45,000 open pension / pay off mortgage / or money in cash ISA?

Bookwell

I'm self-employed (since 2012), 56 years old and have £31,000 left on my mortgage (approx £671/month until May 2030).

I've been paying £200/month into a savings account since I went freelance and realise I'm probably missing out on tax breaks and better interest by doing so. I've accumulated £45,000 (I started off with some savings).

I'll get a state pension at 67. At 65 I'll get approx 10,000 /year from a previous workplace pension (or less with a lump sum). I'm assuming I'll retire at 67, but a few years earlier would be amazing.

Do I open a low risk stakeholder pension with the £45,000? I was about to, but have realised there is more to it than I'd realised. For example, the £671 a month I save for the next 4 years if I pay the mortgage off now is after tax, so I'm saving more than that in reality. And 3/4 of the tax relief on my pension pot will be taken away again when I take my pension (assuming I make use of the free 25% lump sum).

What other considerations might have escaped me? I'm not biting at the bit to pay off my mortgage if it won't save me anything - I've only got just over 4 years left. I think a pension is the way to go, but it also seems crazy not making use of a Cash ISA - you never pay tax on any of it.

My mind is boggled.

DRS1

What is the interest rate on the mortgage? Less than the interest rate on your savings?

Is there a charge if you pay off (some of) the mortgage early?

Are your taxable earnings over £45k this tax year (or next)?

born_again

Pay off mortgage & invest the £671 you are saving a month elsewhere.

Bookwell

https://forums.moneysavingexpert.com/discussion/comment/81877404#Comment_81877404

No charge to pay off mortgage early - taxable earnings not over 45K - mortgage interest was over 6% last year but has come down to 5.75 this February.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81877612#Comment_81877612

Assuming your self employment profits are the only income you have that is relevant for pension purposes then you won't be able to add £45k (a gross contribution of £56,250 with the basic rate tax relief added) in one tax year. You will need to spread it out.

Roughly what are your annual profits?

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81877612#Comment_81877612

So I doubt you are getting more interest on your savings than you are paying on the mortgage. So it makes sense to pay off the mortgage. I know some people advocate keeping the mortgage if it is "cheap" money.

Contributions to a pension only get tax relief to the extent you have taxable earnings (including earnings from self employment). So you couldn't get all £45k into a pension in one go anyway. You would have to spread it over a number of years.

It is always good to have a reserve fund in case anything happens. Some people say 3 months of income some say more. My inclination would be to keep that much back (in an easy access ISA perhaps) and then spend the rest on paying off the mortgage first and contributing to a pension second. But that is just me I don't like having debt even if it is a mortgage. Given what board this is others will be along to tell you it is far better (more tax efficient) to put as much as you can into a pension

penners324

I'd pit it all into a pension. Stakeholder pensions are really a thing these days.

Ho to Hargreaves Lansdown, PensionBee, AJ Bell or something like tbat.

It'll be the best option by far

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81877739#Comment_81877739

I think there is a NOT missing there.

MarlowMallard

One point to consider is if you may retire at say 63 before the workplace pension kicks in at 65, you can take £16700 pa for 2 years out of the pension at no tax, because 25% is tax-free and the other 75% is inside personal allowance. That chunk gives a 25% gain compared to an ISA, or more if you salary-sacrificed. So it's worthwhile having a couple of years of £16700 in the pension, you still gain a bit if you wait until 65.

Albermarle

Overall, you probably want to have more money invested and less in cash savings. It might sound risky, but in the long term you should get a better return.

This would apply the same whether you add to a pension, and invest it within the pension, or you invest outside a pension ( in a S&S ISA normally)

When I say invest, I mean in mainstream funds, that contain shares and often Govt Gilts. I do not mean betting on individual shares, or crypto!