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    • 1980ds
    • By 1980ds 12th Jan 19, 10:53 AM
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    1980ds
    Pension vs Mortgage
    • #1
    • 12th Jan 19, 10:53 AM
    Pension vs Mortgage 12th Jan 19 at 10:53 AM
    Hi everyone, first time poster here so be gentle.
    Looking for a bit of personal finance advice. Would I be better paying into pension than trying to draw my mortgage down?
    Details are high tax earner, approx 120k with bonus. Current mortgage 200k over 21 years and think I can cut this down to 10years if I wanted to but at 2% now and remortgage next year hopefully at a similar rate for 5 years am I best to try and maximise my pension contributions as opposed to paying an extra £500-1,000 per month on the mortgage?
    Any advice will be gratefully received!

    Thanks!
Page 1
    • dunstonh
    • By dunstonh 12th Jan 19, 11:04 AM
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    dunstonh
    • #2
    • 12th Jan 19, 11:04 AM
    • #2
    • 12th Jan 19, 11:04 AM
    Looking for a bit of personal finance advice.
    You don't get that on the internet. Just discussion and comment.

    Would I be better paying into pension than trying to draw my mortgage down?
    In your case, the pension is financially by far the better option.

    1 - pension contributions could recover your personal allowance
    2 - higher rate tax relief.
    3 - investment returns typically higher than the interest you are paying on the mortgage

    So, purely on financials, pension trumps mortgage overpayment.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • ukjoel
    • By ukjoel 12th Jan 19, 11:13 AM
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    ukjoel
    • #3
    • 12th Jan 19, 11:13 AM
    pension v mortgage
    • #3
    • 12th Jan 19, 11:13 AM
    This board will say pension.
    Post the same on the mortgage board - guess what they will say

    I am in similar position and did the basic numbers and pension won over every time.

    Your mortgage looks very affordable v salary so I think you need to consider age, risk of loss of employment, and family liabilities, but based on limited information I would be thinking pension all day long.
    • Fatbritabroad
    • By Fatbritabroad 12th Jan 19, 11:39 AM
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    Fatbritabroad
    • #4
    • 12th Jan 19, 11:39 AM
    • #4
    • 12th Jan 19, 11:39 AM
    Also depends on what your assets are in various place.

    Im 38 have a 31 year mortgage but fixed for ten years at 2.59%i have 60/ltv and a decent amount in pensions so I'm prioritising isa savings now as I'm lacking in this area. Still contributing alot to pensions. I'm hrt payer but not above 100k. If i earned what you did I'd pay at least enough to get back below 100k if possible
    • OldMusicGuy
    • By OldMusicGuy 12th Jan 19, 11:43 AM
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    OldMusicGuy
    • #5
    • 12th Jan 19, 11:43 AM
    • #5
    • 12th Jan 19, 11:43 AM
    You should maximize the generous pension tax relief for high earners while it's available. That will be a prime target for reduction in the future.
    • dunstonh
    • By dunstonh 12th Jan 19, 11:46 AM
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    dunstonh
    • #6
    • 12th Jan 19, 11:46 AM
    • #6
    • 12th Jan 19, 11:46 AM
    This board will say pension.
    Post the same on the mortgage board - guess what they will say
    The difference is that the people in the mortgage-free wannabe board are in there for that purpose and they don't consider alternatives. Whereas the posters in this section are generally more financially aware & technically minded and consider alternatives and make an informed choice.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Dazed and confused
    • By Dazed and confused 12th Jan 19, 11:50 AM
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    Dazed and confused
    • #7
    • 12th Jan 19, 11:50 AM
    • #7
    • 12th Jan 19, 11:50 AM
    You should maximize the generous pension tax relief for high earners while it's available. That will be a prime target for reduction in the future.
    In all honesty that could have been written 20 years ago.

    Whilst there have been some limits on what very high earners can pay in it is not that long ago pension tax relief itself was limited to 40%.

    Officially it is now upto 46% (Scottish taxpayers only) but in reality there are plenty of posters on here who are effectively getting 60% relief.

    So for plenty they are getting more relief now than they have been in the past.
    • OldMusicGuy
    • By OldMusicGuy 12th Jan 19, 11:53 AM
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    OldMusicGuy
    • #8
    • 12th Jan 19, 11:53 AM
    • #8
    • 12th Jan 19, 11:53 AM
    In all honesty that could have been written 20 years ago.
    Originally posted by Dazed and confused
    Not if you were using carry forward allowances like I did to make up for lost time.
    • Thrugelmir
    • By Thrugelmir 12th Jan 19, 12:23 PM
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    Thrugelmir
    • #9
    • 12th Jan 19, 12:23 PM
    • #9
    • 12th Jan 19, 12:23 PM
    How secure is your job? Are you likely to burn out. Clearing the mortgage isn't just about making money. It's removing a financial burden and providing an opportunity to allow one to change tack. Do what one wants to do. Rather than have to work long hours for an employer who ultimately regards every employee as expendable. Everyone is replacable.

    Personally I'd always choose a balanced approach. Mortgage overpayments, savings and pension. Life is full of uncertainty. Everyday people get hit on an individual basis by the 3 D's. Divorce (relationship breakdown), Distress ( financial, loss of job etc) and Death ( health affliction). All of which can change a cosy secure existance upside down overnight.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • hugheskevi
    • By hugheskevi 12th Jan 19, 2:05 PM
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    hugheskevi
    Details are high tax earner, approx 120k with bonus.
    You don't say what your existing pension arrangements are (total value and annual contributions), and this could be very important. It is interesting to note you put in far more detail about your mortgage, which could suggest an inadvertent over-emphasis on mortgage.

    If you are not familiar with the pension tax Annual Allowance and the tapered Annual Allowance you should learn about them now. If you think your income will increase much in the coming years, then you are likely to start having issues with either or both of these things (assuming you don't already). That might suggest making pension contributions now, whilst you still can, but it might also suggest not doing so if you think you may need to use carry-forward of unused allowance to mitigate an Annual Allowance breach in a few years.

    You should also consider the Lifetime Allowance, and whether that will be a future issue for you before deciding to put more into a pension.

    Details are high tax earner, approx 120k with bonus.
    If you are not familiar with the tapering of the income tax Personal Allowance, and how it imposes an effective income tax rate of 60%, you should learn about this. Using a pension can avoid the taper.

    Current mortgage 200k over 21 years and think I can cut this down to 10years if I wanted to but at 2% now and remortgage next year hopefully at a similar rate for 5 years am I best to try and maximise my pension contributions as opposed to paying an extra £500-1,000 per month on the mortgage?
    I would say the mortgage is pretty low priority given current interest rates and your capacity to service what is a small debt, relative to your income.

    You need to consider and deal with multiple priorities to be most efficient. This will ensure you take full advantage of all incentives available, and don't make the mistake of focusing just on one objective at a time, leaving you unable to fully exploit the advantages of all investment types either now or at a future point. Factors such as whether you plan to more to a more or less expensive house at some point may influence your financial decisions now, for example. You should also be taking into account a partner in the planning, if you have one.

    Personally my priority order for allocation of additional funds is pension > ISA > mortgage > 0% credit card. There could be an argument for using Venture Capital Trusts too (again, if you are not familiar with these you should research them - not right for everyone, but should be considered.) You could also consider exploiting 0% credit cards to reduce mortgage - I have a bit over £72,000 on 0% credit cards between myself and partner, which is effectively used to reduce mortgage, although both the mortgage plus credit card balance is more than covered by ISA investments (invested cautiously reflecting they are using primarily borrowed funds and that I expect to draw on them in about 4 years time).

    I prefer ISAs over mortgage as in addition to higher expected returns I think they give more security than paying a mortgage - if you suffer a devasting income shock you have a greater buffer with a mortgage of £100,000 and an ISA of £50,000 to use to meet ongoing payments than you do with a mortgage of £50,000 and no ISA.
    Last edited by hugheskevi; 12-01-2019 at 2:12 PM.
    • Kynthia
    • By Kynthia 12th Jan 19, 2:48 PM
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    Kynthia
    Looking purely at numbers, pensions are the better place for your money. However life is more complicated than that. If you need more cash in the short term or medium term then money being locked into a pension doesn't work due to it being locked away until you are older. So you still need emergency savings, cash for living now, medium term savings perhaps for work in the house, a new car, or deposit/equity in order to upgrade to a bigger or better house, etc. However pensions should always be contributed to as well in order to make the best use of your money and ensure a good standard of living in retirement.
    Don't listen to me, I'm no expert!
    • 1980ds
    • By 1980ds 12th Jan 19, 5:20 PM
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    1980ds
    Exactly what Iím doing in terms of AVC pension payments to ensure I fall under the 100k
    • 1980ds
    • By 1980ds 12th Jan 19, 5:26 PM
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    1980ds
    Can someone explain how an ISA works??
    • dunstonh
    • By dunstonh 12th Jan 19, 5:33 PM
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    dunstonh
    Can someone explain how an ISA works??
    Originally posted by 1980ds
    Same as a pension except you dont get tax relief on the way in and its tax free on the way out.

    It is likely to be significantly worse off for you compared to a pension (subject to information we don't know about you)
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • atush
    • By atush 13th Jan 19, 4:58 PM
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    atush
    Op- as a HRTaxpayer who will lose his PA, penion for sure.
    • planteria
    • By planteria 13th Jan 19, 4:58 PM
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    planteria
    Same as a pension except you dont get tax relief on the way in and its tax free on the way out.)
    Originally posted by dunstonh
    ..but also an ISA allows flexible access: we can access most cash ISAs and S&S ISAs whenever we want to, rather than having to wait until 'retirement age'. this, in some circumstances, could be considered a negative rather than a positive.
    • kidmugsy
    • By kidmugsy 13th Jan 19, 6:49 PM
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    kidmugsy
    Would I be better paying into pension than trying to draw my mortgage down?

    Details are high tax earner, approx 120k with bonus.
    Originally posted by 1980ds
    If you love paying 60% income tax overpay the mortgage.

    As for pension contributions, you want to read this fellow carefully, either for now or for the future.

    https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/
    Free the dunston one next time too.
    • 1980ds
    • By 1980ds 14th Jan 19, 9:30 PM
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    • 1 Thanks
    1980ds
    Thanks, aware of the >100k tax impact so already ensure I stick under this, just seeing if best to keep going and put 30-40k into pension per year or go for mortgage reduction. Iím 38 and didnít really pay into pension until 10 yrs ago so only a £75k pot at present. Company put 8% towards pension.
    • Clive Woody
    • By Clive Woody 14th Jan 19, 11:46 PM
    • 4,543 Posts
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    Clive Woody
    Thanks, aware of the >100k tax impact so already ensure I stick under this, just seeing if best to keep going and put 30-40k into pension per year or go for mortgage reduction. Iím 38 and didnít really pay into pension until 10 yrs ago so only a £75k pot at present. Company put 8% towards pension.
    Originally posted by 1980ds
    One point to note is that you may be restricted on how much you can overpay your mortgage if you're on a fixed term deal, often you can make over payments up to 10% of the original balance without penalty.

    I'm a few years further down the line (43 years old) and have just under 2 years until we're mortgage free. I took the approach advised by some on here of balancing what I went after, with over-paying 10% on the mortgage each year, maximising pension contributions to ensure full employer contribution and also build up ISAs and savings pots.

    In a couple of years when the mortgage is gone I will re-assess plans, most likely throw a lot more at my pension to avoid the 60% tax band which next year's bonus will most likely take me into. Potentially I will look at speaking with an IFA to review my plans and to get some professional advice. I enjoy reading up and DIY finance, but I don't doubt there are folk far better qualified than me who could help the money work harder.

    Being debt free will be a great milestone and I should have a reasonable pension pot by then with plenty of time to build it significantly more before I call it a day and become a man of leisure.

    One final tip - don't forget to live your life, you have a good salary so enjoy the moment (you never know when you might get hit by a bus). Take the holidays, buy the big TV, savour the fine wine, do what makes you happy
    Rugby Union - The Greatest Game
    • 1980ds
    • By 1980ds 15th Jan 19, 5:46 AM
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    1980ds
    Best advice at the end! These are top of the list for sure!!!!
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