Mortgage versus Stakeholder versus ?

pjl_2

I'm on the verge of being a higher rate tax payer, it's only my 350 per month contribution to my company's organised stakeholder pension that's keeping me for the most part in the lower tax bracket (although the occassional bonus throughout the year may take me just over).

Anyway I have a nationwide fixed rate mortgage (4.95%) that allows me to make overpayments.

What I'm wondering when my pay goes up in Janurary would it make sense to take the salary sacrifice and increase my pension contribution or make overpayments on my mortgage. I am looking at the long term investment gain.

Any advice?

Thanks Peter.

reddevilled

If you are a higher rate tax payer then any payments you make towards your mortgage would be after HR tax deducted. However, if you pay towards your pension you get tax relief and in effect pay no higher rate tax.

BUT it could be quite a while before you get your pension whereas you can benefit from the mortgage overpayments pretty quickly.

I would say that a lot depends on your age, your outstanding mortgage and what your long term plans are.

dunstonh

If you are in receipt of childrens/working tax credits, then those pension contributions are also increasing the amount of tax credit you receive.

Paying off short term debts is a good idea. However, mortgage is a different matter. As reddevilled says, it depends on a number of things. I would also say it depends on how likely you are to make up the missing payments into the pension at a later date.

pjl_2

I'm 35 with no kids with about 22 years, and 100k, left on my mortgage (about 14 more months with Nationwide which allows decent overpayments).

I'm naively assuming that the tax break I would get by increasing my pension contribution and a decent return on my investment funds would outweight any benefit to overpaying on my mortgage. I would also be looking at increasing my pension contribution in the future, unless of course overpaying on my mortgage would be a better option ;->.

I suppose what I'm trying to work out is, if my salary was increased to say £100 a month before tax, would it be better in the long run to overpay the after tax amount on my mortgate repayments or simply take the salary sacrifice and increase my pension contribution for the year.

littld

I look at it this way, I ACTUALLY owe the money on the mortgage vs. I MIGHT benefit from an increase in pension one day. Unless you are very certain that the value of the pension will rise (this is unlikely given the past 10 years of stock market performance), I would swallow the extra tax and get rid of the debt. What do others think?
btw I am 33 with kids but I don't use childcare at all. I owe 70K and have chosen to set my morgate over 15 years to save on interest.

reddevilled

Further to what I've said above. If it were me in your situation I would pay off my mortgage first, for as littld says you are clearing an existing debt.

I am 25 with an estimated 10 years left on my mortgage and I would much prefer to pay off my mortgage then I would have spare cash to pay into my pension if I wanted to.

From a tax perspective paying into pension is better but I think it is easy to get bogged down with what is cheaper for tax rather than what is best for you in your current situation.

Hope some of that made sense

dunstonh

Unless you are very certain that the value of the pension will rise (this is unlikely given the past 10 years of stock market performance), I would swallow the extra tax and get rid of the debt. What do others think?

I also think people need to take as much care as where their pensions are invested as they perhaps do trying to get low interest rates. A decent spread of investment funds would have provided in excess of 10% a year over the last 10 years. A UK stockmarket fund would have been closer to 7% and basic managed fund around 5% a year.

If you are stuck in a one fund investment for the pension and intend to keep it that way, then you probably are better off clearing the mortgage first. If you are invested in a decent spread of funds across the sectors (of even sector average performing funds) then you have far greater potential for growth.

pjl_2

Thanks for the info. I suppose the way I've been looking at it is like this. A 100 gross a month increase in wages invested in my pension is going to yield me £1320 after a year (includes company contribution of 10% and assumes my funds haven't generated any profit). As I see it this would be much better than a post tax amount of £60 (not including NI) invested anywhere else (excluding reducing the mortgage payment).

However what I cant see, but given the reples am willing to accept, is how the post tax amount amount of 720 used to overpay on my Mortgage is going to be better in the long run.

Cheers,

Peter.