Mortgage overpayments vs 'up'ing pension contributions?

ChatwithJacqs

Hi,

Just wondered what the general feeling was towards what's best money wise please....... We sometimes have some spare cash (sometimes quite a few hundred) after each month and wondered if it would be better to overpay the mortgage or add to hubby's pension. Would some and some be good or an ISA maybe. Just want to make the most of the spare cash.

Thanks in advance

Jx

Corley

i would personally say Mortgage, but thats just me and my situation, depends on your age, and how much you have left to pay your Mortgage etc.

dunstonh

There is a thread in the pensions section asking the same question.

As a summary, it depends on your personal situation, investment strategy with the pension, interest rates on the mortgage and your personal discipline as to whether you would save for retirement (by any means) at a later date.

So, there is no straight answer.

Thefunkygibbons

The answer is bound to be a mix

Paying off the mortgage is a risk free rate of return and compares well to investing, although an ISA is also tax free

A pension is a good thing to have, but they are quite an inflexible way of saying, but then again you don't want to retire with wealth in a house, but no income

It is also worth making sure that you have a sufficient rainy day fund

So all in all, more questions than answers

michaels

For risk free investment:
If you have the right mortgage (ie one paying less than the interest on the best cash isa) your cash isa allowance is the best way to go - once this is used up then pay down the mortgage.
For more risky investment:
Max out share isa first, then consider pension
Reasoning - ISA always beats mortgage or pension as the funds are available rather thna locked up. Share ISA beats pension as it is more efficient tax wise (pension income is taxable beyond the 25% lump sum) and more flexible.
Only exception might be if you want to invest in something (property for example) that can be held in a pension but not an ISA.

dunstonh

Max out share isa first, then consider pension

On what grounds and justification can you give for that?

Reasoning - ISA always beats mortgage or pension as the funds are available rather thna locked up.

That is an advantage but insufficient as justification. Pension funds can beat ISA due to lower charges. Thats an advantage but again, not justification. Death benefits are better with pensions and they are also not liable to IHT, unlike ISAs.

Lump sums in pensions may not impact on benefits but in ISAs they will do.

You cant pick one advantage and say that reason is good enough for everyone. For some it may be, for others it may not.

Share ISA beats pension as it is more efficient tax wise (pension income is taxable beyond the 25% lump sum) and more flexible.

No it is not. Or rather, it may be and it may not be. A higher rate taxpayer gets 40% tax relief. An ISA gets nothing. You can earn £7090 tax free at age 65. So some of the income will be tax free. A non taxpayer or basic rate taxpayer gets 22% tax relief but may be a non taxpayer in retirement so all the income will be tax free.

In addition, the pension can quality you for increased childrens/working tax credits. The maximum can equate to 77% tax relief. You dont get that with an ISA.

So, its dangerous to say an ISA is better than a pension. Sometimes it will be correct, sometimes it will be incorrect.

Also, the annuity rate at 65 for a male is around 7% guaranteed for life. With tax off (on whole amount), thats 5.46% net. This makes it better than an ISA which will fluctuate and may not be suitable for the main income source. A non working partner making pension contributions to use up the personal allowance in retirement can save you £1000 a year in tax.

ISAs and Pensions can both be suitable for retirement planning but both have their pros and cons. Depending on individual circumstances and personal views, one may prove to be better than another.

EdInvestor

This makes it better than an ISA which will fluctuate and may not be suitable for the main income source.

How can an ISA fluctuate? It's a tax wrapper. :rolleyes:

You must be referring to the investments within it. Depending on what they are, they can remain constant or fluctuate - and normally if they are equity investments, they would be expected to rise over the long term.

Unlike the annuity income which will not rise, but rather fall, as it will be overcome by inflation. And of course there's the loss of the capital invoved with a pension - it does make it rather unattractive.

After the new rules come in next year I can't see the point of most basic rate taxpayers paying intO inflexible personal pensions with no company contribution any more, as the "use it or lose it" annual tax relief limits on contributions will be dropped.

So you can save in an ISA and then if you want to, sweep the whole lot into a pension later and get tax relief on all of it. So why choose to lock up your money now if you don't have to?

dunstonh

How can an ISA fluctuate? It's a tax wrapper. :rolleyes:

You must be referring to the investments within it. Depending on what they are, they can remain constant or fluctuate - and normally if they are equity investments, they would be expected to rise over the long term.

Correct, it is a tax wrapper. However, I am not aware of any ISA fund or account that guarantees an income at a specific rate for life.

Unlike the annuity income which will not rise, but rather fall, as it will be overcome by inflation.

Only if you buy a level annuity and not an increasing one. A choice you make at retirement. However, an ISA paying 5% interest rate will have exactly the same problems with inflation as a level annuity so no difference there.

After the new rules come in next year I can't see the point of most basic rate taxpayers paying intO inflexible personal pensions with no company contribution any more, as the "use it or lose it" annual tax relief limits on contributions will be dropped.

Increased childrens/working tax credits will be main gain to basic rate taxpayers. Not a great deal to some but others could see a bit. Non-tax payers will also still benefit.

Also, the annual tax relief limits on contributions will still exist. Albeit higher than they are now.

So you can save in an ISA and then if you want to, sweep the whole lot into a pension later and get tax relief on all of it. So why choose to lock up your money now if you don't have to?

On a like for like basis, you have potentially lower charges, potential higher rate tax relief, potential increased working/childrens tax credits, potential reduction in IHT liability and potential increase in death benefits. Some of those will be important to some and not others. Hence my repeated comments that you cannot blanket rule out pensions.