Expecting payrise - should I overpay mortgage or buy extra pension?

Izz · 24 September 2006 at 4:33PM

The mortgage is huge (130k) and on a 9 year fix at 5.01%. I'm already overpaying by £50 per month, but the pay rise, plus the money released by no longer being in debt (:j ) means I could start overpaying by a further £250 per month. This would mean no more mortgage in 12 1/2 years.

Or, should I put the extra into my occupational pension (teacher's pension scheme). I can buy 'extra years' to boost what will be a very meagre retirement income.

I have 21 years to go before retirement (if I retire at 65).

I have 6 years in the current pension scheme, plus a couple of (very) little personal pensions.

I don't know what to do, and would really welcome some advice.

Izz

Hereward · 24 September 2006 at 5:37PM

Perhaps you would be better posting this on the Pension's forum. Personally I would get a quote to find out how many extra years the £250 per month would buy and then make a decision. In addition to this could you transfer your smaller pension pots to your current pension?

Cazzywazzywoo · 26 September 2006 at 6:36AM

I was in this position about 2 years ago and chose to put £100 per month in to my pension, £100 per month to overpay my mortgage and £50 extra towards a nice holiday each year.
This way I figured that I was covering all options -planning for tomorrow whilst still enjoying life today!
Hopes this helps -Cazzy

Thefunkygibbons · 26 September 2006 at 9:13AM

Given that you have just cleared your debt, it is probably worth building up a rainy day fund first

But a bit of both, sounds like a good idea, akthough you should check what the pension is invested in and how relaiable its investment returns have been in the past

Joe_Bloggs · 26 September 2006 at 10:26AM

The problem with a pension fund can be that it's pensioners are not dying off quickly enough. I don't mind this at all but it means a higher rate has to be paid now for those who contribute to the scheme. My employers took several years off during the stockmarket boom. The funds of the pension were hit hard by the fall. As it stands I pay 6% and employer pays 13%. A pretty good deal in my view, if they can keep to their final salary promises.
J_B. (I really don't know anything about pensions.)
Edit.
It might not be worth it unless you get some contribution from your employer. Pension decisions versus anything else are the hardest to make in my view. You could be dead, living in poverty or comfortably off, given the time scales of the predictions that involved.

arse_neck · 27 September 2006 at 5:19PM

As everyone else seems to have said, this is a tough call. I'm currently overpaying on my mortgage in a desperate bid to pay it off as soon as possible. Hope to be mortgage-free in 15-odd years (it's a big mortgage, and I'm balancing it with credit card debt!).

I'm also paying into my employer's stakeholder pension scheme, but my main focus is on the mortgage. As I see it, if I get mortgage free by my late 40s (fingers crossed), I can worry about maxing up on the pension then. This may seem like a 'bury my head in the sand' approach, but pensions seem to me to be a funny, unpredictable business. I'd much rather have a mass of capital in the shape of my home behind me first.

Joe_Bloggs · 27 September 2006 at 6:40PM

@!!!!_neck
It is great that you can make overpayments that can make an impact on your mortgage. However the debts at the highest interest rates should go first. If these are your credit cards then pay them off before the mortgage overpayments.
J_B.

Izz · 28 September 2006 at 3:43PM

I think the pension scheme is pretty reliable (ha!) as I'm a university lecturer, so it should still be there when I retire. But I think my action should be to spread the payrise across pension and mortgage. Happily, I don't have credit card debts, and we do have a little rainy day money - so we can spend the payrise on either.

Thanks again

bunking_off · 28 September 2006 at 5:44PM

Balancing across the two to hedge your bets isn't a bad move, particularly as you have a "safe" pension scheme. Tension is between saving for retirement now and accepting that you'll pay more mortgage interest as a result, or going hell for leather to clear mortgage then have more funds available to build a pension pot.

I looked at the issue myself. I could buy extra years into my final salary scheme, and in broad terms, comparing with the returns I'd get by paying my mortgage off, it made sense for me to direct funds into the pension scheme if (assuming I retired at 60) I would "last" until I was 68 or beyond. Given my mother had just died aged 67, decided I'd prefer to have the certainty of using the funds to pay down the mortgage more quickly...

Tim_L · 4 October 2006 at 7:50AM

If you don't die early (and most people don't) you will need a pension. And the earlier you get funds into a pension the more you will end up with at the end.

You certainly can't assume that your scheme (presumably defined benefit) will run unchanged in the future, so if you're in a decent scheme now it's prudent to accrue as many benefits now as possible: you certainly can expect a lot of pressure from taxpayers to have the very generous provisions of public sector pensions scaled back, because ultimately they are being heavily subsidised by council and other taxes. In the private sector, most defined benefit schemes are being replaced by defined contribution schemes, and it would be reasonable to assume this will happen for public sector workers too at some point.

It really makes very little sense to pay off a mortgage under any circumstances: it locks your money somewhere where it is difficult to access when needed. As I've said before, doing this is an emotional response to having the mortgage monkey on your back, but in a regime where you can beat mortgage rates using savings accounts, and easily beat them using low risk investments, it's usually better to get into a position where you can pay a mortgage off than actually to do it so that income from savings and investments offsets the mortgage costs.

Ultimately you need to see an IFA, (and on no circumstances should you take advice from random people on the internet!) but personally if I were able to buy extra years in a defined benefit scheme I would do so immediately - this is a fantastic benefit. If not in a defined benefit scheme I would consider splitting the money between savings and pension, depending on how much I had in savings currently.

Expecting payrise - should I overpay mortgage or buy extra pension?

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