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Is it better to use extra money to overpay on your mortgage or put it into your pension?

(15 Posts)
chicaguapa Wed 30-Jan-13 20:50:29

I get a pay rise in April and can't decide whether to increase my pension contributions or overpay on my mortgage.

Any ideas what I need to consider? Thanks.

zumo Wed 30-Jan-13 21:22:48

A pension has no guarantee of a return
We reduce our mortgage with any spare money

chicaguapa Wed 30-Jan-13 21:53:05

I should have said I'm in a defined benefit pension scheme and can increase contributions to increase my accrual rate. That means the pension is guaranteed.

CogitoErgoSometimes Wed 30-Jan-13 22:17:15

It depends on your circumstances and the terms of your mortgage and pension. Both options tie your money up for the long-term so - assuming you have no debts - do you have adequate short-term (tax-free) savings or investments that can be easily converted to cash in an emergency? Paying down the mortgage makes sense if the interest you are paying is high or if you'd like the security of lower overall debt. Increasing pension payments makes sense if you have a very secure job and, if you are in the higher rate tax threshold, there is tax-relief.

wiltingfast Wed 30-Jan-13 22:27:04

Even a defined benefit scheme can go down the tubes. Money gone off the mortgage stays gone!

harbingerofdoom Wed 30-Jan-13 22:30:49

Seen lots of nice pensions go down the pan lately sad

Your firm can change the goal posts whenever it wants.

ScillyCow Wed 30-Jan-13 22:31:43

Overpay mortgage.


zumo Thu 31-Jan-13 06:14:55

Now I am sure some one will correct me as I am no expert, but pensions tell you what you might get not what you will, so you could pay £1000,000 in and they could say well its not performed so you will get £1 a week.

CogitoErgoSometimes Thu 31-Jan-13 07:42:12

A defined benefit pension scheme means there is the commitment to a specified monthly payment on retirement. The OP is not going to put in £1m and get £1 back....

OP do you work in the public sector?

ceeveebee Thu 31-Jan-13 07:53:24

If you overpay mortgage and circumstances change then done companies let you have the overpayment reserve back or let you take payment holiday. So I would overpay mortgage and then it is there if you need it back.

chicaguapa Thu 31-Jan-13 07:57:30

Cognition No I don't but I work for a big company that's reminiscent of being in the public sector. I'm in pensions so I understand the scheme, guarantees, risks etc. Just can't work out whether to pay the mortgage off and then buy extra pension or buy extra pension now and pay the mortgage as normal. If it were a money purchase scheme, there'd be an advantage in investing extra contributions now for maximum return. Then equally I think it would be better to buy extra pension while I'm there as there's no guarantee I'll still be in the scheme when I've paid the mortgage off.

ceeveebee Thu 31-Jan-13 07:59:07

Could you not split it and do 50:50 on both?

CogitoErgoSometimes Thu 31-Jan-13 09:06:59

Would there be any merit in looking at alternative places for your spare money .... investment funds, for example.... or is the pension a really good one?

houseelfdobby Thu 31-Jan-13 09:10:26

Unless your employer makes large matching contributions and/or you are very close to retirement age (at which point the tax relief amortised over the remaining period of your contributions will be worth a lot), then overpay your mortgage.

The money is more accessible in your house than in your pension as you can, if necessary, sell your house and release the money. Pensions sit there ready for governments to target if they become short of cash at any point and decide that having a pension makes you wealthy.

Also, make sure that you have maxed out on your ISA allowance for the year before you do either a mortgage overpayment or a pension contribution.

ceeveebee Thu 31-Jan-13 10:12:54

Wrt to investing in ISAs rather than paying down debt - only really makes sense if the interest rates make it worthwhile surely? If paying interest on mortgage at 5% and most ISAs paying only 2-3% maximum then surely better to pay off mortgage?

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