Increase pension or mortgage payments?

[skinnyman]

Our financial situation has changed, meaning I have some spare money each month, how best to use it? I'm not a powerfully built director, so I'll use actual figures rather than cloaked humble brags.

Mortgage
Current property is worth £300k~, mortgage is £142k with 18yrs left, we're on a 2.19% fix that ends Dec 2023, current payments are around £750/mth.

Pension
I have a now closed final salary pension, this is worth a deferred amount of £9k/yr, tracking inflation but capped @ 2%pa, so I've pretty much written this off in terms of being useful for retirement. Last year the company moved us onto an employer contribution pension, I currently pay £250/mth and my employer pays £500, I also top this up with £200/mth in voluntary contributions.

So, I have £500/mth to put somewhere. I can either make additional mortgage payments of £500/mth, or additional pension payments of £700/mth (total cost me will be around £500).

Which would be the better option?

[Nemophilist]

skinnyman said:

Our financial situation has changed, meaning I have some spare money each month, how best to use it? I'm not a powerfully built director, so I'll use actual figures rather than cloaked humble brags.

Mortgage
Current property is worth £300k~, mortgage is £142k with 18yrs left, we're on a 2.19% fix that ends Dec 2023, current payments are around £750/mth.

Pension
I have a now closed final salary pension, this is worth a deferred amount of £9k/yr, tracking inflation but capped @ 2%pa, so I've pretty much written this off in terms of being useful for retirement. Last year the company moved us onto an employer contribution pension, I currently pay £250/mth and my employer pays £500, I also top this up with £200/mth in voluntary contributions.

So, I have £500/mth to put somewhere. I can either make additional mortgage payments of £500/mth, or additional pension payments of £700/mth (total cost me will be around £500).

Which would be the better option?

I am not a financial adviser, but what I am doing in a similar situation is overpaying the mortgage.
This will help when it comes to remortgaging in 2023 when rates are likely to be higher than what you are currently paying.

Its not clear how far you are from retirement, but it seems that you are putting a decent amount into it from the figures quoted above. If you weren't already doing that then I would consider splitting it 50/50 with half going on overpaying mortgage and half on pension contributions.

[Flooble]

40% or 20% taxpayer?

[skinnyman]

Sorry, I did forget some further information.

I'm 36, my wife is 31 but has no pension at all, yet.

This year's cost of living wage increase has just nudged me into the 40% bracket on salary, but I'm keeping below this due to my AVC payments.

[Flooble]

If a 20% taxpayer and that far from retirement my *personal* attitude would be to pay down the mortgage. Being mortgage free is a wonderful sense of relief and freedom from worry. You have a long while to build up a pension pot, given that for someone your age State Pension Age, if it still exists, is going to be hovering around 70 I think.

Also, a 9K deferred final salary amount is still pretty chunky - you'd need a few hundred thousand in a pot to get that from an annuity.

[LordHaveMurci]

Personally, and I am not a professional adviser, I’d be tempted to pay 1/2 against mortgage & the other 1/2 into S&S ISA and/or Premium Bonds so some cash is available if required.

[The Ferret]

As a 40% taxpayer its very difficult to get away from the savings you make by stuffing money into pension, but at the same time you never know when you might need that cash over the next 20 years. Having some of it in equity in the house might at least allow you remortage and gain access to it should you need to. Despite not making the same savings as you would by going all into pension, you do still get some financial saving by overpaying.

I've always hedged my bets and split things like this 50/50.

[skinnyman]

Flooble said:

If a 20% taxpayer and that far from retirement my *personal* attitude would be to pay down the mortgage. Being mortgage free is a wonderful sense of relief and freedom from worry. You have a long while to build up a pension pot, given that for someone your age State Pension Age, if it still exists, is going to be hovering around 70 I think.

Also, a 9K deferred final salary amount is still pretty chunky - you'd need a few hundred thousand in a pot to get that from an annuity.

The deferred final salary is still pretty decent, I think I just feel bitter towards it as its only increasing by 2%pa, and also because when covid hit the transfer value was around £360k, but due to my age I wasn't able to transfer into a SIPP, now covid has calmed down that figure has nearly halved.

In terms of cash available, I still have a decent chunk of liquid assets/ISA balance, should I need money for something in particular.

But the advice here is probably right, a 50/50 split is probably the best bet

[Jurgen Schmidt]

There's no right or wrong answer, but if you are a HRT, I'd be inclined to go pension

[p1doc]

i would recommend mortgage overpayment as so so young and as others have said likely to retire age 70 you will have loads of time to increase your pension payments

[Deesee]

Op have a look at a LISA will give you and the other half some flexibility rather than into the pension.

Kids? Perhaps start some savings for them.

[The Ferret]

p1doc said:

i would recommend mortgage overpayment as so so young and as others have said likely to retire age 70 you will have loads of time to increase your pension payments

I agree to an extent, but even at 45 I'm wishing I'd split things a little more evenly and put that bit more into pension when I was younger. Cheaper to put a smaller amount in now and with the effects of compounding, compared to trying to make up the shortfall later in life. You can always still go nuts later in life and increase the payments further, and in the process bring forward your retirement date.

Weird times we live in though, and part of me does think having access to cash could be more important over the next few years, even if only to sink into pension/shares if the market falls on its arse again.

[JohnP68]

The cap of 2% pa mentioned by the OP doesn’t sound right, as less than statutory minimum, see https://www.sackers.com/pension/revaluation-in-def...

[JapanRed]

We are fortunate in that we have money spare each month as of earlier this year. Our options were;

Overpay mortgage (mortgage is 0.99% until Feb 27)
Pay into savings
Pay into pensions

We decided to pay into savings accounts and are currently getting over 3% by fixing for a year. Will keep doing this 2-3 times a year and keep fixing until Feb 27 when we will pay the lump sum off the mortgage.

[CalNaughtonJnr]

Deesee said:

Op have a look at a LISA will give you and the other half some flexibility rather than into the pension.

Kids? Perhaps start some savings for them.

Would second a LISA but not sure it offers much 'flexibility' - OP is already a homeowner and any other withdrawals before hitting 60 incur a 25% fee IIRC?

[p1doc]

The Ferret said:

I agree to an extent, but even at 45 I'm wishing I'd split things a little more evenly and put that bit more into pension when I was younger. Cheaper to put a smaller amount in now and with the effects of compounding, compared to trying to make up the shortfall later in life. You can always still go nuts later in life and increase the payments further, and in the process bring forward your retirement date.

Weird times we live in though, and part of me does think having access to cash could be more important over the next few years, even if only to sink into pension/shares if the market falls on its arse again.

you could never have predicted covid then ukraine crisis but cannot see mortgage rates reducing for a good while so worth paying mortgage off asap by overpaying,unless you are retiring soon compound interest will soon add up in your pension due to ever increasing pension age which surely has to max out at some point as no one in right mind is going to work beyond 75 as you would literally retire then die!

[mike9009]

The Ferret said:

As a 40% taxpayer its very difficult to get away from the savings you make by stuffing money into pension, but at the same time you never know when you might need that cash over the next 20 years. Having some of it in equity in the house might at least allow you remortage and gain access to it should you need to. Despite not making the same savings as you would by going all into pension, you do still get some financial saving by overpaying.

I've always hedged my bets and split things like this 50/50.

This has always been my approach to financial decisions....spread betting.

Many years ago I needed to decide between pensions, ISA and mortgage overpayment. So, I went thirds into each pot. Seems to be working so far. Yes, I may have paid my mortgage off by now, if I had gone 100% mortgage, but now I have a decentish pension pot, nearly paid the mortgage off (a few years more needed) and have some 'ready' cash to provide some immediate flexibility.

[Caddyshack]

Don’t forget that the pension income is taxed when taking it so having a big income from yours and no income from the wife is not smart for tax in retirement. Having £20k each pa is far more tax efficient than 4o income for just one of you.

I would overpay the mortgage with some, the pension and make sure you have some small medium term savings. If you are higher rate now then the tax relief is better for you in your pension but be mindful of the taxed income for both in retirement.

[Deesee]

CalNaughtonJnr said:

Deesee said:

Op have a look at a LISA will give you and the other half some flexibility rather than into the pension.

Kids? Perhaps start some savings for them.

Would second a LISA but not sure it offers much 'flexibility' - OP is already a homeowner and any other withdrawals before hitting 60 incur a 25% fee IIRC?

Yes but you get 25% on input…

If you need cash it’s there..

Pension, you’d have to crystallise it.

No tax on withdrawals/income from isa..

[duckson]

Caddyshack said:

Don’t forget that the pension income is taxed when taking it so having a big income from yours and no income from the wife is not smart for tax in retirement. Having £20k each pa is far more tax efficient than 4o income for just one of you.

I would overpay the mortgage with some, the pension and make sure you have some small medium term savings. If you are higher rate now then the tax relief is better for you in your pension but be mindful of the taxed income for both in retirement.

Exactly this, my wife (42yrs old, im 46yrs old) had basically very little pension (ok a DB pension with the Local Gov scheme but worth £80pm at 68yrs old! We've got a CETV and transferred it into a SIPP (Vanguard, just buying FTSE Global All Cap market tracker)) and she pays the minimum into a works pension (the company only pay the min they have to so no point upping it).

We've started paying more and more into her SIPP, at least she'll have something at 57/58yrs old and utilising her tax personal free allowance until she gets to her state pension age will give her something at least (does your wife work OP?).

We are relying on my DB pension that i've been paying into for 30yrs (since i was 16), I'll be mortgage free by mid 2024 after taking a 2yr fix early this year (6 month early for a low rate!) and we'll be paying off the rest (£35k) when that expires. Just debating when to remove that from Premium Bonds and put it into a 1yr fix (probably next month after the Oct draw), hoping for an upper 3% rate appearing.

Like you OP i've paid £750pm on my mortgage since 2004, once that becomes available i was all for paying it into my work AVC and retire at 57, i'm now having doubts as it does mean i take a big hit on the DB going before 60, feels like i'm throwing it down the drain.

I may just split it between my Pension, my wifes SIPP and use the rest towards the house/car/holidays monthly saving pot......