To ask if it’s better to overpay mortgage or increase pension?

[FuzzySock]

Basically next year I’m starting a private pension as my company doesn’t have one/doesn’t match contributions. I’m 25 with a 25 year mortgage, if I overpay by 50 per month it’ll reduce my term by 1yr 8months. I’m trying to weigh up whether it’s worth it or if it would be better to stick that extra money into the pension due to the tax relief benefits?

Thanks in advance!

I thought companies had to offer a pension now? In fact I'm sure you have to actively opt out now, rather than opt in.

Paying more into your pension is always a good idea because it's tax efficient. And paying in now, whilst you're young, will be hugely beneficial.

Should have said, I’m not in the UK 😊Thank you!

I would compare the average rate for mortgage interest over the past 20 years with the average annual performance of your pension fund over same period, then make your decision.

It's important to factor in the reduction in benefits resulting from the fees applied by the managers of your pension not just the top line.

Paying into a pension means you’ll have money to live on when you retire. Too many people think their property is their pension, but it’s very difficult to eat a house!

I agree that it's impossible to eat a house but it is possible to release a lot of money from it if you own a house in London.

Pension definitely. You can always revise in 5 years (or whatever) and swap the priority, but for now I’d definitely get a few good years of pension under my belt, and give it a longer time to grow in value.

Well she’s not in the UK so she won’t be releasing money from a London house.

There's really not a huge amount of difference between paying for a mortgage for the next 25 years compared to paying one for the next 23 years and 4 months. Chances are in 15-20 years you will be on a higher salary and can pay a big chunk off at the end anyway.

With compound interest, there could be a big difference in putting away a few hundred quid in a pension pot now and letting that grow between now and retirement.

Fwiw, I'm 42 and really regret not paying more into my pension when I was in my twenties.

I’d go for pension. Good to start early. Do you have any kind of state pension if you’re not in the UK? If you’re planning to return to the UK you need to be aware your state pension here may be minimal if you’re not paying National Insurance.

@ThroughThickAndThin01 You're being perversely literal minded here, OP might live somewhere were property values are very high.

It was a tongue in cheek comment, but the point is serious. A pension fund is liquid - it gives you flexibility over how you retire (dropping from 5 days to 3 days say) and when you retire (wouldn’t fancy trying to sell right now). You can take a little or a lot of money out of a pension, whereas you can’t take a little out of the value of your property.
It’s not great emotionally knowing that you’ll be forced to move in order to live in retirement. It’s a time when having good social connections is very important so moving to a new place isn’t always a good idea. Downsizing also doesn’t always release as much capital as expected once stamp duty, moving costs, renovating & new furniture are taken into consideration.

Thanks everyone!

I found out recently (the hard way!) That our mortgage only gives mortgage holidays if you've overpaid already. Check your t&C's, it might be worth overpaying a few months worth of mortgage to give yourself that option if you're ever suddenly out of work.

Both are good goals

If you overpay mortgage, check how much you can pay without incurring early redemption penalties

Pension!!

I'd do pension. I'm now 36 and wishing I'd paid more in during my 20s before kids!

I would get proper legal advice for this (I've done it recently).
Definitely have a pension in place. Then aim to have about 3-6 months salary in savings in a high interest instant access account (you can get about 5% right now). Depending on your salary this may/may not be better in an ISA.

E.g. for me right now my mortgage rate is better than my savings so money goes in savings. Also the way pensions are being managed has totally changed so please do get some proper advice.

Do you have the option of overpaying the mortgage abd reducing the capital rather then the term? Usually you have a choice.

If you overpay the mortgage will be paying less per month almost immediately and then can use that to pay into your mortgage.

Since you are 25, pension. You got the whole working life for it to grow and is tax efficient.

Pension, if you start early you'll get years of growth and all the extra tax relief.
As you are only 25 if you stay in same house you'll only be 50 when you finish your mortgage which is relatively young anyway ! Then you'll have a mortgage free house AND a pension !