Overpay mortgage or pension

Fireflyaway wrote: »

I'd pay the mortgage. Not only are you likely to save more in interest than you would gain interest in savings, it's security. Should something unplanned happen, your home is safe once it's paid for.

No, it's completely the opposite. If disaster strikes the pension is protected from bankruptcy. The house is not.

Once you are mortgage free with no house payments, you will be in a good position to pay even more into your pension or savings.

No, they will be in a much worse position as they will be closer to retirement and won't have as much time to benefit from compound investment growth. The direction of travel has also been to make paying into a pension increasingly restrictive and less attractive (while preserving money already paid in). Hypothetically, the OP might pay off their mortgage and then find that tax-relieved pension contributions have been abolished, and they've missed the boat. That's what George Osborne wanted, and he's unlikely to be the last.

Your home is an investment too. It's likely to increase in value and the option is there to downsize if you need in future.

Downsizing is very popular as an excuse for not paying into pensions and very unpopular as a way of actually releasing capital. If you downsize, you often don't release nearly as much money as you think, and a lot of it is swallowed up by stamp duty and other moving costs. By contrast, if you have money in your pension, it costs nothing to access it. (Ignoring exceptions such as the cost of advice for safeguarded rights.)

The OP should post in the Pensions forum, which will also require more information, but the consensus will almost certainly be to put the money in a pension. Pension contributions get tax relief - mortgage payments don't. Pension contributions are invested in assets which typically deliver higher returns than mortgage repayment.

Much of the information in this thread is highly misleading and displays a clear lack of knowledge about pensions (I don't mean to pick on Fireflyaway in particular).

Indeed. People don't realise that to release enough money to make a difference to your lifestyle, you generally have to put up with a pokier house or a poorer area. Losing a spare bedroom or two doesn't cut it. Bricks are not expensive and a 2 bedroom house just isn't that much cheaper than an equally nice 4 bedroom house.

So it's not really income in retirement, it's sacrificing one part of your lifestyle - the building in which you spend most of your life - in order to improve another. Unless you've planned it properly, it's in the same category as "I'm going to fund my retirement by downstomaching and eating two meals a day instead of three."

By contrast, when you access your pension, you're not sacrificing anything, every penny goes on improving your lifestyle in retirement.

Of course if you live in London and want to return to the bosom of your family in North Wales then it's a different matter, but people who were previously happy to live in London who want to move to North Wales are the exception.

Malthusian wrote: »

Indeed. People don't realise that to release enough money to make a difference to your lifestyle, you generally have to put up with a pokier house or a poorer area. Losing a spare bedroom or two doesn't cut it. Bricks are not expensive and a 2 bedroom house just isn't that much cheaper than an equally nice 4 bedroom house.

So it's not really income in retirement, it's sacrificing one part of your lifestyle - the building in which you spend most of your life - in order to improve another. Unless you've planned it properly, it's in the same category as "I'm going to fund my retirement by downstomaching and eating two meals a day instead of three."

By contrast, when you access your pension, you're not sacrificing anything, every penny goes on improving your lifestyle in retirement.

Of course if you live in London and want to return to the bosom of your family in North Wales then it's a different matter, but people who were previously happy to live in London who want to move to North Wales are the exception.

I'm not sure where you live that a 2 bed house isn't much cheaper than a 4 bed but it certainly isn't the SE! In addition, downsizing means lower utility bills and council tax, less cleaning and (usually) gardening - all of which are desirable when you're older.

I can't speak about the pros and cons of the 2 options but there are far more advantages to downsizing than you seem to think.

onomatopoeia99 wrote: »

Though if investments always outperform mortgage interest over the long term (say, a mortgage term of twenty five years or more), one would think the high street banks would be queueing up to sell us interest only mortgages with an investment backed repayment vehicle, and there would never be shortfalls on endownment mortgages. But that's not the case.

Because of the risk that when interest rates fall, people don't put the money they're saving on mortgage interest into the repayment vehicle, but spend it instead. Which is what caused endowment shortfalls.

As it turned out that people couldn't be trusted to put enough money into their repayment vehicles, regulation killed off the market.

Private pensions are vulnerable to government policy. See my uncle who retired just after Gordon Brown mounted his raid on dividends, the value of the annuity that he was compelled by law to buy with his pot at that time was slashed from the projection six months earlier, they had to cut back their retirement plans a lot due to the loss of expected income.

Projections are useless and mean nothing.

For the last twenty years government policy has been to make money already in pensions more attractive (the dividend tax raid was an exception, and as George Osborne has now abolished the dividend tax credit, it's ever more academic). At the same time they have made it more difficult to get new money into a pension, which is one of many reasons why suggesting delaying pension contributions until you have paid off the mortgage is terrible advice.

Pension freedom was a big step in making private pensions more attractive, but please don't make out make out the case as being quite so cut and dried. You are assuming that investments will always outperform savings over the long term

What does that mean? Savings are investments. Pensions and savings can be invested in the same things, so it makes no sense to say that one will or won't outperform the other.

and that government policy on what one can do with the pension pot of a private pension will never go back to the nannying "you must buy an annuity" of yore.

And you're asssuming the government will never make a house less attractive as an investment - say, by restricting primary residence relief, or increasing stamp duty, or Corbyn's idea of a windows tax?

Similar to Kynthia is what I would do. Pay maximum into pension to get tax relief and employer's contribution and then think about overpaying mortgage. Malthusian's posts are largely correct, except IMO with regard to downsizing.

We have always planned to use our property as an asset that can release capital in retirement. And the plan has worked very well. We stretched ourselves 20 years ago and bought a house that was probably bigger than we needed (5 bedroom as opposed to 4 bedroom) but that has worked out really well. We always planned to relocate from the very expensive area in the SE in which we live to a cheaper area in the South West. We will be able to move from a 5 bedroom house to a 3/4 bedroom detached house and release a lot of capital. This will also reduce the running costs of the house by about 25% I reckon.

We will renovate the next place we buy and kit this out as a 20 plus year retirement home for the two of us (our son is just about to move out). We will move to an area that more suits our lifestyle as a retired couple (we live in a suburban area in the SE) and it will be a renovation/improvement project for both of us, as we both enjoy DIY. The next planned move after that will be when we are in our 80s to a flat. That will release a bit of capital but we should have less need for that at that stage. That will leave the flat to be sold to fund care home fees if needed.

I've always viewed property as an asset to be used in retirement planning. If you plan ahead, downsizing definitely can pay dividends. I have seen too many relatives of friends and family get stuck in houses that are too big for them as they get older, which can hasten the move into care.