Pay off the Mortgage or top up my Pension pot?

Steppy

Hiya,

My heads in a spin and I need some food for thought ideas on whether to pay off the Mortgage early by making over payments or top up my Pension pot.

I have £400 per month spare… So do I overpay the Mortgage or top up the Pension?

Any ideas? Pro’s and Con’s?

Cheers,

Steppy

JimmyTheWig

What bracket of income tax are you (/your partner) in?
What interest rate is your mortgage at?
Do you use your (/your partner's) ISA allowance?
How old are you? (Roughly is fine!)

Would need those answers to give a decent reply. But if you want an off-the-cuff answer, why not do half and half?

Steppy

Does this help?

Mortgage:

50% Equity and £106k Mortgage.
20 Years term remaining.
Interest & Capital repayment Mortgage at £696.00 per month - Base rate tracker 0.23 above base for term with no penalties for overpayments.

Pension:

Company final salary – 1/50 – I put in 6.2% / Company 27% of my salary.
12.5 years contributes.
30k, 20% tax payer.
Age 38

Cheers,

Steppy

EdInvestor

Prong no 3 of the long term plan should be maxing out your annual stocks and shares ISA allowance (up to 7.2k a year).This gives you a pot of money tax free to supplement your pension, and also acts as an accessible fund in case of emergencies - whereas putting money into a pension/paying of mortgage may make money inaccessible.

It would be better to wait until you pay higher rate tax to top up your pension.Since you have substantial equity in your home already and are on a repayment mortgage, there's no reason to make extra payments there.

Dithering_Dad

Why not check to see if your current pension provision will meet your retirement requirements, or whether you need to top them up, then base your decision on this?

For example, if you think you'll need (at today's money) £30k per year in retirement for a decent living but your pension forecast says it'll pay £20k at retirement age, then you should top up the pension. If you're forecasted to beat the £30k then pay down the mortgage.

Whatever you decide, both options are far better than spending the money on crap, so either way you'll be making a good decision financially.

Just to throw something else into the mix - if you're married, you might want to look at your wife's pension provision too. The ideal is for you both to be low-rate tax payers when you retire and for you both to use up your tax free allowances. If she has little or no pension, then use your excess to top her pension up (this is what I'm looking at doing with my wife's).

JimmyTheWig

Not much to add.
From what you've said, pension looks good and mortgage looks good.

If you up your pension contributions, will your company up theirs? (From the amount you've said they're putting in I doubt it.) If they will then this would probably be worth doing.

nephilim

I would pay off the mortgage, because thats paid off sooner, so you will have the extra money afterwards to go towards your pension. Win/Win situation

Badger_Lady

^^ The theory is that, if you pay towards the pension earlier, it'll have more time to "grow". Of course, we all know how reliable that growth is.

And the reverse argument is that paying the mortgage off quicker reduces the interest payable. I don't know enough about figures to compare the two!

Congrats on the final salary pension though I had one until I left the company for a (much higher paid) job elsewhere that won't even provide a company pension And it's a huge financial services company!

purch

Pay Off your Mortgage

dunstonh

Dont forget the importance of using your ISA allowance. Its a use it or lose it allowance and that can be more valuable in the long run than paying extra into the mortgage.

JimmyTheWig

dunstonh wrote: »

Dont forget the importance of using your ISA allowance. Its a use it or lose it allowance and that can be more valuable in the long run than paying extra into the mortgage.

Agreed.
Currently you can get better interest on a cash ISA than you pay on your mortgage. Fill up your cash ISAs and then if things change (i.e. mortgage rates go above ISA rates then withdraw your ISA money and pay it off your mortgage in a chunk.
It gives a better return _and_ better flexibility than paying the money off your mortgage.

A stocks and shares ISA, as with a private pension, has a risk associated with it, but it _should_ give a better return than cash over 5-10+ years. If you are happy with the risk and don't need the money in that time scale then go down this route. But if mortgage rates go up you might not want to cash in your stocks and shares ISA to pay a chunk off the mortgage if the stock market is in the middle of a slump.

As per my first post, why put all your eggs in one basket. Why not spread the extra money around a bit. (Though I think a cash ISA would be the best starting point.)