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 general the value of putting money into pensions drops the older you get.
My order:
House deposit
Pension
Pay of mortgage

I am will shortly be in the position to put money into pension, pay off mortgage and invest money.
My IFA says he gets that paying off the mortgage is a psychological thing, but there are better places to put the money.

I'd do pension but it depends on your risk appetite.

By paying your mortgage off, you are effectively getting a risk free return of whatever your rate is as you will be saving on interest.

If you look at historic share returns over >25years, they almost always out perform mortgage rates. Although as they always say, that's not a guarantee that it will be true for the next 25 years.

If you are comfortable having £600k in a house, I think you can afford to take the risk of having more equity investments than you currently do.

Plus you have the tax considerations, if you pay 40p, I think pension is clearly the better option.

Pension every time! You’re missing out on so much tax relief!

I understand how addictive it is to watch your mortgage balance reduce each month, but I echo others on here, only overpaying your mortgage exposes you to more risk. What happens if house prices collapse, or the mortgage market stalls and nobody wants to buy when you need to sell? Much better to spread your risk now, even if it’s only 5% diverted to the pension now it will give you so many more options at retirement.

I would absolutely pay for the house. What a massive achievement

House prices have been rising for the last 50 years, I would say a much better “bet” than a pension.

I'd put at least something into your pension, it's tax efficient and mortgage interest rates will be very low for the foreseeable future so you're not saving a lot by paying in extra.

Honeylulu - I hope you have the wrong end of the stick as that is terrible advice from a financial adviser! Yes it’s not as simple as ‘debt = bad’ but actively taking on debt when you don’t need to is not sound financial advice.

OP - if you are not working you would be limited to £2,880 into a pension per year and of course would not get the employer contributions PPs are talking about as you have no employer.

Overpaying your mortgage while you can and then later concentrating on a pension with the money that used to go on your mortgage payments is an OK financial plan.

Yes there are other ways to do it too. What’s best for you depends on many factors including perceived job prospects, loan to figure value on the house and attitude to risk.

I’d suggest you use a couple of online calculators to work out the impact of overpaying the mortgage now and the impact of delaying pension payments. If you’re happy, keep going.

Lots of people do overlook the benefits of pensions so it’s nice to see people champion them here. But what the OP is doing may suit them really well.

It also makes sense to diversify across time.

If you put everything towards paying off your mortgage and then spend the 10-15 years before retirement saving for a pension, you will be taking on more risk overall because you will be very exposed to what happens in the markets during those years.

If you invest now, you have 30 years for markets to work themselves out and you can even reduce your pension risk as retirement approach whilst still achieving a better expected return overall.

Pension all the way. The only reason to overpay the mortgage would be if interest rates exceeded pension tax relief.

If you were older I would understand wanting to the clear the mortgage more because it gets harder to find work if you lose your job in your sixties than in your thirties.

I overpaid my mortgage and was glad, bc it reduces my interest payments directly for now and later.
Once that's paid off you will have far greater spare income and security And will save you loads on the loan later. Interest rates might be low right now but in a few years they may jump up.

If you can start a pension then do as the earlier the better, maybe 15% mortgage 5% pension once you are working again?

Definitely pension. I have critical illness cover that would pay my pension if I ever needed to claim then have my pension to claim too.

"Your house is worth 600k now. What if it drops in value?" This is naive as a stand alone in that your pension pot can also plummet due the markets. The case that comes to mind was the pension scheme of one of the biggest firms of accountants. A number of my friends were badly hit by that.

As you are not working you're not missing out on an employer's contribution so I would stick with what you are doing for now. Most seem to think interest rates are going to go up given the hit the economy is currently taking. Review your position when you restart employment.

My pensions give me a grand total of £21 a year (less than £2 a month!) when the time comes, and I don’t have a house... so whatever you doing is better than me 😂

Pension payments tend to be extremely tax efficient, especially if your employer makes a contribution.

I would get advice.

We spent the best part of the last decade over paying our mortgage to the detriment of our pensions (mine in particular).
Looking back, I regret this. I wish I had continued to put a couple of hundred ££ into my pension each month rather than now having to put several hundred £££ to catch up. We probably would have had a mortgage for a year longer but I would have had a lot more in my pension because of the tax benefits.
You don't know what the stock market will do, that's true, but as long as you invest to your risk tolerance you should be ok. Plus the 20% top up from HMRC means you ought not to lose your money. The same could be said for property prices but a house is far harder to liquidate and you will still need a home.

Also consider, at present you are able to take 25% of your pension tax free - this could be as a lump sum. So, in theory you could put all of your overpayment into your pension with the intention of paying your mortgage off when you get your pension. I would probably only do this if I had less than 10 years until I could get my pension pot though.

Tax relief on pensions means a better return BUT you’re tying it up and can’t access until 55. Life isn’t linear. Our savings (offsets our mortgage) literally saved our bacon in the last recession when redundancy struck both of us and DH had a 9 mth gap between jobs.

Our offset mortgage works for us and we stopped being rate tarts 20+ yrs ago. Psychologically, we prioritised the mortgage but still maintained 10% - 20% pension payments. Once, we reached the point when our savings pot could technically pay off our mortgage amount (in our mid 40’s), we pumped a larger % of our income into our pensions.

Honestly, I’m a saver at heart but can never understand when people seem to go in debt (expensive car loans, etc) whilst paying significant pension contributions and then come on MN for advice.

I'd start putting money into a pension. Get financial advice so you have the best type of pension for you.

Once you've paid off the house you live in, would you buy another property to let out? That would work as a pension income once you've paid off a second mortgage (or remortgaged on your home).

No guarantees your pension will grow! I've had one for 10 years, since I started working, and it's not grown much above the contributions I've put in. There have been a couple of years where it's actually decreased in value. I have more confidence in my house increasing in value than my pension fund.

I think they are equally important. Remember that the earlier you pay into your pension, the more opportunities the money has to grow. Diversification is prudent, remember that if you get into financial difficulties you might have to sell your house, or have it repossessed. A pension has a lot more protection from bankruptcy.

I did similar and now have another property which is my pension along with my actual pension and savings. It would have been ideal to keep adding to my pension as well but I wanted to live and I couldn't afford everything. I'm content with what I have for retirement as I am retiring early in two years.

You get tax relief on your pension contributions. Essentially you’re currently throwing money down the drain.

Company pensions normally come with other stuff - death in service benefit etc. Does your employer contribute too ? I'd divert some of the OP into one.

As someone nearing pension age with part of my pension in a pension fund and part in my mortgage-free house I’d say long term it’s worth having a pension fund too so you don’t have to sell your property immediately in order to retire. You do also need to think about how much you’d have to downsize in order to retire comfortably. But I’d say the value of my house has risen faster than the value of my pension plan over the past few years for sure.