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  • FIRST POST
    • klew356
    • By klew356 14th Jan 20, 1:55 PM
    • 691Posts
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    klew356
    Mortgage V Pension dilemmas
    • #1
    • 14th Jan 20, 1:55 PM
    Mortgage V Pension dilemmas 14th Jan 20 at 1:55 PM
    I’m 36 and have a 22 year mortgage…..should I overpay the mortgage or put money away in my pension? Its all so confusing!
    I have a work based pension its been on the go since around 2014?
    Whatever the government is going to give me when I retire

    I have it in my head I want to overpay and have it cleared by the time I am fifty but should I be concentrating on my pension instead? From April 2019 the minimum contribution was 8% - 5% employee/3% employer
    This work based pension has an annual investment charge of 0.3% with a monthly administration charge of £1.50 per month
Page 1
    • SonOf
    • By SonOf 14th Jan 20, 2:02 PM
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    SonOf
    • #2
    • 14th Jan 20, 2:02 PM
    • #2
    • 14th Jan 20, 2:02 PM
    should I overpay the mortgage or put money away in my pension? Its all so confusing!
    It is something that needs more detail about your financial circumstances, current position and future position.

    I have a work based pension its been on the go since around 2014?
    So, that is a little over 5 years. How much is in it? This will let us know how far behind you are with your retirement planning.

    I have it in my head I want to overpay and have it cleared by the time I am fifty but should I be concentrating on my pension instead?
    And when you do not have enough for retirement, you can then sell the property and move into rented (cost of rent for life) or take out equity release and pay interest on the debt for the rest of your life.

    From April 2019 the minimum contribution was 8% - 5% employee/3% employer
    For someone that started late in their retirement provision, that is not a high contribution level. Good if you were in your early 20s but you have some catching up to do.
    • torrence
    • By torrence 14th Jan 20, 2:17 PM
    • 34 Posts
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    torrence
    • #3
    • 14th Jan 20, 2:17 PM
    • #3
    • 14th Jan 20, 2:17 PM
    Your mortgage debt reduces in real terms with inflation. So unless you are paying a high interest rate, a £100,000 mortgage in 22 years will be less in real terms in 22 years than it is today.
    On the other hand every £100 put into a pension invested in mostly equities assuming a long term average 6% growth over a 22 year period and the growth will compound to £360. That's even before adding in any tax credits that may apply.
    • crv1963
    • By crv1963 14th Jan 20, 2:32 PM
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    crv1963
    • #4
    • 14th Jan 20, 2:32 PM
    • #4
    • 14th Jan 20, 2:32 PM
    As SonOf said others will want more info, generally as a rule of thumb with interest rates where they are people advise to put money into pensions as inflation reduces the value/ cost of a mortgage over time while compounding increases the value of the pension.

    One caveat is if you are trying to increase the LTV to get a better interest rate at the next re-mortgage.

    Why not do a bit of both? Round the mortgage payment up to the next whole zero- mortage £392 pm, increase to £400 pm, have the psychological benefit of knowing you're overpaying while putting more into a pension.

    Another generally stated "rule of thumb" is to save a percentage of salary into pension half your age when you start- in your case if you didn't start until age 30 about 15% and keep that rate up to retirement- if you want to go earlier than SPA put more in.

    Though like everything it is doing the best you can afford with what you have coming in and crucially look at any partners provision as well- it is if in a relationship all about joint planning.
    CRV1963- Light bulb moment Sept 15- Planning the great escape- aka retirement!
    • Albermarle
    • By Albermarle 14th Jan 20, 3:15 PM
    • 2,193 Posts
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    Albermarle
    • #5
    • 14th Jan 20, 3:15 PM
    • #5
    • 14th Jan 20, 3:15 PM
    .
    should I overpay the mortgage or put money away in my pension? Its all so confusing!
    As you can already see from the previous posts , there is no absolute right or wrong answer either way .
    It partly depends on your circumstances but there is also an emotional aspect too .
    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 .
    • steampowered
    • By steampowered 15th Jan 20, 12:48 AM
    • 3,788 Posts
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    steampowered
    • #6
    • 15th Jan 20, 12:48 AM
    • #6
    • 15th Jan 20, 12:48 AM
    Financial benefits of investing into a pension:

    1) Tax relief: Worth an additional 20% of your investment if you are a basic rate taxpayer, 40% if you are a higher rate tax payer.
    2) Investment returns: The average long term return on pension investments is about 6-8% per year.
    3) Matched contributions: The 3% put in by your employer is free money.

    The financial benefit of clearing a mortgage early is that you save interest. If you are on a competitive rate you are probably paying about 1-2% per year at the moment.

    Looking at it from a purely financial view, you are better off increasing your pension contributions than overpaying the mortgage. 8% pension contributions are the bare minimum really.
    Last edited by steampowered; 15-01-2020 at 12:51 AM.
    • JoeCrystal
    • By JoeCrystal 15th Jan 20, 5:54 AM
    • 2,096 Posts
    • 1,503 Thanks
    JoeCrystal
    • #7
    • 15th Jan 20, 5:54 AM
    • #7
    • 15th Jan 20, 5:54 AM
    I’m 36 and have a 22-year mortgage…..should I overpay the mortgage or put money away in my pension? It's all so confusing!
    Originally posted by klew356
    Well, the essential thing that you are saving into the pension scheme, which is the whole point behind the auto-enrollment really (and that the employer has to contribute into it).

    Bluntly, you can do both. The most important thing is making sure you got a right amount in the emergency fund, at least six month's expenses ideally, then look at the minimum you need to pay into the pension and the mortgage which you already got.

    As you already know that you will be paying off the mortgage over the next twenty-two years, that gives you more flexibility in increasing your contribution. So with this in mind, look at first at your retirement provision and make sure that is sufficient. If you got any money left over and if you got enough savings for an emergency, then overpay the mortgage.

    Just make sure you got enough savings outside the pensions and overpaying the mortgage that you are not impacted by permanently losing access to money (or temporary in pension scheme). To this day, I am still wincing and angry at myself at doing significant overpayments I made in the last few years and would again love to have the money sitting in my emergency fund instead.
    Last edited by JoeCrystal; 15-01-2020 at 6:10 AM.
    • atush
    • By atush 15th Jan 20, 6:21 PM
    • 18,101 Posts
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    atush
    • #8
    • 15th Jan 20, 6:21 PM
    • #8
    • 15th Jan 20, 6:21 PM
    I’m 36 and have a 22 year mortgage…..should I overpay the mortgage or put money away in my pension? Its all so confusing!
    I have a work based pension its been on the go since around 2014?
    Whatever the government is going to give me when I retire

    I have it in my head I want to overpay and have it cleared by the time I am fifty but should I be concentrating on my pension instead? From April 2019 the minimum contribution was 8% - 5% employee/3% employer
    This work based pension has an annual investment charge of 0.3% with a monthly administration charge of £1.50 per month
    Originally posted by klew356
    There should be no dilema. A pension beats mtg overpayment.
    • dano17439
    • By dano17439 16th Jan 20, 9:47 AM
    • 331 Posts
    • 282 Thanks
    dano17439
    • #9
    • 16th Jan 20, 9:47 AM
    • #9
    • 16th Jan 20, 9:47 AM
    I have the same dilemma all the time. I 100% agree that putting more into your pension makes better financial sense than overpaying your mortgage, especially if you are on a low rate, BUT once the money has been committed to the pension it is locked away for at least 19 years in your case


    19 years is a long time and anything can happen. This is where the draw of trying to pay your mortgage off as quick as possible has its advantages. At least you will have security if you suffer a financial meltdown - I.e you are out of a job etc, at least you will have a roof over your head and you wont have to find your biggest monthly outlay every month.


    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?


    I think balance is the key here, and no matter what advice you receive on this board, or from anywhere, you have to do what's right for yourself, and what you are comfortable with, even if it means that its not the most financially efficient way
    • klew356
    • By klew356 16th Jan 20, 1:34 PM
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    klew356
    So thank you everyone for your responses, at the moment I pay 5%, I think what I will do is ask for my contribution to my work based pension to be upped to 10% and see how I get on. Plus my employer contribution of 3% takes me to 13%. It’s a start. I have a separate savings pot to add money to for mortgage over payment, my mortgage company wont let me simply up the DD. I can log in online and pay by card or set up a standing order. Only lumps of £500 will be added to the mortgage.

    A bit more info, I’m a basic rate tax payer, I’m in the north so not a massive earner. Work for a successful company. Single. I have got an emergency fund, I’m just looking to transfer it into a better savings account.

    my next question would be should i put this extra 5% into the auto enrollment or look to get another pension aside from this?
    i would like to add where i can still to the mortgage, i get a bonus twice a year, i could add.
    • klew356
    • By klew356 16th Jan 20, 1:35 PM
    • 691 Posts
    • 3,180 Thanks
    klew356
    I have the same dilemma all the time. I 100% agree that putting more into your pension makes better financial sense than overpaying your mortgage, especially if you are on a low rate, BUT once the money has been committed to the pension it is locked away for at least 19 years in your case


    19 years is a long time and anything can happen. This is where the draw of trying to pay your mortgage off as quick as possible has its advantages. At least you will have security if you suffer a financial meltdown - I.e you are out of a job etc, at least you will have a roof over your head and you wont have to find your biggest monthly outlay every month.


    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?


    I think balance is the key here, and no matter what advice you receive on this board, or from anywhere, you have to do what's right for yourself, and what you are comfortable with, even if it means that its not the most financially efficient way
    Originally posted by dano17439

    this is great
    i will see how i get on upping the contribution, i can always knock it down again if need be, whilst making over payments to the mortgage. albeit smaller than i had initially intended.
    • Bemma
    • By Bemma 16th Jan 20, 4:19 PM
    • 39 Posts
    • 25 Thanks
    Bemma
    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!
    Last edited by Bemma; 16-01-2020 at 4:23 PM.
    • Albermarle
    • By Albermarle 16th Jan 20, 4:31 PM
    • 2,193 Posts
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    Albermarle
    my next question would be should i put this extra 5% into the auto enrollment or look to get another pension aside from this?
    Obviously it is easier just to increase the payments to your workplace pension. Maybe when you have built up a more substantial amount , you can review the situation.
    What you should do is have a look at is the choice of investments within your auto enrolment pension ( usually you can do this on line ) and see which one your money is going in to ( if you have not chosen one it will be the default option)
    Due to being a long way from retirement , you should be choosing a high growth option as opposed to a cautious option .
    If you tell us who the pension provider is we might be able to point you in the right direction.
    • Malthusian
    • By Malthusian 16th Jan 20, 4:47 PM
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    Malthusian
    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 .
    Originally posted by Albermarle
    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.)

    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?
    by dano17439
    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.
    • klew356
    • By klew356 17th Jan 20, 8:20 AM
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    klew356
    If you tell us who the pension provider is we might be able to point you in the right direction.
    Originally posted by Albermarle
    it is NOW pensions?
    • Malthusian
    • By Malthusian 17th Jan 20, 11:04 AM
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    Malthusian
    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.
    • Albermarle
    • By Albermarle 17th Jan 20, 11:04 AM
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    Albermarle
    it is NOW pensions?
    They are one of the few who do not offer any choice on investments, there is only one option:
    The 'Diversified growth fund ' is a typical pension middle of the road fund , recently producing good results. So no big problem to stay with this but when your fund gets bigger , say > £50K you might want to review.
    • klew356
    • By klew356 20th Jan 20, 8:50 AM
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    klew356
    thank you all for the info, Email going to boss this morning to up the percentage. i know that my employer wont put anymore in but least something is going in i suppose!
    Last edited by klew356; 20-01-2020 at 8:52 AM. Reason: added too
    • cloud_dog
    • By cloud_dog 20th Jan 20, 9:41 AM
    • 4,744 Posts
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    cloud_dog
    thank you all for the info, Email going to boss this morning to up the percentage. i know that my employer wont put anymore in but least something is going in i suppose!
    Originally posted by klew356
    Have you considered the pluses and minuses of using a Lifetime ISA as part of your retirement planning for the additional monies? From a pure financial perspective it is more beneficial for a BRT payer than extra pension contributions.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • klew356
    • By klew356 20th Jan 20, 11:50 AM
    • 691 Posts
    • 3,180 Thanks
    klew356
    Have you considered the pluses and minuses of using a Lifetime ISA as part of your retirement planning for the additional monies? From a pure financial perspective it is more beneficial for a BRT payer than extra pension contributions.
    Originally posted by cloud_dog
    Sigh, i hadnt, i have already used HTB isa bonus does this affect things?
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