice for the last year or two, and I’m a higher rate taxpayer. 

Am I better off overpaying on my mortgage with that money (and losing the 40% tax saving benefit on that £2,000) or am I better off continuing to pay it into my pension?

Any help or advice would be greatly appreciated as I’m struggling to work it out myself! Thanks.

El_Torro

Short answer: It depends.

Salary sacrifice is a great way to contribute to a Defined Contribution pension. You should really contribute enough to get the maximum employer contribution. Contributing more than that (which I assume you are currently doing) depends on your whole financial situation including:

When you plan to finish paying off your mortgage
When you plan to retire
How much you already have in pensions and other investments that will cover your income when you do retire. 

One option would be to continue contributing a lot to your pension and use your pension to pay off your mortgage when you retire. Possibly by using some / all of the 25% tax free lump sum to finish paying off your mortgage. This is an attractive proposal for many people, it may or may not be suitable for you. 

On-the-coast

Age & psychology come into this. It can be a long time before you can access your pension. 

Financially it’s usually better to invest in the pension, but I paid off the mortgage early instead.  I kind of regret that now with hindsight - but also I’m glad I don’t have to worry about interest rate spikes in my mortgage.

Cairnpapple

I can only share my personal experience which is that we went through a very significant reduction in income over the last year (one redundancy eventually leading to taking a lower paid job; one long term illness which may not be able to work again) and it was a MASSIVE relief to have paid off the mortgage. We're still (just) in our 40s so if we'd put everything in pensions, that wait till 57 would have been a long one.

Altior

Cairnpapple said:

I can only share my personal experience which is that we went through a very significant reduction in income over the last year (one redundancy eventually leading to taking a lower paid job; one long term illness which may not be able to work again) and it was a MASSIVE relief to have paid off the mortgage. We're still (just) in our 40s so if we'd put everything in pensions, that wait till 57 would have been a long one.

However sinking assets into a mortgage locks them away too (but not completely impossible to access and only with significant cost, unless old enough/terminally ill as it is with pension).

If you keep the resources outside of either, you can still do both at a later date. With no loss of benefit (in fact, most likely more beneficial).  And crucially, still access it easily at zero cost in emergency/unexpected circumstances. Covering the mortgage repayments, but also to cover other priority bills with comfort. 

As is oft repeated, people don't need to back only one of the horses. You can maximise employer pension benefit, invest/save in high savings rate/ISA accounts, and overpay the mortgage if your mortgage rate is higher than the risk free rate. 

Ultimately it also comes down to personal circumstances and personal attitude to risk, job security, ambition, mobility etc. So there isn't a right answer that fits everyone. For example I always plan to live alone, and remain in the same property at least until I am of an age that provides pension access, thus only have a single income to fall back on. In a total emergency I could call on my Mum to bail me out. But I don't plan to allow that to become a prospect, ever! 

lisyloo

I would pay of the pension due to the higher rate tax benefit with the caveat that you need sufficient emergency savings.

Hoenir

Altior said:

Cairnpapple said:

I can only share my personal experience which is that we went through a very significant reduction in income over the last year (one redundancy eventually leading to taking a lower paid job; one long term illness which may not be able to work again) and it was a MASSIVE relief to have paid off the mortgage. We're still (just) in our 40s so if we'd put everything in pensions, that wait till 57 would have been a long one.

However sinking assets into a mortgage locks them away too (but not completely impossible to access and only with significant cost, unless old enough/terminally ill as it is with pension).

Benefits aren't locked away though. As there's a lower debt to be repaid and serviced. Clearing the mortgage earlier reduces the need to maintain the same level of income. Many people find themselves sidelined in the latter part of their working lives from senior roles. Once off the escalator they start at the bottom again.