Overpay on pension or mortgage

attila_123

Hi, I didn’t know whether to ask this here, in mortgage section or investments & savings! I’ll try here and hopefully the hive brains can help me.

I have around £1000/month disposable income from my salary, which I currently overpay into the mortgage. The mortgage is at 5% and has around 17 years left to pay. In terms of Taxable Income, I exceed the additional rate so for simplicity assume that the £1000/m that I receive will have been taxed at 45%. I can pay more into my pension (currently well under the £60k limit) and its a company pension scheme that pays through salary sacrifice. I already max out on their contribution so any more would just be mine. 

I’m trying to figure out if its best to put that £1000/m into my pension (as £1.8k/month as it would be gross) and then at 57 take out 25% tax free lump sum and pay the mortgage with the accrued interest or whether to pay the mortgage now. My gut feel is telling me that pension is better, but feels odd leaving a mortgage that isn’t overpaid. 

Marcon

Same question crops up time and again on this forum, so clearly a burning issue for many! If you use the search box using the title of your own thread, you'll get plenty of thoughts which probably apply to you as much as anyone. It always seems to have an emotional content, but possibly working out what your objectives are would help focus your thinking.

MallyGirl

Overpaying the mortgage is often a head and heart thing. Pension makes more financial sense generally but doesn't give the warm feeling of owning more and more of the roof over your head.
I overpaid my mortgage, even paying it off before the last move, as I remember my starting rate of over 14%. Then I had the lightbulb moment about pensions and redirected spare money to that - even increasing my mortgage at one point to help in the pension blitz. I had plenty of equity so this wasn't as crazy as it might sound.
Salary sacrifice gains you NI savings as well as the tax boost. Can you sacrifice enough to bring you down to a lower tax band?

Aylesbury_Duck

As above, there are lots of useful discussions on here about this matter.  I think your gut feeling is correct.  Mathematically, it's very likely to be better to add to your pension rather than your mortgage.  However...you have to consider the potential psychological effect of being mortgage-free.  I faced the same (nice) dilemma some years ago, and accelerated mortgage payments to the point where I paid off a 15-year mortgage in five years.  Not the most tax-efficient thing I've done, but what it did do was change my attitude and risk appetite for investing.  Where I was very cautious before and had the majority of my savings in cash, I felt much more confident investing and choosing higher-risk pension investments, knowing that my single biggest expense was gone.  I haven't done the calculations, but I suspect I've made up much of the difference, maybe all of it, with a transformed approach to pensions and investing.

jimjames

Salary sacrifice especially at 45% seems no brainer to me. No point paying mortgage faster when you can get so much more for pension and especially as it's immediately accessible if you need it due to age

attila_123

Thanks for the answers so far, very helpful. I’ll have a proper search. 

dunstonh

 I exceed the additional rate so for simplicity assume that the £1000/m that I receive will have been taxed at 45%.

From a financial point of view, higher rate tax or above swings it heavily towards the pension.  But as others have said, some people focus more on the emotional side.

it is also worth thinking about future income.  If your income is quite variable or going to be in decline, then despite the pension being better financially, the longer term benefit of have a lower mortgage can be worthwhile.

So, there are many aspects that need to be considered.

Hoenir

As has already been what are your personal objectives and plans, also the personal risks that you face. For example how secure is your job. Pension monies are inaccessible until you retire. Being made redundant in later life is far from uncommon. Once off the ladder can be a challenge to return the same level. 

HedgehogRulez

Increase mortgage term and pay £60k pa into pension

crv1963

All of the above are correct but.............is there "Other Half"? If so what is their view?

I was sorting our pensions and had an unexpected inheritance. I was all for putting it over time into our pension pots (SIPPs) within our allowances. My wife was firmly of the view pay off the mortgage and have the psychological/ emotional security it brings and then save what we would have paid on the mortgage repayments into pensions. I did so, working on the basis happy wife, happy life!

There is a lot to be said about both options but in the end it boils down to what is most comfortable for you.

Ivkoto

It is normal for everyone to feel a lot more relaxed, when the mortgage is paid, but on the other side as early you invest the money to work for you as better the outcome will be at the end.