To over pay mortgage rather than pay in to pension

[Jroseforever]

Thoughts?

Every month I overpay mortgage by 20%

Any bonus or windfall... I put straight in to mortgage.

I am late thirties and hoping to have paid off within 10 years, which is realistic. It’s a lovely property in very sought after area of SE England, valued at £600k.

But my pension... since stopping working (to retrain) I don’t pay in to and have never really prioritised.

Total fund of about £60k but not growing obviously.

Would really appreciate thoughts.

Thanks.

I have no pension and no house, so I’d say you’re doing brilliantly 👌

I do the same (on a much smaller scale overall!). The house is my pension if it comes to that - I will add to my pension what I pay into my mortgage once that’s done.

That will only work if you intend to downsize or release equity. Otherwise what income will you have when you retire?

I would put some into a pension now. It's difficult to catch up later. Rule of thumb is £100k gives you £5k income per year on top of c. £8.5k state pension depending on your circumstances.

Never put all your eggs in one basket. Spread your financial risk.

You should by law at least have a minimum stakeholder pension from your employer.

A house as a pension - bear in mind that when the time came, the only way a house can become a pension is to sell that asset to liquidate cash. Fine if it's a large house you're selling but if it's a small property it could leave you a problem.

I always have this thought. Savings , pension or mortgage.

I now go for all three. With the working world as it is, I want to surround myself with money incase we ever lose our jobs. If I put that into a pension or mortgage I can’t get hold of it to pay the bills etc.
So I put more into savings at the moment. And pay my normal amount to the rest.

When the world is back to normal I think i will carry on the same. But. I have put a limit on my savings. Once it hits a certain point I will start putting in more to my mortgage and pension.
At the moment I want money around me if the worst happens.

Pension, definately. Employer also contributes.
Paying your mortgage off asap is great but will you then be in a position where you are asset rich? How to you access your money unless you downsize? Interest rates are so low, I would be paying more into a pension and less towards rhe mortgage. Again, if you eventually retire with a small pension, do you have to downsize to subsidise your pension or look at equity release?

The calculation I saw recently is dependant on age

So take your age, half it and that’s the percentage you should start putting in your pension pot

So if you go on that you’d look at putting in 18% or 19%

The benefit of putting into a pension is if PAYE or you work for yourself you get tax relief on putting into the pension therefore if you put an extra £108 in your pension your income only goes down by about £80 per month and the government puts the other£28 per month on your pension for you

So pay into your pension £216 and put £56 into your mortgage curtesy if the tax man

I’m not a tax or investment specialist and suspect that it’s probably worth a bit of cash for some professional advice. But (!) from my lay perspective I would think paying into your pension should be more efficient tax wise and would allow you to balance your risk. Mortgages are generally v. low interest and you should (generally speaking) be able to get a better return investing, any gain in your house all accrues to you irrespective of when you pay your mortgage off, whereas compound return on your pension investment means early investment there increases the longer it’s there before you retire.

I totally see the appeal of paying off your mortgage so early, though.

I'm paying off my mortgage first. Self employed and I don't really have much of anything of a pension provision but I do have a big house so scope to downsize and release funds.

Age is a factor though OP - you're a good 15 years younger than me so you could possibly do both pension and mortgage.

With pensions, it’s all about compound interest, even saving modestly over a long period of time will deliver a better return than investing heavily over a shorter period of time. There are free online calculators that help with calculations and show how compound interest works over the long term.

Currently, mortgage rates are so low (and predicted to remain that way for a while) that you would be better off putting your money into a pension, it would achieve a higher rate of return in comparison to the interest rate you are paying on your mortgage. Plus for every pound you save into your pension the Government adds to your pot in the form of tax relief.

I'd probably be focussing on the pension if I were you. You get tax relief on the contributions and any growth is tax free.

Hi @Jroseforever

If you spoke to a financial adviser they would tell you to decide what age you plan to retire (or earliest possible age if you don't know) and pay your mortgage off fully by then. Any spare money should ideally be paid into your pension as early as possible - lots of tax advantages to doing this! Hope this helps.

My financial adviser would say pension because it "buys" you so much more, there are tax breaks, the earlier you invest the more income it will generate. He told me some of his clients have very little pension and no mortgage and the first thing he tells them to do is take out a mortgage and slap those funds into a pension because the return is a "no brainer". I was brought up to consider debt = bad so when he said that I was "whooaaahh ... what?" but it's true.

However there are other ways of looking at it.

1. If squeezing as much into a pension now leaves you short and you're not enjoying life is it REALLY worth it? You might kick the bucket before you retire.
2. Maybe you consider your house to be your pension. Many people do. You could downsize or equity release when you need to.
3. Once the money is in your pension it's hard to get it out if you need it. You can always dip into savings or remortgage.

I do invest extra in my pension but i also paid off my mortgage and refuse to contemplate securing any loans on the house. I also invest in ISAs and other short term savings so I have the peace of mind I can reach my money if I need it (and sometimes I do - currently spending £18k having my roof overhauled).

FA would rather I put it all in pension but it has to feel right for you. We want to enjoy our lives right now, not just when we retire!

I'd pay about 10% into my pension, and overpay the mortgage with the rest. You need to think about employer contribution, the fact that pension is tax free and compound interest.

£600k doesn't give you that much in the south east, and unless you plan on downsizing it doesn't sound as though it's much cop for a pension.

Stop overpaying your mortgage its prob 2?% interest and you get a minimum 20% tax relief on pension contributions (and the amount you can put in a pension is only going to decrease as subsequent governments pull with drawer bridge up)

We are working to having £600k each min in a pension.
I needed a deposit so didn't start a pension until I was 29 so understand your situation. I also consciously reduced contributions to help with deposit size for our second home (I needed 20k to get to a 40% ltv for cheaper rates) but I am now maxing out pension contributions.

You live in the South East so need to consider the increase in the value of your house too. How secure is your job? If you lose your job, could be through a health issue, but your mortgage is paid up it will be much less stressful. None of us know what is round the corner but being debt free helps in any situation. Having said that, I would do as others have suggested and pay some into your mortgage and some into your pension.

Pension.
Mortgages get smaller over 25 years; pension pots need the early input to grow and provide security later.

So by 50 you will own a house probably by then worth £750k outright and still have loads of years working? If you are happy at the moment with this current financial goal I would stick at it, it’s obviously working for you! Then focus on retirement savings. You are doing a million times better than most OP (in the real world I mean, not on mumsnet where you are practically destitute ).

I would always split money. We overpaid our mortgage for house 1 and ended up being mortgage free but used the equity then to have a smaller mortgage on house no. 2. So we didn't really save a lot but gained a larger portion of brick which doesn't give us income but expenses.

So, you won't save a lot unless you really stay in your current house or one of similar value until you are at pension age and then you have bricks coppled with expenses but no income. So you need to sell and downsize but that may still not give you enough for the 3 or so decades you still live.

We had a chat with our financial advisor back in early autumn about a windfall and she recommended splitting it up between private pension, mortgage and short term saving. The latter is earmarked towards a new car in 2-3 years time.

I’d ignore the pension and buy the house. Property is IMO a MUCH better investment. What percentage of your salary are your living expenses?

Your house is worth 600k now. What if it drops in value? You've paid out all that money, put nothing into a pension, and you're say 50. So you'll have to spend the next 20 years, maybe more, working extra hard to build a pension, rather than going part time.

Hopefully the market won't crash that badly, but you'd still have to sell your lovely house to have any kind of retirement. Otherwise you have no money as it's all in that house. And then part of your retirement money is still going to immediately go into a smaller property. How much do smaller properties go for down there if big ones are that expensive? It could be half of the value of your house that you have to live on, will that be enough for the rest of your life? No one knows really.

No absolutely not, I'd be putting some of that into a pension, you're missing out on the tax benefit and employer contributions of your pension? Plus with interest rates so low at the moment and for the foreseeable, I really don't think that's the right course of action.

Definitely reduce mortgage overpayment and increase pension contributions.