Pay off mortgage or invest in SIPP?

Tallulah_Chicken

Hello all, 

I have a decision to make which I have been wrangling with for a while and would appreciate some other views on! 

The background - I'm 46 earning £60k a year. I have a Civil Service DB pension and around £70k in savings split between cash ISAs (£30kish @ 4.5%), regular savings (£25kish @ 4.5%) and a stocks and shares ISA with around £15k in it. All ISAs are maxxed out, and I will move most of the regular savings into cash ISAs in April as I am aware I will be taxed on the interest.  I also have around £500 a month to invest somehow, which will shortly increase to around £1k a month. 

My mortgage at the moment is £170k with 20 years left to run. Current interest rate is 3.08% but is up for renewal in October. My initial thought was to start overpaying the mortgage, but with any luck I may be able to fix again at below 4%. Our LTV is around 35% so we are in a good position for the better deals on the market. This makes me wonder whether I might be better investing it in a SIPP, getting the 40% tax back and using this as an additional lump sum to repay whatever is left on the mortgage when I hit 57. I don't believe it can be as simple as that though, and there must be something I haven't thought of, so would really appreciate your help!!

Thank you in advance.

singhini

"I don't believe it can be as simple"
i thought it was i.e. aslong as the savings are earning more than the debt then it is that simple. Hopefully someone will come along and either substantiate or refute me.


When i was in a similar position to you i paid down my mortgage (as i wanted guaranteed security i.e. working towards being debt-free). It made me happy. 
Whereas i felt i would be constantly in the market chasing interest rates and stressing (and doing that for 20+ years is a real turn off in my opinion)

Example1: £20k paid off the mortgage today @ 3.08% verses saving it at 4.50% = a difference of £284 annually (not huge in my opinion). Yet £20k is a significant amount of money. 

Example2: You have £170k savings and £170k mortgage (hypothetically). If you don't pay the mortgage off you will be £2,400 a year better off ----> I would still be paying the mortgage off and getting debt-free security.

The other option is to try to max out your pension contributions as the tax relief is 20% or 40% or 45% (depending on your tax band) which is way more than 3.08% or 4.50% 

Dazed_and_C0nfused

The background - I'm 46 earning £60k a year. I have a Civil Service DB pension

Is this £60k your salary or your taxable pay (expected P60 pay amount)?

Is the DB pension Alpha?

Bostonerimus1

Do a bit of both. Think of the mortgage as a guaranteed return, it might be below current interest rates, but being mortgage free has additional benefits, not least being the freedom it give you.

Tallulah_Chicken

Dazed_and_C0nfused said:

The background - I'm 46 earning £60k a year. I have a Civil Service DB pension

Is this £60k your salary or your taxable pay (expected P60 pay amount)?

Is the DB pension Alpha?

£60k is my salary, so before tax and pension etc. My pension is now Alpha, but I have15 years of service in Premium too, the McCloud judgement boosted it massively!

Dazed_and_C0nfused

Tallulah_Chicken said:

Dazed_and_C0nfused said:

The background - I'm 46 earning £60k a year. I have a Civil Service DB pension

Is this £60k your salary or your taxable pay (expected P60 pay amount)?

Is the DB pension Alpha?

£60k is my salary, so before tax and pension etc. My pension is now Alpha, but I have15 years of service in Premium too, the McCloud judgement boosted it massively!

So your taxable earnings are likely to be more like £55.5k as Alpha is a scheme that uses the net pay contribution method.

Just something to bare in mind if you are looking for the optimum pension contributions to simply mitigate higher rate tax, not get the most you can into a SIPP.

Yorkie1

It might be worth doing some advance thinking about desired retirement age and future income.

For example, what age you plan to take Premium and Alpha. Do the maths to see how much you'd get under each, depending on whether the McCloud period is taken in each.

Although it is initially attractive to take the years as Premium, you might find that once you add in your Alpha pension at a later point, the overall income is lower than if you had taken the years as Alpha - and found a different way to make up the difference in the years between taking the first and second elements. This is because Premium will only go up in line with your salary increases, whereas Alpha is revalued by CPI - which is almost always higher than a salary increase.

Linked in with that is when you wish to have paid off your mortgage by. Look at the overpayment calculator on the main website here, and see how much difference it will make to do overpayments of certain amounts.

Finally, if you are likely to have savings interest that is not covered by an ISA, if you can make additional pension contributions to bring yourself down into the 20% tax band (after taking account of taxable interest), you'll have £1000 of interest at 0% tax, rather than £500. Those pension contributions could be AVCs / Added pension / EPA all within Alpha, or to a SIPP. 

So there are several pieces of the jigsaw puzzle which might merit being considered in the round.