AVC or mortgage overpayment

Nickynoo1

Hi, Not sure which board this should be on but I'm wondering what's the best thing to do with my money.  On my next payrise I thought it would be put to work, as I have for the last two pay rises.  I'm not sure which is best thing to do.  My mortgage is £100,000 at 4.1% for the next 4 years.  I've run the overpayment calculator which says if I put £290 extra to my mortgage for 5 years i would save £19k in interest in the next 5 years.    I'm in a local government pension scheme and to put money into suggest there AVC with prudential may be a better return.  in the calculator the council have provided it says if I save £400 per month, the net value it would cost me is £288., 'your Shared Cost AVC pot could be worth £264495 with net cost to me being 17572.88.    Im not sure if I have got this all correct.  the figures say i should put it in an AVC but something tells me to put it to the mortgage.  Or should I do a bit of both?  I'm 53 and will need to renew mortgage deal in 4.5 years.  
Ideally I would want to retire at 65 but as thats only 12 years away it sounds a bit scary!!

Brie

I'd go for the mortgage overpayment.  It's a wonderful feeling when it's all paid off and you then have a large chunk of money that you've been paying the bank that can go into AVCs, ISAs or paying off any other debts that might be lingering.  But others may have different opinions for very good reasons.

MX5huggy

AVC all day every day. With zero growth the AVC will be worth £24k after 5 years. Which is £5k more than the mortgage saving. 

saajan_12

Just looking at the highest value:
Assuming your AVC is properly invested in a diversified stock portfolio, you can get an idea of the past returns at least - eg the S&P has averaged over 7% if you have a long enough timeframe. So that's immediately above the 4.1%. Then it also has tax benefits IF you expect to earn less pension / passive income during retirement than you do now,. That's because you save the income tax now and then only pay income tax at your marginal rate as you draw down the pension, plus you could get 25% tax free. Eg for the last £100 gross income now, right now your tax band might be 40% so you get £60 net. By putting that £100 in your pension, you save the £40 now and then during retirement you can optionally take £25 tax free, and then pay 20% tax on the remaining £75, ie £15 if you're a basic rate tax payer. The saving is lower if you're still a higher rate tax payer. 

However in life there's other considerations, eg if something happens and you need the cash sooner, there's rules around when you can draw down the pension whereas you might be able to remortgage if the LTV is lowered or just use the savings from paying off the mortgage earlier. Its up to you how likely that scenario is and what other options you might have (eg emergency fund savings, family support, etc). 

draiggoch

I’m in the same situation regarding a mortgage at 4% for the next 4 years and being in the LGPS. My money is going in to my shared cost avc. Due to the tax advantages including NI saving it’s a no brainer. It all comes out tax free in the end so can clear any remaining mortgage debt. 

Nickynoo1

it does make sense to put in a Shared cost AVC but because my mortgage is still so high, currently £100k when I come to remortgage when my deal ends,  would it be better to have a lower value?  

draiggoch

As long as you are on minimum 40% equity I probably wouldn’t pay anymore. Historically 4% is relatively cheap. 

daveyjp

saajan_12 said:

Just looking at the highest value:
Assuming your AVC is properly invested in a diversified stock portfolio, you can get an idea of the past returns at least - eg the S&P has averaged over 7% if you have a long enough timeframe. So that's immediately above the 4.1%. Then it also has tax benefits IF you expect to earn less pension / passive income during retirement than you do now,. That's because you save the income tax now and then only pay income tax at your marginal rate as you draw down the pension, plus you could get 25% tax free. Eg for the last £100 gross income now, right now your tax band might be 40% so you get £60 net. By putting that £100 in your pension, you save the £40 now and then during retirement you can optionally take £25 tax free, and then pay 20% tax on the remaining £75, ie £15 if you're a basic rate tax payer. The saving is lower if you're still a higher rate tax payer. 

This isn't correct for the LGPS shared cost AVC.  100% of funds can be withdrawn tax free (subject to a limit).

SarahB16

MX5huggy said:

AVC all day every day. With zero growth the AVC will be worth £24k after 5 years. Which is £5k more than the mortgage saving. 

+1  (100% towards additional AVC contributions) 

Then when you drawn down the AVC just use it to pay off what might be remaining on your mortgage.  

In my opinion, a situation where it may not be appropriate (and you would need to run more calculations) would be if you wished to move house and perhaps needed a larger deposit/greater amount of equity however from what you have said I believe you are content to stay where you are living so in my opinion use all of your pay rise to increase your AVC contributions. 

swindiff

I have just answered a very similar question here

https://forums.moneysavingexpert.com/discussion/comment/81170960/#Comment_81170960

Kernowshep

+1 for the AVC route linked to the LGPS especially if via Salary Sacrifice.

This can obviously wait, but you might even be better off borrowing more at renewal time, in order to fund additional AVCs, to use later to pay off the mortgage, with the benefit of the tax saving, and hopefully investment growth on the larger amount. There isn't enough info in your post to decide if that is best/an acceptable risk for your circumstances.  I'd be quite happy with a net zero mortgage just the same as having no mortgage, but others wouldn't and therefore put more value on clearing it.