Reduce pension contribution to overpay mortgage/save

Mat_Lock · 22 January 2019 at 2:27PM

Hi

Currently I am paying 6% and my company 9% in to my pension. Pension started 1/11/2012 and I am 41 years old in May. Pension is currently at around £41k.

Your net cost £152.00
Tax relief adds £38.00
Company adds £285.00
Total investment £475.00
The total investment into your pension each month is 3.12 times your net cost.

I am joint mortgaged with my wife on a 2 bedroom flat which is valued at £230k and the mortgage amount left is £161k so pay around £670 a month and we have a 3yr old too. I really want to get some funds saved for moving to a house but the costs of houses here will increase my mortgage to around £1000 which I just haven't got at moment. I work full time and my wife 8hrs a week part time and 3yr old gets 2 afternoons of free nursery. He won't start school until September 2020 at which time we want to try starting for a 2nd child.

Would it be a good idea to reduce my pension payment so that I can free up some cash for savings (to put towards next move eventually) or overpay mortgage. I can't see how we're ever going to step up the ladder at the moment.

Thanks

ermine · 22 January 2019 at 2:42PM

Mat_Lock wrote: »

I can't see how we're ever going to step up the ladder at the moment.

Ah, the good old British thing about houses. I am child-free so I don't have some of your concernes, but a cautionary tale from 30 years ago, The time, 1989. I had moved from London because, guess what, I couldn't see how I was going to buy a house.

I was stupid enough to buy a house for 4.5 times my salary, 'cos house prices only go up, innit? It is still the single worst financial decision I have ever made in my life. Getting soaked in the dotcom bust doesn't come anywhere near, and at least that was money I had already earned.

10 years later I sold that house for less than I had paid for it. I was lucky enough to hold on to my job, I saw both neighbours repossessed.

It's a tragedy that we meet the housing market at a time set by our parnets when they conceived us. You're 41. You're getting a 3x uplift on the net cost of your pension. You will pay roughly twice in real terms for a house at typical British mortgage rates and a 25 year term. House prices don't always go up. There's a possible financial challenge for the UK impeding.

I guess if you're outside London and the SE the house might be okay. But I offer the cautionary tale, there is no feeling as dangerous as I can't see how we're ever going to step up the ladder at the moment to cloud your judgement. BTDT, it didn't end well

Mat_Lock · 22 January 2019 at 2:49PM

Just want a house with a garden, isn't that what anyone wants for their family? I get what you're saying and we could easily bring up 2 kids in a 2 bed flat but only for so long. Moving away from family and friends is always an option later down the line but for now we have to stay in South East even though it's insanely costly.

Brexit for sure is going to cause some issues somewhere

dunstonh · 22 January 2019 at 3:31PM

Would it be a good idea to reduce my pension payment so that I can free up some cash for savings (to put towards next move eventually) or overpay mortgage. I can't see how we're ever going to step up the ladder at the moment.

And when you buy the larger, more expensive house, you wont make up the missing pension contributions because you still wont be able to afford it.

but the costs of houses here will increase my mortgage to around £1000 which I just haven't got at moment.

And that is at a time when interest rates are near historic lows. So, if its unaffordable now, it will be unaffordable later.

You would effectively be mortgaging your retirement years so your younger self has a better life than your retired self.

kidmugsy · 22 January 2019 at 5:12PM

Mat_Lock wrote: »

I am paying 6% and my company 9% in to my pension.

Do you need to pay all that 6% to get the whole 9%?

Is the 9% the most the employer will contribute?

atush · 22 January 2019 at 7:11PM

Would it be a good idea to reduce my pension payment so that I can free up some cash for savings (to put towards next move eventually) or overpay mortgage. I can't see how we're ever going to step up the ladder at the moment.

Generally speaking no it int a good idea.

There have to be ways/areas of spending you could cut back. Have you done a full MSE spending MOT? You have to be able to save on utilities and other bills, unconscious spending like poncy coffees on the way to work, too many take outs, impulse buying etc.

Do an SOA and post it (the debt free board is good or you can do it here). Do a spending diary where both of you write down every single pound you spend. There will be plenty of aste to cut out, and you can bank the rest into a S&S isa.

justme111 · 22 January 2019 at 9:52PM

Choices, choices...
Monetary it would likely to be a bad idea. But may be you need money now more than you will during your retirement - check how much money you will forgo in the future if you stop your pension contribution; think how much money you will need in the future. Think about other options. And then decide.

bolwin1 · 22 January 2019 at 11:45PM

The cost of selling your current home, solicitors costs, stamp duty etc. etc will be circa £15K. If you stop your pension completely, it will take 8 years saving just to cover those costs - never mind the additional mortgage payments. That would be a pretty catastrophic hit on your future self.

As previous sellers have mentioned, have a hard look at your total expenditure & work out what else can be cut instead. Or look for a better paying job if that's possible (but keep an eye on the employers pension contribution rates as the 9% you are getting is more generous than many).

pensionpawn · 22 January 2019 at 11:46PM

As suggested by kidmugsy try to pay into your pension at least the minimum to maximise your employers maximum contribution. Also, try to manage your finances so that your wife can pay into a pension too, better still, trigger her employers (maximum) contribution. What you want to be able to do from (personal) pension age is both be able to draw your personal allowances from your pensions. My wife effectively became a full time Mum at 30 when we started our family, and had built up a very small pension pot in the previous 9 years, however I really didn't appreciate, until recently, the importance of building up her pension too. Being able to draw an amount equal to both personal allowances is effectively £25k tax free! So 20 years after she quit work to spend 10 years at home as a FT Mum she is now dumping most of her salary (sacrifice, AVCs etc) into her pension as from the summer all our children will be off our hands. I appreciate your dilemma as we've been there too. However the early years of pension contributions, even if you have to cut back at some point, have time on their side to grow by retirement. The large mortgage payments will also eventually level off. Personally I would not overpay the mortgage unless you have triggered your employers maximum contributions. I believe that we've entered a new era of mortgages in which home owners will continue to pay into retirement, if not until they croak it. Monthly mortgage payments are eroded with inflation (rates remaining constant...) however pensions increase with time. Good luck.

Kynthia · 23 January 2019 at 10:22AM

You're not paying that much into a pension, just £152 per month, and I assume your wife is paying much much less or none. Reducing it isn't going to help your savings increase by much but will reduce your future pension more significantly. At the moment you are getting 312% of your contribution into your pension plus future growth and returns but by overpaying your mortgage your money will only save you a few percent.

Earning more or reducing spend elsewhere will be less costly to you if that's at all possible. Can your wife work more or is her take home pay less than childcare costs? Could she work when you're not working and can look after your child? Have you looked at how you can reduce your outgoings?

green_man · 23 January 2019 at 11:56AM

Yeh I think the main thing here is that reducing what you put in to your pension isn’t really going to free up enough money to make enough of a difference to your circumstances, and as has been said once you do it it won’t get any easier and you’ll just never replace that money.

If you are 41 you don’t have much of a pension pot yet so I wouldn’t be reducing that or you will be guaranteeing a difficult old age IMO.

Reduce pension contribution to overpay mortgage/save

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