Pay extra on mortgage or into a pension

shomk

Before I start, I know nothing about pensions  . Ask me about mortgages and I have some idea!

I'm 45, currently looking to remortgage to a lower interest rate. I'm paying about £100 extra off my mortgage which leaves me tight but I'm thinking of the end goal. Term of new mortgage will be 25 years.
I am self employed and have no pension at all.

My idea was to overpay on my mortgage, even if only £50-£100 per month. I could shave 2-3 years off my mortgage. But then I thought maybe I should be setting up a pension instead and paying the money into this?

So the question is, if I have to choose, then which one? I don't really get how a pension works so I don't understand how to compare which is the better option.

Can anyone point me in the right direction on pensions? Do I need to pay in a lot to make it worth while?

Thanks

El_Torro

Generally speaking a pension will grow faster than the interest rate on a mortgage, so in the long run you will probably (no guarantees) be better off putting more into your pension than your mortgage.

On the other hand people who pay off their mortgage often talk about what a massive sense of relief it gives them. Depends what your priorities are.

crv1963

shomk said:

Before I start, I know nothing about pensions  . Ask me about mortgages and I have some idea!

I'm 45, currently looking to remortgage to a lower interest rate. I'm paying about £100 extra off my mortgage which leaves me tight but I'm thinking of the end goal. Term of new mortgage will be 25 years.
I am self employed and have no pension at all.

My idea was to overpay on my mortgage, even if only £50-£100 per month. I could shave 2-3 years off my mortgage. But then I thought maybe I should be setting up a pension instead and paying the money into this?

So the question is, if I have to choose, then which one? I don't really get how a pension works so I don't understand how to compare which is the better option.

Can anyone point me in the right direction on pensions? Do I need to pay in a lot to make it worth while?

Thanks

Others with much more knowledge than I will likely answer this later on but there springs to mind a number of things- i) pensions grow (generally) so are a good idea, read up and research some more for planning pensions. ii) how do you pay yourself? Do you have a limited company if so cost of contributing to a pension should be cost effective if you use an accountant they should be able to advise how to do this.

Paying the mortgage is from taxed income, paying from pensions attracts tax relief so is obviously advantageous. 

Do you have a partner/ spouse? If so what is their pension provision? 

Cobbler_tone

I’d imagine that it far, far more common to overpay a mortgage to pay it off quicker, opposed to paying, say, another £100 into a pension.
Are the majority wrong? Maybe?
Being clear of a mortgage makes it a lot easier to budget for your targeted retirement. I wouldn’t want to retire at 60 with a chunky mortgage left.
It’s a topic that comes up on here often and tends to focus on some number crunching, without valuing the powerful emotional impact. Life isn’t just about numbers, especially when it isn’t a given you’ll be better off.

Universidad

Cobbler_tone said:

Are the majority wrong?

I remember being stunned when @Silvertabby talked about what proportion of LGPS pensioners take the maximum lump sum. Apparently the majority are clueless about pensions. Just being here asking one question probably puts you into the upper 10th centile. I'm still a complete novice when it comes to pensions, but in real life I know maybe two people who understand them better than I do. I'm not proud of that - it's horrifying.

Albermarle

In simple terms a pension is an investment account.
You pay in, the money goes to your chosen investment ( often there is a default for inexperienced investors) and over the long term you would expect a decent return.
In addition there are some tax benefits, but you can not access the money until you late Fifties.

As already said in strict financial terms investing via a pension will probably bring a better result in hard figures over a long period than overpaying a mortgage.
However reducing a big debt, like a mortgage, can reduce stress, especially of your work is not that secure.

Brie

I would suggest you have a look at what pensions you might have already. 

There's the state pension - get a forecast of where you are with that. 

Then there's work pensions - you might have a few scattered about as well as paying into one at work currently.  Easiest thing is to tell payroll to put a bit extra in each month - you won't miss it and it will add up.  Generally these will be referred to as AVCs - additional voluntary contributions. 

Also check that you are getting the max out of your employer.  Some schemes set things up at a base level, maybe if you pay 3% of your salary the employer will pay 5% or similar.  But if you up your contribution to 5% they might then pay 8%.  So by increasing your payment by 2% you end up getting 5% worth.

AND be careful if your employer changes their scheme and "suggests" that everyone should join the new shiny version.  Generally it's a way for them to contribute less.  One place I worked brought in a new scheme and were encouraging those in the old scheme to quit that and join the new one.  If I'd done that the employer contributions would have dropped from 17% to 10%.

Cobbler_tone

Universidad said:

Cobbler_tone said:

Are the majority wrong?

I remember being stunned when @Silvertabby talked about what proportion of LGPS pensioners take the maximum lump sum. Apparently the majority are clueless about pensions. Just being here asking one question probably puts you into the upper 10th centile. I'm still a complete novice when it comes to pensions, but in real life I know maybe two people who understand them better than I do. I'm not proud of that - it's horrifying.

Agree with that. Just logging on here shows an interest.
It’ll be the reason why most overpay a mortgage (if you are lucky enough to get/afford one these days) as the pension option hasn’t even registered.
The people I know with grown up kids and no mortgage in their early 50’s have very cars and  holidays. They probably should be throwing more at their pensions now. 
Anyway, forget the pension and mortgage….just don’t have kids, a sure way to early retirement!

powerspowers

Could you save in a pension to take a lump sum to pay off the mortgage? You’d get the tax savings and the sense of relief of paying it off. 

DRS1

Brie said:

I would suggest you have a look at what pensions you might have already. 

There's the state pension - get a forecast of where you are with that. 

Then there's work pensions - you might have a few scattered about as well as paying into one at work currently.  Easiest thing is to tell payroll to put a bit extra in each month - you won't miss it and it will add up.  Generally these will be referred to as AVCs - additional voluntary contributions. 

Also check that you are getting the max out of your employer.  Some schemes set things up at a base level, maybe if you pay 3% of your salary the employer will pay 5% or similar.  But if you up your contribution to 5% they might then pay 8%.  So by increasing your payment by 2% you end up getting 5% worth.

AND be careful if your employer changes their scheme and "suggests" that everyone should join the new shiny version.  Generally it's a way for them to contribute less.  One place I worked brought in a new scheme and were encouraging those in the old scheme to quit that and join the new one.  If I'd done that the employer contributions would have dropped from 17% to 10%.

I think you may have missed the in the OP where he says he is SELF employed.

El_Torro

Many of the comments so far (including my first one) have been very generic. Just looking at the OP's situation more closely:

Having no pension at all at 45 isn't great. It's not the end of the world, though it does mean you are running out of time to allow compound growth in your pension to work in your favour. Of course if you are happy to work to state pension age (if your health over the next 23 years allows you to do this) and you are happy just getting state pension then this is less of an issue. Most people wouldn't be happy just living on state pension though, even with no mortgage to pay. 

Paying into a mortgage until you're 70 isn't great either. For most people it makes sense to pay off the mortgage by the time you retire. Of course if you concentrate on paying it off sooner then this gives you less scope to get a decent sized pension pot. 


How much scope is there for your income, or at least your spare income, to grow in the coming years? Putting aside £50 - £100 a month for someone who currently has no pension and a 25 year mortgage to pay doesn't sound great. Thankfully your mortgage debt won't grow (assuming you don't miss payments or borrow more in future) so while things might be a bit tight now you may find yourself with more money to spare over the years. If you were employed you would at least hope to get inflationary pay rises. Being self employed it depends on your business model.