Pay extra on mortgage or into a pension

DRS1

@shomk You are posting on the pensions board so you are going to be encouraged to go for a pension.

If you genuinely have no pension at 45 then it is high time you started.  Even if it is £100 pm it will mount up over the next 20 or so years.  You should think what you will need to live on when you can't work any more.

As for the mortgage - are you happy that it might still be around your neck when you are 70?  I know I would not like that.

Some people talk about using the tax free lump sum from a pension to pay off a mortgage.  You could think of your pension contributions as building up a fund to pay off the mortgage if that makes you feel more comfortable about making pension contributions.

CapricornLass

Aren't pension savings protected from creditors if the proverbial hits the fan?  I've got a feeling they are. 

I would recommend looking for a good independent Financial Advisor if you decide to go down the pension route.  They should be able to answer your questions.  Worth asking round for recommendations, but check their status on line before you contact.

Silvertabby

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.

Not just the LGPS - I believe similar figures apply to the other public sector pension schemes.

Helps keep them affordable, though.  

Hoenir

CapricornLass said:

Aren't pension savings protected from creditors if the proverbial hits the fan?  I've got a feeling they are. 

You still will lose that roof that's over your head. At great financial cost. 

Phossy

Might be worth a watch https://youtu.be/MWadHLKMgB4?si=JHr2YX1ODoGhq6Jc

Cobbler_tone

Phossy said:

Might be worth a watch https://youtu.be/MWadHLKMgB4?si=JHr2YX1ODoGhq6Jc

That is a great video and summarises the pro's and cons really well. He usually explains things in a manner that you can understand.
 
A couple of points:
A lot of people will struggle to get interest only mortgages these days and they usually come with a premium interest rate. Way back I ran an interest only mortgage for three years to afford the third house move I wanted. It was a lot easier back then.
 
I would also imagine employers passing on NI savings is the exception rather than the norm.

It was good that he covered the emotional side as most people don't really want a £150,000 debt at retirement, regardless of having money to pay it off. I think the best way to think of that is that you are effectively 'renting' your house for the next 18 years at £500 per month. I guess the £500 won't change (only with interest rates) and hopefully your income (and house value if you intend to downsize) will increase. As long as it all goes in the pension and not fancy holidays or else you might be working until you are 70+! I can see some people struggling to maintain that discipline for 17/18 years (in this example) and would be more inclined to overpay the mortgage.

I personally find the increasing pension contributions a constant challenge. Looking at my net pay, I'm still in the same job and was coming home with more in 2019. It's that constant balance of living for now and saving for (hopefully) the future.

Hoenir

Cobbler_tone said:

A lot of people will struggle to get interest only mortgages these days and they usually come with a premium interest rate. Way back I ran an interest only mortgage for three years to afford the third house move I wanted. It was a lot easier back then.
 

A considerable pension pot is required if the plan is to the clear the mortgage with the 25% lump sum.  Given the average is only in the region of £150k.  No great surprise that interest only has moved to being a niche product. When one also considers the failure of low cost endowments to fulfill their purpose. Investment returns in part being permanently damaged by the Nikkei Index crash of 1990. There still remains legacy interest only mortgages from the Northern Rock era rolling off as well. For which many people have never made adequate plans to repay. 

hugheskevi

Silvertabby said:

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.

Not just the LGPS - I believe similar figures apply to the other public sector pension schemes.

Helps keep them affordable, though.  

All the schemes have to set assumptions about the proportion commuted in their 4-yearly Valuations. For example, the LGPS valuation assumptions are at this link and the NHS valuation assumptions are at this link.

There is limited data on behaviour in the post 2015 career average schemes, due to a small number of retirements to date. However, the previous schemes also did not have an automatic lump sum and there is more evidence from those schemes. There is a consistent pattern across schemes that about 80% of the maximum possible lump sum is taken on average. In practice, I understand that most either take maximum commutation or nil commutation, suggesting that about 4 in every 5 members are choosing maximum lump sum and 1 out of 5 choosing nil commutation.

With regard to using a pension or mortgage overpayments for eventual mortgage repayment, it is worth noting it doesn't have to be one or the either, a combination can be used. It also isn't necessary that an interest-only mortgage is used, that just maximises the gain, but using a normal repayment mortgage with the longest-term possible and periodically borrowing more will still be very efficient. Understanding the principles and coming up with a personalised approach that works for the individual is key.

I find most people tend to initially reach for corner solutions, ie, maximising one thing or another possibly to the complete detriment of the other, but over a longer term it may well be best to keep options open, do a little bit of everything and tilt toward one approach or another depending on the incentives without going too far in any one direction. Having said that, the advantages of a pension are compelling for many people and so may well be worth maximising given how much better the incentives are compared to just about any alternative, depending on individual position around rate that will be paid in retirement, tax relief on contribution, and the individual Lump Sum Allowance position.

ali_bear

Over the years inflation will gradually erode the mortgage debt. But it is good if you can afford to overpay it. 

Having said that it is good to have a balance between paying down the mortgage and saving for the future. And as you point out you don't currently do that. Why not start a new SIPP with a regular contribution £100 or more? Pick a good underlying investment (separate topic). When it comes to maturity you'll have the choice of what to do with the money. 

poseidon1

OP I sense none of the responses to your query maybe resonating with you.

Please note most of the respondents are unlikely to have acquainted themselves with your backstory, so perhaps the following summary I culled from some of your other posts might help:

1) You are (recently?) Divorced with 2 children.

2) Debt has been an issue and had resulted in secondary charges against your home in the past due to issues caused by your Ex. You are now solely responsible for servicing the mortgage as well as supporting the kids. Those past issues with  debts maybe a contributory factor in your wishing to accelerate discharge of the mortgage via overpayments.

3) You describe yourself as self employed but in fact seem to be one of a  four partner  LLP ( I don't believe you ever clarified your business status). That said, back in 2022 you only had fixed drawings of £1300 monthly for UC purposes. 

In the absence of any additional information about your past employment history and whether you have any small pension pots worth looking into, it appears your current pension expectations may reside in the state pension only, and that depends on NI contributions you might be making on your self employment income.

If you are an LLP partner I assume an accountant assists in preparing your annual tax return, so I suggest you check on what basis you are making NI contributions. Class 4 payments based on your declared  partnership profits do not directly accrue state pension benefit, so you should certainly be checking your state pension forecast to ensure your contribution history will set you on course for the maximum state pension ( currently only £230 per week).

I think a stark question to  ask yourself in relation to your future income expectations when you eventually retire , is will you be happy to survive solely on the equivalent of £230 per week at that time.

 Even with your mortgage paid off by then, I would suggest that would a tough ask, and as good a reason as any to divert £100 per month to a pension scheme especially with HMRC adding a £25  boost to every payment you make even before tax free investment growth is taken into account.

Suggest you jump on to any of the conventional pension company websites and get a quote for what £100 per month could produce to your retirement age based on 5% annual assumed growth. See below a useful article from Aviva on this ( other insurance companies are available).

https://www.aviva.co.uk/retirement/aviva-pension/knowledge-centre/sipp-tax-relief-and-allowances/