Mortgage V Pension dilemmas

As already mentioned Pension beats Mortgage. Tax relief on contributions and pension growth should easily outstrip mortgage over payments. But a pension is less flexible if the money might be needed before 55, so some people suggest mortgage overpayments or doing both, when clearly pension contributions are the best financial choice.

A better solution might be to use a flexible mortgage product such as an offset mortgage. Over payments can reside in an offset savings account, so same benefit as regular mortgage over payments, but still accessible. When approaching 55, deplete these savings into your pension - particularly if there's a possibility of 40% tax in later life. Not optimum, missing out on pension growth, but the flexibility could be worth it if things go wrong.

Offset mortgages are typically a bit more expensive than regular mortgages, you pay for the flexibility, so needs to be considered. Also, only for people who will have the room to increase contributions in later years and not be limited by £40k annual limit, which is probably most people!

Albermarle wrote: »

Some people are wedded to the idea of paying their mortgage off asap . There is even a forum on MSE called 'Mortgage free Wannebees' Now of course if your mortgage is giving you sleepless nights then probably better to pay it off quickly , however financially it might not be in your best interests in the long run as putting more money in your pension is nearly always a good idea .

And if your mortgage is giving you sleepless nights I would suggest hypnotherapy. A full course costs a few hundred quid which is likely to be cheaper than underfunding your pension by a few orders of magnitude.

If people think you are worth lending lots of money this is a good thing. If you are worried that they were morons for lending it to you because you might default, then you should probably spend more time considering whether they might be right about your creditworthiness and you wrong.

(If you have enough money to overpay the mortgage, and are inclined to commit it to the mortgage rather than leave it in cash for a rainy day, that means there is not a material reason to worry about the mortgage. If there was an imminent risk of job loss or other disaster, you would leave the surplus money in cash so you could use it to continue making the normal payments if/when you lost your source of income.)

dano17439 wrote:

You think your bank will care if you cant make your mortgage payment but you say you have hundreds of thousands in your pension pot, which you cant access for another 10 years?

Which is precisely why pensions beat overpaying the mortgage. If you pay into a pension and later run into trouble, your pension money is protected from bankruptcy. (Assuming the contributions were not made deliberately in anticipation of bankruptcy.) If you used it to overpay your mortgage instead, it is not protected and you've handed free money to your creditors that you could have used to support your family once you reached middle-age.

Your bank isn't going to care if you were overpaying your mortgage but something happens that means you then can't make the normal payments. Default is default. They may give you some allowance but banks are keen to work out payment plans and avoid repossession whether you were formerly overpaying or not.

You can partly disregard what Albemarle said then, because you don't have any option - unless you transfer out. Everyone gets the same fund in NOW Pensions - a "Diversified Growth Fund" (which appears to be something like 60% equities / 40% bonds, although NOWP's disclosure is extremely vague) with a cash fund mixed in if you are 10 years from retirement or fewer.

As long as your contributions are being matched by your employer, you are probably stuck with NOW in terms of contributions going in.

For money already paid in and/or any contributions above that, you would need to look for an alternative provider if you particularly wanted a different split than the one NOW invests in.

The split NOWP invests in is neither particularly good or nor particularly bad. I can say that even without NOWP telling us exactly it is; it's a default workplace fund and will do a job. Albemarle is right that others things being equal, a 30-something with pension money can afford to take more risk, but it depends on how badly you want to see bigger downs and ups in the pursuit of a higher return.