Stakeholder Pension OR reduce mortgage

LeeJ_2

I guess this is a fairly broad question, but I'll ask anyway.

I can afford to put a modest amount aside each month (say £150 to £200). I'm 50 and would hope to retire at 65. I could use the money to:

i) pay into a pension (Stakeholder?)
ii) overpay my mortgage
iii) a mix of the two.

Any suggestions/pointers/advice would be appreciated.

EdInvestor

Hello Leej

What other savings and investments do you have already?

How about other pensions - state, company, past and present?

What kind of interest rate do you pay on your mortgage?

dunstonh

In addition to above...

It may be a bit late to look at pensions now. 15 years with a small contribution like that would not result in much of a pension at the end. However, the lump sum may be more valuable to you and depending on the tax situation at the time of retirement, you could always consider sticking it in the pension then.

Of course, a pension may be still suitable if you are a higher rate taxpayer or in receipt of childrens/working tax credits.

Ignoring pensions as they are just a savings product, your question is really should I save for retirement or pay off my mortgage. If you are low risk and dont intend to invest in medium risk areas or higher, then paying off the mortgage may be the cheapest solution (mortgage interest is more than the rate or return on the "savings").

However, if you pay off the mortgage and don't save for retirement, you get to 65 and find yourself with no debt but no money to live on apart from the paltry state pension/credit. So you do need to do both. Its just when and how. Some of that answer will be based on your attitude to investment risk and your own discipline. You will know better than us if you would save the money at a later date if you werent to save it now (and pay off the mortgage). If you dont think you would, then doing both now may be the better option. Even if its not potentially the best financial option.

LeeJ_2

Thanks for the replies so far.

Savings - £20K+ in a high interest account
Pension - Two 'frozen' pensions from previous employment.

I suppose the calculation I'm trying to make is a simple comparison between the saving on interest payment (on the mortgage) vs gains from a pension (presumably interest paid and tax 'credits' paid into the stakeholder).

I intend to sell of the house (which will be too big) come retirement and buy a much smaller property so I guess I see the house as part of my pension (rightly or wrongly)

Any more thoughts?

EdInvestor

LeeJ wrote:

I intend to sell of the house (which will be too big) come retirement and buy a much smaller property so I guess I see the house as part of my pension (rightly or wrongly)

Sounds good.:)

Don't you have any ISAs? With two frozen pensions and a "house as pension" planned, the tax wrapper you're under-using is the ISA, not the pension. So the choice ought to be overpay mortgage or save/invest more in ISA, IMHO.

[Note that with a pension you get tax credits on contributions but you pay tax when you take the income on most of the money.Whereas with an ISA, although there is no tax credit on the way in, the income and the capital is tax free. The other thing with a pension is that you can never access the capital, whereas with an ISA, it's all yours.]

You don't mention the state pension.Are your NI contributions up to date, any missing years? Have you got a recent state pension forecast?Are you eligible for the S2P(SERPS) top up?

For anyone of your age, paying up missing years can be a bargain (especially if you are self employed).The state pension would cost you nearly 100k to buy on the open market (partly because it is index linked for inflation) - it's a much more valuable benefit than many people think.

LeeJ_2

I will take a look at ISAs as you suggest.

NI contributions should be up-to-date (no missing years). How does one go about etting a pension forecast?

EdInvestor

Pension forecast here:

http://www.thepensionservice.gov.uk/atoz/atozdetailed/rpforecast.asp

At your age, it might be quite helpful to work the whole thing backwards, bearing in mind that all pension income is taxable (but that tax allowances go up at age 65).

That is, find out your entitlement from all the pensions acquired so far and work out how much post tax income they will generate.

This might clarify whether or not it's better to keep remaining savings/assets outside the tax net, which will tend to favour some ways to save/invest rather than others ( eg savings in ISAs and direct purchase of shares, rather than pensions and BTLs).

dunstonh

At your age, it might be quite helpful to work the whole thing backwards, bearing in mind that all pension income is taxable (but that tax allowances go up at age 65).

Subject to personal allowances. At 65, you can earn £7090 a year tax free currently. If you have a wife/partner, it still may be sensible to look at retirement planning including them. If they have no retirement income, you can contribute to a pension in their name, get tax relief and when the income is paid in retirement, if the amount is less than the personal allowance limit (which based on what you have said it would be), then the income would be tax free.