Mortgage, pension dilemma

ThedeadJackal

I’m 65 in December and currently planning to work until 67.

I took out a small mortgage just over 2 years ago for £50k, there is currently £29k left to pay at £968 month, the rate is 5.85%
I have savings which I’m considering to use part to pay the mortgage off.

The money that I’d be saving monthly on the mortgage I’ll salary sacrifice to put into my pension for the remainder of employment.

Is this the right move or should I just continue to pay the full term of the mortgage.

Any advice would be appreciated.

senor_naranja

Have you considered overpaying ? If you haven't worked out the true cost of what you may save by doing so then use the Money Saving Expert Mortgage Overpayment Calculator (versus savings).

Unless you have a fantastic savings account that pays over your 5.85% then you may be better off overpaying if that is an option on your mortgage

DRS1

Presumably there is no early repayment fee on the mortgage?

Albermarle

As your mortgage rate is relatively high, then probably makes sense to pay some of it down, as long as you leave yourself some savings for emergencies.

Then if you can afford it increasing your pension contributions makes sense, as you will get tax relief on the contributions and as it is salary sacrifice also some NI saving.

Kernowshep

How much other pension savings do you have? Will the TFLS from that be enough to pay off the remaining mortgage?

What tax rate do you pay now, and what will you be paying in retirement?

It could make sense to use the savings to offset paying more into your pension then sorting out the mortgage later, or do both.

af1963

As always, it depends. But doing something with the savings is likely to be a good idea, as long as you keep some accessible for emergencies. As savings, it is probably earning under 4%.

For each £1k available, using it to pay off a bit of your mortgage will effectively give you a fixed 5.85% return for as long as the mortgage lasts. Paying off £1k of your £29k mortgage could reduce your payments by about £33pm or £400pa.

If instead you just used that £1k to live off, you could salary sacrifice an extra £1k plus the saved tax and NI directly into your pension:

If you pay 20% tax now and will be paying 20% in retirement, you could sacrifice £1388 extra into the pension and that would reduce your take home pay by £1k. When you come to draw the pension, you'd get part of it tax free so it would effectively be taxed at 15%, giving you back £1180 (plus any investment growth)

If you pay tax at 40% now and 20% in retirement, you could sacrifice an extra £1724 which would cost you £1k in take home pay, and then give you back £1465 (plus any investment growth) when withdrawn.

Also worth making sure you qualify for a full state pension - if not, then buying extra NI years is likely to be a good use for some of the money.

V3cash

As others have said I’d OP mortgage as long as there are no penalties, most allow 10% per year.

As for pension I’m not sure it’s worth it for the short time you have left. Is it just 2 years?

I’ve got 9 years until I retire and OP my pension at this point wouldn’t really make much difference, I’d have to live 20 yrs to enjoy it past retirement. I would put it in savings or ISA.

Definitely get financial advice re pension, I was advised by AVIVA to get free and impartial advise from pension wise or money helper.org.

I think I’d rather have a tax free pot to draw on in retirement as they will just tax your pension anyway.

jimjames

As for pension I’m not sure it’s worth it for the short time you have left. Is it just 2 years?

Most people don't take all their pension at retirement date so the timescale will be much more than 2 years

Albermarle

Definitely get financial advice re pension, I was advised by AVIVA to get free and impartial advise from pension wise or money helper.org.

Giving personal financial advice is a regulated activity, that only a financial advisor is allowed to do ( and charge for) .

Pension Wise/Moneyhelper is free, but will only give you general guidance on options, and not personal financial advice.

I think I’d rather have a tax free pot to draw on in retirement as they will just tax your pension anyway.

Normally you get a minimum tax benefit from a pension of 6.25%, based on 20% tax relief going in and 25% tax free and 20% tax on the rest when withdrawing. However there are many scenarios where the benefit is bigger.

With an ISA the tax benefit is zero.

( taking into account that for both pensions and ISAs you are protected from any tax on investment growth.)