Mortgage vs Pension
Discussion
Sorry if this one has been asked lots before.
Situation(ish, as I can't remember the exact numbers):
Just under £100k mortgage left
£700 a month
13(ish ) years left
If that was paid off from savings and the money put into a pension each month, what are the downsides? The pension could either get £700 or that amount pre-tax, therefore saving a lot more into the pension.
It feels like a good idea to save the 40% tax but I'm sure there's something in the rules that's going to scupper that idea. Also, not having access to any savings feels risky.
Has anyone done it and prospered/regretted it?
Situation(ish, as I can't remember the exact numbers):
Just under £100k mortgage left
£700 a month
13(ish ) years left
If that was paid off from savings and the money put into a pension each month, what are the downsides? The pension could either get £700 or that amount pre-tax, therefore saving a lot more into the pension.
It feels like a good idea to save the 40% tax but I'm sure there's something in the rules that's going to scupper that idea. Also, not having access to any savings feels risky.
Has anyone done it and prospered/regretted it?
Nothing in any rules would stop you doing that. You have already paid tax on your savings, however you might consider the loss of ISA wrap - assuming they are in tax efficient savings.
You are effectively losing the growth on your savings vs saving interest on mortgage.
The other consideration is not having access to a rainy day fund, and by the sounds of it, no plans to restore it as pension is locked away.
You are effectively losing the growth on your savings vs saving interest on mortgage.
The other consideration is not having access to a rainy day fund, and by the sounds of it, no plans to restore it as pension is locked away.
I’ve done loads of calculations on this and there are too many variables to say for sure. But, basically, 40% tax saving on pension contributions seems to pretty much trump everything else.
On an interest only mortgage over 13 years you’d pay £78k at 6%.
If you paid the mortgage off and used that £700 to pay £1160 pre tax into a pension, you’d save £71k in tax (from the additional £460) which, if you compound it at 5% would give you about £100k just from the tax saving. And the £700 would compound at 5% in your pension to £153k.
Of course, the £100k that you used to pay off your mortgage could have returned significantly more, but you’ll never know. Or mortgage rates go even further up and completely ruin your plans.
FWIW mine is on interest only and I’m maxing out my pension. But I’ve recently started paying down the capital on the mortgage and will try and sit half way between the two, perhaps more towards the pension.
On an interest only mortgage over 13 years you’d pay £78k at 6%.
If you paid the mortgage off and used that £700 to pay £1160 pre tax into a pension, you’d save £71k in tax (from the additional £460) which, if you compound it at 5% would give you about £100k just from the tax saving. And the £700 would compound at 5% in your pension to £153k.
Of course, the £100k that you used to pay off your mortgage could have returned significantly more, but you’ll never know. Or mortgage rates go even further up and completely ruin your plans.
FWIW mine is on interest only and I’m maxing out my pension. But I’ve recently started paying down the capital on the mortgage and will try and sit half way between the two, perhaps more towards the pension.
The main downside is that the money you pay in to your pension will be locked away until retirement (currently 55 but I believe moving out to 57). If paying off the mortgage depletes the rainy day fund why not split the £700 between pension and an ISA until you feel the rainy day fund has attained a satisfactory level and then increase pension contributions accordingly.
I was fortunate to have an offset mortgage until recently. The main offset account equalled the mortgage some 10 years ago but I didn't pay it off. Instead I paid the monthly interest amounts which actually paid down the capital sum. I then had access to the whole balance as a rainy day fund until I finally paid the mortgage off a couple of months ago. Any other cash could be invested as I wished without fretting about accessibility.
I was fortunate to have an offset mortgage until recently. The main offset account equalled the mortgage some 10 years ago but I didn't pay it off. Instead I paid the monthly interest amounts which actually paid down the capital sum. I then had access to the whole balance as a rainy day fund until I finally paid the mortgage off a couple of months ago. Any other cash could be invested as I wished without fretting about accessibility.
I've been thinking about doing similar.
I've got about £35k left on an interest only mortgage. It's on base rate +0.75%, so currently paying 6% interest. I had been overpaying throughout the time when interest rates were low, but now my monthly payment is now really paying much less off the total.
I debating taking cash out of my pension when i get to 55 (I'm 52 now) to pay off the mortgage, and to then pay add my monthly mortgage payments to my pension payments to boost it back up. Taking the £35k out of my "pot" will be the majority of it i expect.
I'm a 20% tax payer
I've got about £35k left on an interest only mortgage. It's on base rate +0.75%, so currently paying 6% interest. I had been overpaying throughout the time when interest rates were low, but now my monthly payment is now really paying much less off the total.
I debating taking cash out of my pension when i get to 55 (I'm 52 now) to pay off the mortgage, and to then pay add my monthly mortgage payments to my pension payments to boost it back up. Taking the £35k out of my "pot" will be the majority of it i expect.
I'm a 20% tax payer
If you take the assumption that you don't know what is going to happen in future, then splitting the risk across both seems sensible. If putting money into the pension enables you to access things like child tax credit, or other benefits, then it may swing it into paying the pension. If you are worried about the effect of an increase in IR on day to day spending, ie another £200/300 on the mortgage payments is going to cause difficulties, then pay off the mortgage quicker. If neither are relevant then max out any employer pension contribution and split the remaining money across both.
EDIT - In your situation the question would be what is happening with your savings? If they are just sat as cash then pay off the mortgage. If they are earning a reasonable return (or more than the mortgage rate) then keep them in savings. Thing with savings, beyond a certain point, is what are you saving for? No point having £100k in the bank if you can live for a year off £30k. The £70k balance is just sat there for what? You may as well make it work, pay off a mortgage, buy some toys, whatever suits you.
EDIT - In your situation the question would be what is happening with your savings? If they are just sat as cash then pay off the mortgage. If they are earning a reasonable return (or more than the mortgage rate) then keep them in savings. Thing with savings, beyond a certain point, is what are you saving for? No point having £100k in the bank if you can live for a year off £30k. The £70k balance is just sat there for what? You may as well make it work, pay off a mortgage, buy some toys, whatever suits you.
Edited by Condi on Wednesday 30th August 12:08
I used to take the approach of third to mortgage overpayments, a third to pension and third for fun stuff of the money I had left over each month.
I am now more or less mortgage free (just keeping it ticking over until the end of term), so 50% fun and 50% pension now.
I think a balanced approach works - although I was overpaying my mortgage on a BOE +0.25% lifetime deal, which some thought was a bit barmy ten years ago. Thankfully I stuck at it.
I am now more or less mortgage free (just keeping it ticking over until the end of term), so 50% fun and 50% pension now.
I think a balanced approach works - although I was overpaying my mortgage on a BOE +0.25% lifetime deal, which some thought was a bit barmy ten years ago. Thankfully I stuck at it.
There’s different ways to get your finances in check. Everyone has different ideas so you just have to decide what appeals most to you.
What I done earlier this year (mainly due to interest rates rising & gloomy economic outlook) was I used savings to pay off the existing 6 figure mortgage debt off as I was able to and I figured what meant most to me was to enjoy the security of owning my home.
I then bought a car outright instead of the usual leasing / pcp. Plan to keep this for 10yrs or so.
My biggest monthly bill is now council tax and my outgoings have drastically fallen.
The combination of mortgage payment and what I used to pay monthly for a car, let’s say £2k I split 3 ways.
Roughly 600mnth additional into pension avc. Boosted to £1k a month with the tax savings.
700mnth into ISA - long term savings strategy.
700mnth short term savings & to enjoy life a bit more.
I’ve anywhere between 15-25yrs working life ahead of me so plenty time to rebuild the savings. Can’t see any flaw in my approach although others may think otherwise.
What I done earlier this year (mainly due to interest rates rising & gloomy economic outlook) was I used savings to pay off the existing 6 figure mortgage debt off as I was able to and I figured what meant most to me was to enjoy the security of owning my home.
I then bought a car outright instead of the usual leasing / pcp. Plan to keep this for 10yrs or so.
My biggest monthly bill is now council tax and my outgoings have drastically fallen.
The combination of mortgage payment and what I used to pay monthly for a car, let’s say £2k I split 3 ways.
Roughly 600mnth additional into pension avc. Boosted to £1k a month with the tax savings.
700mnth into ISA - long term savings strategy.
700mnth short term savings & to enjoy life a bit more.
I’ve anywhere between 15-25yrs working life ahead of me so plenty time to rebuild the savings. Can’t see any flaw in my approach although others may think otherwise.
boyse7en said:
I've been thinking about doing similar.
I've got about £35k left on an interest only mortgage. It's on base rate +0.75%, so currently paying 6% interest. I had been overpaying throughout the time when interest rates were low, but now my monthly payment is now really paying much less off the total.
I debating taking cash out of my pension when i get to 55 (I'm 52 now) to pay off the mortgage, and to then pay add my monthly mortgage payments to my pension payments to boost it back up. Taking the £35k out of my "pot" will be the majority of it i expect.
I'm a 20% tax payer
There's a limit to what you can pay into your pension once you've taken from it.I've got about £35k left on an interest only mortgage. It's on base rate +0.75%, so currently paying 6% interest. I had been overpaying throughout the time when interest rates were low, but now my monthly payment is now really paying much less off the total.
I debating taking cash out of my pension when i get to 55 (I'm 52 now) to pay off the mortgage, and to then pay add my monthly mortgage payments to my pension payments to boost it back up. Taking the £35k out of my "pot" will be the majority of it i expect.
I'm a 20% tax payer
Slightly different scenario but wondering if anyone else has used this as an affordability calculator before buying a house.
Wife and I are in the fortunate position of building up government pensions and minimising 40% tax by contributing to private pensions too. However we do not have much equity for a new house purchase. We have approx 3-6 years before planned retirement, 10-15 years before SPA.
Supposing a lender will let us borrow enough, I'm thinking that our mortgage should not be greater than a combination of our 25% tax free lump sums and our total private pension pots. We then have a choice that we could use the tax free lump sum to reduce the mortgage with the accessible private pension funds to pay the interest on what is left. The 75% remaining of our government pensions is for living.
As an example, gov pen pot £400k, private pen pot £200k. 25% tax free is £150k. Remaining private pot is £150. So mortgage should be no more than £300k.
I'm thinking that should cover most situations - high interest rates, pay off capital, low interest rates, keep money in pensions.
Anyone planned or done anything similar?
Wife and I are in the fortunate position of building up government pensions and minimising 40% tax by contributing to private pensions too. However we do not have much equity for a new house purchase. We have approx 3-6 years before planned retirement, 10-15 years before SPA.
Supposing a lender will let us borrow enough, I'm thinking that our mortgage should not be greater than a combination of our 25% tax free lump sums and our total private pension pots. We then have a choice that we could use the tax free lump sum to reduce the mortgage with the accessible private pension funds to pay the interest on what is left. The 75% remaining of our government pensions is for living.
As an example, gov pen pot £400k, private pen pot £200k. 25% tax free is £150k. Remaining private pot is £150. So mortgage should be no more than £300k.
I'm thinking that should cover most situations - high interest rates, pay off capital, low interest rates, keep money in pensions.
Anyone planned or done anything similar?
Crumpet said:
I’ve done loads of calculations on this and there are too many variables to say for sure. But, basically, 40% tax saving on pension contributions seems to pretty much trump everything else.
On an interest only mortgage over 13 years you’d pay £78k at 6%.
If you paid the mortgage off and used that £700 to pay £1160 pre tax into a pension, you’d save £71k in tax (from the additional £460) which, if you compound it at 5% would give you about £100k just from the tax saving. And the £700 would compound at 5% in your pension to £153k.
Of course, the £100k that you used to pay off your mortgage could have returned significantly more, but you’ll never know. Or mortgage rates go even further up and completely ruin your plans.
FWIW mine is on interest only and I’m maxing out my pension. But I’ve recently started paying down the capital on the mortgage and will try and sit half way between the two, perhaps more towards the pension.
Approaching 40 myself and really need to sort myself out. On an interest only mortgage over 13 years you’d pay £78k at 6%.
If you paid the mortgage off and used that £700 to pay £1160 pre tax into a pension, you’d save £71k in tax (from the additional £460) which, if you compound it at 5% would give you about £100k just from the tax saving. And the £700 would compound at 5% in your pension to £153k.
Of course, the £100k that you used to pay off your mortgage could have returned significantly more, but you’ll never know. Or mortgage rates go even further up and completely ruin your plans.
FWIW mine is on interest only and I’m maxing out my pension. But I’ve recently started paying down the capital on the mortgage and will try and sit half way between the two, perhaps more towards the pension.
I found this quite interesting.
So.
If I put in 10% extra to my pension it would be an extra £700ish going into my pension with a £500 drop in take home salary. So a 28% saving.
Is that how I understand it?
Snozzer said:
boyse7en said:
I've been thinking about doing similar.
I've got about £35k left on an interest only mortgage. It's on base rate +0.75%, so currently paying 6% interest. I had been overpaying throughout the time when interest rates were low, but now my monthly payment is now really paying much less off the total.
I debating taking cash out of my pension when i get to 55 (I'm 52 now) to pay off the mortgage, and to then pay add my monthly mortgage payments to my pension payments to boost it back up. Taking the £35k out of my "pot" will be the majority of it i expect.
I'm a 20% tax payer
There's a limit to what you can pay into your pension once you've taken from it.I've got about £35k left on an interest only mortgage. It's on base rate +0.75%, so currently paying 6% interest. I had been overpaying throughout the time when interest rates were low, but now my monthly payment is now really paying much less off the total.
I debating taking cash out of my pension when i get to 55 (I'm 52 now) to pay off the mortgage, and to then pay add my monthly mortgage payments to my pension payments to boost it back up. Taking the £35k out of my "pot" will be the majority of it i expect.
I'm a 20% tax payer
Aiminghigh123 said:
Approaching 40 myself and really need to sort myself out.
I found this quite interesting.
So.
If I put in 10% extra to my pension it would be an extra £700ish going into my pension with a £500 drop in take home salary. So a 28% saving.
Is that how I understand it?
As bompey said, if you’re on £84k (assumption based on £700 being an extra 10% a month), then that £700 extra going into your pension would see your take home drop by £420 ish. You can download apps for ‘salary calculator’ if you want to play with the figures. I found this quite interesting.
So.
If I put in 10% extra to my pension it would be an extra £700ish going into my pension with a £500 drop in take home salary. So a 28% saving.
Is that how I understand it?
One other ‘win’ from having high pension contributions is that if things start to get a little tight on a month to month basis you can easily give yourself a 10% pay rise!
Crumpet said:
As bompey said, if you’re on £84k (assumption based on £700 being an extra 10% a month), then that £700 extra going into your pension would see your take home drop by £420 ish. You can download apps for ‘salary calculator’ if you want to play with the figures.
One other ‘win’ from having high pension contributions is that if things start to get a little tight on a month to month basis you can easily give yourself a 10% pay rise!
That’s the way I was looking at it.One other ‘win’ from having high pension contributions is that if things start to get a little tight on a month to month basis you can easily give yourself a 10% pay rise!
Mortgage is locked in at 3% until October 2027.
Good financial situation now having been unemployed for 2 years due to COVID.
Hammer some pension now plus some instant savings so I’m spread out a bit. If I need to just drop pension contributions down.
It’s never been explained to me how beneficial upping pension contributions can be from a tax perspective.
Aiminghigh123 said:
It’s never been explained to me how beneficial upping pension contributions can be from a tax perspective.
It is, but apart from your 25% tax free amount any pension income above the current tax free personal allowance of £12k will be taxed at the prevailing rate at the time.eliot said:
It is, but apart from your 25% tax free amount any pension income above the current tax free personal allowance of £12k will be taxed at the prevailing rate at the time.
That’s true. But I doubt there will be many current 30-45 year olds who’ll be drawing down (or receiving from an annuity) enough from a pension to get stung with the higher rate; getting a pension pot large enough is just too difficult. For me, and probably others, having the money locked away where I can’t be tempted to spunk it on an Aston is the better option. I’m already eyeing-up the contents of my ISA!
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