Pension Or Mortgage
Discussion
Right , just after some advice.
Basically im 32 and have been paying 10% of my salary into my pension which is also matched by my employer. Now it seems a fair bit of the value is being wiped out due to the world economic downturn and inflation fears , and this doesnt look like it will be improving anytime soon , it certainly doesnt feel like its a worthy investment at the moment.
On the other hand myself and my partner bought our first house together 18 months ago and took advantage of the stamp duty holiday paying a 15% deposit on our purchase , and have a mortgage of just over £200k at 2.64% fixed term until December 2025. Now with rising interest rates and fears this will increase massively by the time our fixed mortgage rate expires (most likely looking at 5% plus in 2025 on a 25 year term) , would it be worth knocking pension payments on the head for a while and throwing the monthly payments at the mortgage ready for the worst case scenario? i know i will loose the tax relief but right now that seems like its pennies compared to what we will be facing in just over three years time.
Basically im 32 and have been paying 10% of my salary into my pension which is also matched by my employer. Now it seems a fair bit of the value is being wiped out due to the world economic downturn and inflation fears , and this doesnt look like it will be improving anytime soon , it certainly doesnt feel like its a worthy investment at the moment.
On the other hand myself and my partner bought our first house together 18 months ago and took advantage of the stamp duty holiday paying a 15% deposit on our purchase , and have a mortgage of just over £200k at 2.64% fixed term until December 2025. Now with rising interest rates and fears this will increase massively by the time our fixed mortgage rate expires (most likely looking at 5% plus in 2025 on a 25 year term) , would it be worth knocking pension payments on the head for a while and throwing the monthly payments at the mortgage ready for the worst case scenario? i know i will loose the tax relief but right now that seems like its pennies compared to what we will be facing in just over three years time.
We are already overpaying by £250pm (started 2 months ago) , and with calculations our renewal will be for around £185k and at 3% which rates are now our payments will go down by roughly £40pm. At 5% rates our mortgage payments will increase further than what we are paying now ,even with what we are overpaying
softtop said:
Soon you will get a more commercial view, pension now means so much more later in life. If those in their 50s could go back, they would say, " remember that time I was thinking of dropping the pension payments?" Then laugh like the aliens in the SMASH potato adverts.
Yeah but will three years of no pension payments make that much difference when considering the tax you have to pay from retiring early which im sure will be virtually impossible by the time im in my 60'sTricky one and depends on your attitude to risk.
The money into the pension saves you tax (does it affect your tax band, if so need to consider that) and you get the employer’s contribution and you’re you young enough that the current market should be a great buying opportunity (although this is not guaranteed, of course).. Plus you have the power of compounding working for you for at least 20 years.
If you pay off the mortgage you’ll reduce your outgoings and potentially have more disposable income in your peak earning years (unless you trade up and take on a bigger mortgage …) plus three years money off the mortgage (albeit after tax and with no employer contribution) will presumably mean no great shock when you come off the fixed rate.
In your shoes, I would probably halve my pension contributions and put the other half into the mortgage but stick any pay rises into the pension, and review every 6 months depending on how the markets and interest rates are going.
The money into the pension saves you tax (does it affect your tax band, if so need to consider that) and you get the employer’s contribution and you’re you young enough that the current market should be a great buying opportunity (although this is not guaranteed, of course).. Plus you have the power of compounding working for you for at least 20 years.
If you pay off the mortgage you’ll reduce your outgoings and potentially have more disposable income in your peak earning years (unless you trade up and take on a bigger mortgage …) plus three years money off the mortgage (albeit after tax and with no employer contribution) will presumably mean no great shock when you come off the fixed rate.
In your shoes, I would probably halve my pension contributions and put the other half into the mortgage but stick any pay rises into the pension, and review every 6 months depending on how the markets and interest rates are going.
Nitro182 said:
Right , just after some advice.
Basically im 32 and have been paying 10% of my salary into my pension which is also matched by my employer. Now it seems a fair bit of the value is being wiped out due to the world economic downturn and inflation fears , and this doesnt look like it will be improving anytime soon , it certainly doesnt feel like its a worthy investment at the moment.
Don’t make the mistake of thinking that you should stop buying pension units because the market is dropping. The more it goes down, the more value you are buying for the money you are putting in Basically im 32 and have been paying 10% of my salary into my pension which is also matched by my employer. Now it seems a fair bit of the value is being wiped out due to the world economic downturn and inflation fears , and this doesnt look like it will be improving anytime soon , it certainly doesnt feel like its a worthy investment at the moment.
Buying into a pension at a time of a market low is very much a good thing!
Remember, you are getting your 10% plus any tax relief, plus another 10% employer contrib to buy into a pension at a low purchase price that is then going to rise for the next 30 plus years. Historically, this will outperform the mortgage comfortably.
So don’t panic and hold on for the ride cos it’s going to be bumpy!
fat80b said:
Nitro182 said:
Right , just after some advice.
Basically im 32 and have been paying 10% of my salary into my pension which is also matched by my employer. Now it seems a fair bit of the value is being wiped out due to the world economic downturn and inflation fears , and this doesnt look like it will be improving anytime soon , it certainly doesnt feel like its a worthy investment at the moment.
Don’t make the mistake of thinking that you should stop buying pension units because the market is dropping. The more it goes down, the more value you are buying for the money you are putting in Basically im 32 and have been paying 10% of my salary into my pension which is also matched by my employer. Now it seems a fair bit of the value is being wiped out due to the world economic downturn and inflation fears , and this doesnt look like it will be improving anytime soon , it certainly doesnt feel like its a worthy investment at the moment.
Buying into a pension at a time of a market low is very much a good thing!
Remember, you are getting your 10% plus any tax relief, plus another 10% employer contrib to buy into a pension at a low purchase price that is then going to rise for the next 30 plus years. Historically, this will outperform the mortgage comfortably.
So don’t panic and hold on for the ride cos it’s going to be bumpy!
Unless you are very risk averse, in which case pay off the mortgage.
(Edited for typo)
Putting money into your pension and/or making overpayments is locking the funds away. Both are good to do and I'd probably favour pension contributions. Older you will thank you later.
Having said that - I think you should put aside enough money which is relatively easily accessible for a rainy day. It could be in a Stocks & Shares ISA for max return, premium bonds or best savings account you can find. A month or two or three of regular income would be a good buffer.
Having said that - I think you should put aside enough money which is relatively easily accessible for a rainy day. It could be in a Stocks & Shares ISA for max return, premium bonds or best savings account you can find. A month or two or three of regular income would be a good buffer.
Compounding, and the matched employer contribution and the tax breaks for (potentially) 30 years till retirement, OR pre-empt mortgage payments going up by tens of pounds a month and pay it off a few months earlier than the anticipated term. Pension all the way.
That’s not advice, just opinion
That’s not advice, just opinion
bigandclever said:
Compounding, and the matched employer contribution and the tax breaks for (potentially) 30 years till retirement, OR pre-empt mortgage payments going up by tens of pounds a month and pay it off a few months earlier than the anticipated term. Pension all the way.
That’s not advice, just opinion
If I could buy shares at half the current price (which is what the employer matching effectively gives), I’d be doing as much of it as I possibly could. IHT benefits are also worth considering. That’s not advice, just opinion
BUT, having taken a break from pension contributions for a few years when the money was needed elsewhere, I get where he’s coming from but it does mean you need to put in later if you’re relying on your pension in retirement.
Cheers for the opinions/advice , iv learnt a lot by reading this financial forum over the last 2 years , and seems whatever bizaar scenario is going on in the real world , fellow Pistonheader's can put the world to right here !
Step One - So it seems the pension contributions need to keep happening , thats a must. Point taken so thanks for that.
Step Two - Fortunately the rainy day fund isnt a problem , i have more than enough tucked away in a certain easy access savings account paying 1.5% (again thanks to this place for the heads up)
What i need to do - I think where iv been saving every month , i need to divert that cash straight into the mortgage instead of the easy access savings account and then just rely on the "rainy day fund" for additional extras like holidays and home improvements and just suck it up that over time that savings will erode gradually (not the whole lot, like 25% of it) up until the mortgage renewal. Is a £20k easy access pot too big anyway?
I was considering drip feeding some of it into the Vanguard60 LS account but with rising interest rates i dont want to take the risk of seeing losses when i know we will be hit with high interest rates in a few years.
Step One - So it seems the pension contributions need to keep happening , thats a must. Point taken so thanks for that.
Step Two - Fortunately the rainy day fund isnt a problem , i have more than enough tucked away in a certain easy access savings account paying 1.5% (again thanks to this place for the heads up)
What i need to do - I think where iv been saving every month , i need to divert that cash straight into the mortgage instead of the easy access savings account and then just rely on the "rainy day fund" for additional extras like holidays and home improvements and just suck it up that over time that savings will erode gradually (not the whole lot, like 25% of it) up until the mortgage renewal. Is a £20k easy access pot too big anyway?
I was considering drip feeding some of it into the Vanguard60 LS account but with rising interest rates i dont want to take the risk of seeing losses when i know we will be hit with high interest rates in a few years.
Edited by Nitro182 on Friday 17th June 00:12
Nitro182 said:
What i need to do - I think where i was saving every month before now i need to divert that cash straight into the mortgage instead of the easy access savings account and then just rely on the "rainy day fund" for additional extras like holidays and home improvements and just suck it up that over time that savings will erode gradually (not the whole lot, like 25% of it) up until the mortgage renewal. Is a £20k easy access pot too big anyway?
Offset mortgage an option?Nitro182 said:
What i need to do - I think where iv been saving every month , i need to divert that cash straight into the mortgage instead
You are 100% doing the right thing planning ahead. When I bought my first house just pre the 2008 crash interest rates were running at 6% or so, so imagine my disbelief on been offered sub 2% even last year on mortgage renewal.We all knew rates were going up, but its going up surprisingly quickly. You mentioned 5%, well the 2% product I secured is now already at 3.7% with the same lender now offering 4% for some products. Given we aren't near 'peak' inflation, 5% I would say is an under estimate.
The whole 'invest' vs 'mortgage' stuff comes up here alot, but once you have been there lying awake at night, prioritising mortarage affordability relative to your income becomes a no-brianer, step A of any house hold financial plan.
Overpayment, shorter terms, all work to reduce your chance of not been to afford the repayments should rates shot up.
The difference between 2% and 6% is quite eye watering on a larger mortgage. It's £700/month difference on a £400k debt. I remeber my parents arguing about where to find the money to pay the mortgage when rates hit 10%+ back in 1990s...that would be £2k/month extra over a 2% product.
Loads of us on here I suspect have really benefited from a decade long of sub inflation mortgage borrowing, I know we wouldn't be in the property we are in now without quantitive easing and cheap borrowing. But it looks like the music is about to come to a stop very quickly, just make sure you have your chair reserved for when it does stop ASAP!
bigandclever said:
Nitro182 said:
What i need to do - I think where i was saving every month before now i need to divert that cash straight into the mortgage instead of the easy access savings account and then just rely on the "rainy day fund" for additional extras like holidays and home improvements and just suck it up that over time that savings will erode gradually (not the whole lot, like 25% of it) up until the mortgage renewal. Is a £20k easy access pot too big anyway?
Offset mortgage an option?Keep the pension payments up, 10% matched is pretty good in this age. So you're getting an extra 10%, plus tax benefits, with the compounding effect this will far outweigh mortgage overpayments in the long term.
I know there's alot of concern regarding BOE base rates and mortgages, but they need to be very careful, alot of people have purchased houses at historical highs, with historically low interest rates, and small deposits, and a jump in base rate up to 5%, combined with inflation and real world pay decreases would leave an awful lot of people potentially homeless, and a collapse of the housing market, and my money is the government will do everything they can to keep the housing market afloat.
I know there's alot of concern regarding BOE base rates and mortgages, but they need to be very careful, alot of people have purchased houses at historical highs, with historically low interest rates, and small deposits, and a jump in base rate up to 5%, combined with inflation and real world pay decreases would leave an awful lot of people potentially homeless, and a collapse of the housing market, and my money is the government will do everything they can to keep the housing market afloat.
If it's your first house I would assume you want to upsize in the future, if this is the case overpay your mortgage. If you have kids you may need a bigger house, go down to one salary, or pay the huge (mortgage size) cost of childcare so overpaying more now would be helpful in reducing your future monthly mortgage payments.
If not pay into the pension, the additional employer contribution is no risk money for nothing.
If you have a low mortgage rate it might be worth just holding some of the extra as cash as your only losing 2.65% against the mortgage, worst case scenario you can just pay off at the end of the term, nice to have a buffer in these uncertain times.
Also don't rule out you might want to split from your partner in a few years...
If not pay into the pension, the additional employer contribution is no risk money for nothing.
If you have a low mortgage rate it might be worth just holding some of the extra as cash as your only losing 2.65% against the mortgage, worst case scenario you can just pay off at the end of the term, nice to have a buffer in these uncertain times.
Also don't rule out you might want to split from your partner in a few years...
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