Overpay Mortgage or chuck in to pension ?

[5150]

Hi all.

Wondered if more finance-savvy members could give their opinion!?

In a position to overpay by approximately 150% into either my mortgage or pension.

I'm currently overpaying on the mortgage, which if continued, will see it paid off within 8 years.

I've recently thought tho, would it be better to chuck the same amount into the pension, or maybe split between the two?

Any thoughts or similar experiences ?

Thanks in advance

[CubanPete]

Pension better tax wise, esp with salary sacrifice, and you can take cash out at 55.

[gibbon]

If you are a higher rate tax payer, pension, they may well change the rules in april so stash in quickly whilst you can.

[Ozzie Osmond]

It's really a question about your level of confidence in future cash flow.

You don't want to invest £40k in a pension, watch it collapse to £10k in the stock market, lose your job and then wish you'd paid down £40k of mortgage instead. However, if you have a pretty secure future income stream to carry the load this potential risk may not be a big deal.

[TwigtheWonderkid]

Financially, pension is best. But emotionally, paying off mortgage is best. I paid off my mortgage 9 yrs ago but then moved to a bigger place so took on another for £120K (still only 25% or purchase price.) But have now cleared that mortgage.

The joy of finally clearing a mortgage is right up there with birth of kids and Chelsea winning the champions league. Don't underestimate the feel good factor.

[audidoody]

Pay down the mortgage. The increased equity is a virtual bank account. The property can be your pension (with equity release). You'll sleep better at night not worrying about how the latest FTSE and Dow Jones collapse has cost you £xxxxx

Pensions have become a political football. The rules change every year (as we've seen). The tax advantages (which Osborne is eroding) is simply deferred tax. Unless your income drops to zero when you want to retire and withdraw it you'll pay back tomorrow the tax benefit you're getting on it today.

Apart from which the value of the cash you put into it is being eroded by charges anyway.

[anonymous-user]

Pay down the mortgage. The pension providers will gamble/lose it on the stock market..

[gibbon]

Ozzie Osmond said:

It's really a question about your level of confidence in future cash flow.

You don't want to invest £40k in a pension, watch it collapse to £10k in the stock market, lose your job and then wish you'd paid down £40k of mortgage instead. However, if you have a pretty secure future income stream to carry the load this potential risk may not be a big deal.

Except 40k only costs you 22k. Its free money, and as noted above, take the tax rebate come april and pay off your mortgage with that.

[Ozzie Osmond]

gibbon said:

Except 40k only costs you 22k.....

...which is why I used the figure of £10k above to overwhelm that initial tax advantage.

As others have said, at the end of the day a lot of it comes down to how you "feel" about being debt-free. I'm aware that the numbers generally say it makes sense, on average, to "borrow to invest". However, the nature of reality is that some people will get a below average result and may risk taking a stuffing.

Am I opposed to investing in pension while having a mortgage? Absolutely not. In many situations the "free money from government" which you have rightly highlighted can be very persuasive. Especially if tax relief can be obtained at 40% now while George Osborne is contemplating further cut-backs next year.

[gibbon]

Ozzie Osmond said:

gibbon said:

Except 40k only costs you 22k.....

...which is why I used the figure of £10k above to overwhelm that initial tax advantage.

As others have said, at the end of the day a lot of it comes down to how you "feel" about being debt-free. I'm aware that the numbers generally say it makes sense, on average, to "borrow to invest". However, the nature of reality is that some people will get a below average result and may risk taking a stuffing.

Am I opposed to investing in pension while having a mortgage? Absolutely not. In many situations the "free money from government" which you have rightly highlighted can be very persuasive. Especially if tax relief can be obtained at 40% now while George Osborne is contemplating further cut-backs next year.

45% tax relief and borrowing money at sub 1.5%? I appreciate everyone has a different set of circumstances and a different appetite to risk, but if you can borrow at such rates and pay a lot of tax, its a no brainer to me.

[CaptainSlow]

OP...the answer is...it depends. There are many factors to consider..some known...most unknown!!

How old are you? What are your retirement plans? What are you future housing plans? How risk averse are you? Do you have other assets? Do you have dependents? Are you a higher rate tax payer?

[TheRocket]

After looking at one of my annual pension statements last week (mothballed fund with no payments going in) which has lost 5 pct in the last year I'd say pay of the mortgage !

[mike9009]

I am in a very similar situation, so following this thread with interest.

I have two kids (3 and 6) and took the decision to pay off the mortgage over the next few (8) years. Overall financially probably not the right decision, but I thought that in ten years time or so, university costs may become an issue. Having zero debt appealed.

Subsequently, having watched a telly programme about Uni fees and loans, maybe I should be paying into my pension at a greater rate, rather than the folly of paying off the mortgage and then saving for Uni?

I already pay 9% into my pension (+1% from the company).

So, I may say sod paying off the mortgage and the extra into my pension pot. I should just 'enjoy' the money I have now. Who knows what the future holds with tax, Uni loans, interest rates. pensions, global economy ......


Mike

[Simpo Two]

mike9009 said:

So, I may say sod paying off the mortgage and the extra into my pension pot. I should just 'enjoy' the money I have now. Who knows what the future holds with tax, Uni loans, interest rates. pensions, global economy ......

One thing the future will hold for sure is your need for money in it.

My contemporaries who once quoted 'work to live not live to work' - are still working.

[mike9009]

Simpo Two said:

mike9009 said:

So, I may say sod paying off the mortgage and the extra into my pension pot. I should just 'enjoy' the money I have now. Who knows what the future holds with tax, Uni loans, interest rates. pensions, global economy ......

One thing the future will hold for sure is your need for money in it.

My contemporaries who once quoted 'work to live not live to work' - are still working.

I agree, I was somewhat jesting and musing what the right answer is? Therefore, I have taken a stance of increasing my pension and paying the mortgagee off in a 50/50 split. (I also have six months pay in a crappy cash ISA).

[5150]

Thanks for the replies. Glad other folk are getting some value from it also!

For info: Age 40, Higher Rate Tax payer, No dependants, One other property (BTL flat), No plans to move up housing ladder, Good job: not desperate to retire (but ask me in 20 yrs time!). Generally risk averse.

[hunton69]

I have just been looking into this myself and my conclusion is chuck it in the pension depending on age.

As an example my pension over the last 5 years has had an average rise of 5.8% (One of the larger pension funds) interest rate on property is 2.34% so that alone is making me money.
Tax relief on pension and 25% draw down tax free it seems like a no brainer or am I missing something?

Also add in that property in the south will now incur inheritance tax when you die and a pension fund past on is tax free.
I know you have to factor in the mortgage interest but the tax relief should cover that.

[otherman]

Ozzie Osmond said:

...which is why I used the figure of £10k above to overwhelm that initial tax advantage.

But it's such an unrealistic figure that's it's irrelevant. When did a pension stock porfolio ever drop to 25% of its value.

[Willy Nilly]

audidoody said:

Pay down the mortgage. The increased equity is a virtual bank account. The property can be your pension (with equity release). You'll sleep better at night not worrying about how the latest FTSE and Dow Jones collapse has cost you £xxxxx

Any fluctuations in various stock markets only cost or make you money on the day you come to cash in/use your pension. A big stock market crash today means it's a good time to chuck a load of money in, because you get better value. Over the decades you pay into a pension there will be several economic cycles.

[Tony Angelino]

Sorry to butt in, but I have a question on similar lines. I am about to look at remortgaging as I have come to the end of my fixed term and have hopefully sneaked under the next LTV threshold to enable me to improve my rate and reduce my term rather than reduce my payments. I have a similar question about pensions and/or mortgage payments. Would I be better looking to reduce my term and hammer away at the mortgage, should I stuff a few extra quid into the pension and do I need a financial advisor (thought my amounts where too small to warrant the cost)?

Some background, just an 'average Joe' really:

Higher rate tax payer,but not by a massive amount.
Pay 4% to work pension matched by employer, maximum is 5% for employer matching. Been paying about 4 years only.
No plans to move.
10 year old child.
40 years old.
17 years left on mortgage.

Also, I don't do a self assessment, do I need to do one for any reason?

thanks lads.