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.

@CayrolBaaaskin

Hi op

You will get tax relief on pension contributions up to £2800 even if no pensionable income. So basically you get £3600 in the fund for contributing 2800. I do this for each of my (primary school age) dds. So I would make that as a pension contribution with the rest to mortgage.

Thank you How would gov know if it’s a sipp rather than employer pension

I get all this about pensions being tax deductible but in reality they offer a poor return on years of investment because they are geared to take into account how long other people live. And you have to pay fund managers and are heavily restricted in what you can do with the money. They're not protected from fraud (eg Robert Maxwell) or disastrous fund managers.

Whereas with a 600k property, you could feasibly buy a 100k retirement property in Spain and have a 500k pension fund.

You obviously have another source of income too, so I'd definately concentrate on paying off your mortgage.

Cayrol “ You will get tax relief on pension contributions up to £2800 even if no pensionable income. So basically you get £3600 in the fund for contributing 2800. I do this for each of my (primary school age) dds. So I would make that as a pension contribution with the rest to mortgage.”

I don’t understand this and it would be good to know in case I have to become mums carer.

Does it mean the government top up that £800, that sounds too good to be true.

@AcornAutumn

Cayrol “ You will get tax relief on pension contributions up to £2800 even if no pensionable income. So basically you get £3600 in the fund for contributing 2800. I do this for each of my (primary school age) dds. So I would make that as a pension contribution with the rest to mortgage.”

I don’t understand this and it would be good to know in case I have to become mums carer.

Does it mean the government top up that £800, that sounds too good to be true.

Yes it is true - you can put in £2880 if you have no income and up to 100% of your earned income in (subject to the £40k cap which is tapered down to £10k for high earners), not just the bit that is taxed.

I am working PT (2 days) at the moment and I put my full salary into my pension and so I get the 20% top up, even though I do not pay that much in tax.
I also pay into my LISA £4K which gets topped up by £1k.

So, for example - if I earn £15,000 - I am taxed £500 on my pay above the personal allowance but if I put £12k into my pension the government tops it up by £3k and then I put £4K into my LISA which is topped up to £5k.
My outlay £16k, actual money in my pension and LISA £20k, tax paid £500.

Fleur so I would let HMRC know and they’d top it up? Thanks, this is very helpful.

@AcornAutumn my pension provider automatically does it - I assume they claim it from HMRC?

[quote Fleurchamp]@AcornAutumn my pension provider automatically does it - I assume they claim it from HMRC?[/quote]
So if putting in to a sipp, it’s not automatically given? You have to ring HMRC?

OK, my advice has now changed since you obviously don't need to access this income. As a non taxpayer, open a SIPP and deposit up to £2880 for this tax year. The pension provider will apply automatically for the 20% tax relief of up to £720 which will arrive in your account about 2 months later. It's £240 pcm if you prefer to drip it in monthly in the next tax year.

If there is any excess, I would stick it into a S&S ISA. Do your own research and select your own funds/stock.

I actually don't think you need an IFA, just read up on it yourself

I think as @sansou says - if it is a SIPP it should be automatic.

Yes done automatically for non or basic rate tax payers. You put your National Insurance number on the form. Higher and additional rate tax payers need to claim extra tax back via their tax return.

Thank you all
I have a plan

Put in the maximum allowable in order to get the gov contribution
I will continue to over pay my mortgage

When I return to work, I will up the pension

Thanks

I did. I wish I hadn't.

Do a LISA until you are 40 (you put in £4K the government puts in £1k). I do mine via a SIPP. Then keep some form of pension contribution up. I know it’s tempting to pay off the mortgage but interest rates are low and you need to spread your asset profile risk for retirement. The earlier you invest in a pension the bigger it will grow. You will get there with paying off the mortgage but don’t neglect the pension now.

No point lsa
Only two months away!

You can open a LISA up until your 40th birthday but you can keep paying in (and the government topping up) until you are 50. You cannot access it without a penalty until you are 60.
Worth opening one, in my opinion, even if you don't pay in every year.

@Jroseforever - fab. Good plan - as others say, the pension provider applies for the tax relief themselves. Doesn’t matter what type of private pension it is.

Also pensions are no less secure than any other type of investment in stock market and hugely more beneficial for tax. Robert Maxwell stole from employee defined benefit pension funds. The law has been changed massively since then and it’s not relevant to private D.C. pensions anyway. Also pension freedom means funds can be used flexibly.

I didn't start my pension until 30 so pay in £500pcm but also double pay mortgage. I have recently considered trying to pay more into my pension though as actually, pension payments go in pre tax and bring down tax liability (though taxed later it would be lower %) so actually not sure it always makes sense to pay off house as a pension instead of a pension at all. If I were you I would pay at least a bit in - better to have thumbs in different pies incase the house market goes crap or pensions (if share based) go awful/company bust etc

@Fleurchamp

You can open a LISA up until your 40th birthday but you can keep paying in (and the government topping up) until you are 50. You cannot access it without a penalty until you are 60. Worth opening one, in my opinion, even if you don't pay in every year.

Read up on these and sounds good but then also seemed to suggest better paying into pension as pre tax. Now confused as to whether to bother with one

@Charleyhorses

I did. I wish I hadn't.

Why? What happened?

@CayrolBaaaskin

Hi op

You will get tax relief on pension contributions up to £2800 even if no pensionable income. So basically you get £3600 in the fund for contributing 2800. I do this for each of my (primary school age) dds. So I would make that as a pension contribution with the rest to mortgage.

So you can set up a SIPP on behalf of someone under 18?

@Charleyhorses

I did. I wish I hadn't.

I’m actually not clear which you did, sorry if being thick.

I think the LISA v Pension debate is that if you can salary sacrifice and / or employers contribute too then a pension is better as you save the National Insurance as well.

However, for me, I am subject to how much I earn (which isn't much at the moment) as to what I can put in my pension and my employer would not salary sacrifice or increase their contributions (they are so tight, they will literally only pay the bare minimum - I tried to explain that salary sacrifice would save them money too but they are suspicious). LISAs don't make much sense if you are a higher rate tax payer as you only get the 20% benefit whereas with a pension you can claim back the rest on your tax return.

Anyway, the LISA allows me to save more. Plus that will be tax free at 60 whereas I may have to pay tax when I take money out of my pension.

The other consideration is that for benefits calculations money tied up in a pension does not count but a LISA would as you can get at it even though there is a penalty. Plus there are inheritance tax benefits for pensions.

I do think that the rules are simpler for LISAs and shouldn't change so much as those for pensions which seem to be messed about with quite a lot.

If you are coming up 40 I would open one anyway just in case circumstances change and it becomes useful.

My DSIS is a SAHM and her husband puts the £2880 into a pension for her and £4K into a LISA so she has £8600 saved each year in her name.

It is a minefield, isn't it?

I am the other end of the spectrum.
If you pay into a pension your savings it goes in gross before tax (up to 40k p.a) Also as someone says your employee also pays in as well.
At 55 you can take 25% tax free lump sum (assuming this is available when you retire).

In theory you can save into your pension, get money from the tax man and your employee and still get your hands on a tax free lump sum in the future.

If an employee says they pay 3% that is of your gross salary (before tax).

The issue is also the way they calculate the minimum employers have to contribute - it isn't true that it is 3% of your entire pay it is 3% above £6,240 which, if you are lower paid means a lot less than you realise goes in.

Youn mentioned both overpaying monthly and adding bonuses into mortgage.

Could you perhaps put the bonuses at least into pension, or divert up to 5% to pension rather than mortgage and half bonuses in each?

I agree with others - yes you want to reduce interest payable on mortgage and pay that off sooner, but also get biggest lump sum in early to pension - for opposite effects of compounding over time (reduce mortgage more and increase pension more over time).

But I would definitely try and do both in some way.