To pay off my mortgage or save for pension ?

[Mangoandlychee]

I’ve been feeling stressed about this and similar to another thread, I would really
appreciate some advice but realise there may be no right answer.

I’m 39, single and live in a small flat but k do love it. Can’t see my circumstances changing anytime soon and will possibly never move. My mortgage is now £140,000.

I am wondering whether I should overpay it as much as possible and look to clear it asap in the next five years. However, I’m a freelancer and I have barely no pension. Just £3000 in a SIPP. No employer one. And I’ve been stressing as to whether I should really be making my overpayments into my SIPP instead?

please help - what would you do?

if I was planning to move later on, is it worth paying off my mortgage now?

thank you!

You will get very differing opinions on this from an economic/financial point of view. But I will offer a self employed, single person's view. The day I paid off my mortgage was so satisfying and an enormous relief. Knowing that, whatever shit life throws at you, you will always have a roof over your head takes an awful lot of stress away. I paid off my mortgage as fast as I could and then, once that was done, I now shove every spare penny into a pension. My pension isn't great but none of us know how long we will live. I would rather be happy and stress/mortgage free whilst I'm young(ish) and definitely still alive than paying off a mortgage forever, building a big pension then falling off my perch when I'm 70. (My thinking is possibly skewed by two close members of my family dying before pension age so never got the benefits of all that saving).

The sensible answer is probably both. Maybe if I had my time again, even if it was only £50 a month, I would probably have paid a tiny bit into my pension but not at the expense of getting rid of the mortgage.

How much is your income / how much is servicing the debt costing you?

IMO paying your mortgage off isn’t worthwhile.

Given your position as a single person and freelancer - I’d probably prioritise some pension saving (tax efficient), plus put money in a S&S ISA so you have cash you can access before you are 57. Maybe 50/50 on these - this gives future cash but also accessible cash for anything before retirement age (and which you can pay your mortgage off with at some point if you so wish).

I'd overpay it, without making yourself short for leisure/entertainment. To be mortgage free at 44 sounds great. You will be young enough to enjoy holidays/leisure pursuits etc., without the problems that old age can bring eg. arthritis/rheumatism/other health concerns. So many of my friends had plans for their retirement, only to be plagued by illness or worse dead. Make the most of being young and fit, old age creeps up on you before you know it. Not having a private pension isn't a concern of mine, recent circumstances have given me a YOLO attitude, I'm 7 years away from getting a state pension and I'll reassess things then (if I'm lucky enough to still be here.)

And if you do live past state pension age… what will you do to fund yourself, given you currently at present will only have access to a state pension?

We paid off our mortgage by downsizing many years ago against the advice of our accountant who wanted us to maintain the then tax advantages of having a mortgage. I cannot begin to tell you how freeing it was to have our housing costs gone!

There are lots of considerations. How are you going to fund your retirement? Can you sell and downsize to free up some cash? Would state pension be enough to pay your bills and give you a quality of life that you want? I'd probably have said pay off the mortgage if you were living in something like a four bed where you could easily downsize to a two bed flat and have cash to live off.

In the last 12 months I increased my pension payments and then got a terminal diagnosis. I'll never see the benefit of my pension and I can't take it all until I have less than 12 months left to live. I'm still adding to it whilst working because the returns on it are still higher than if I put the money into a savings account. However we still have a mortgage of 200k left, maybe we should have overpaid on it. Thankfully I have life insurance so the mortgage will be paid off.

So many things to think of including ill health before state pension age and not being able to work and losing your job as examples.

There are so many variables here and it really depends on what your objective is. From a purely financial perspective, it's almost certainly best to contribute to a SIPP given the tax relief and the potential for growth while you're still young. If you wait until your mortgage is paid off, compounding will have much less of an effect.

You don't say whether you're a higher rate tax payer, but if you are this argument is even more compelling. If it's security and peace of mind you're looking for then that's a strong argument for paying off the mortgage. That being said, with my current rate low, I've been focussing on the pension to such an extent that I could stop contributions and still have enough income at 60- compounding will do the heavy lifting for me now. That in itself is enormous peace of mind.

Finally, it may be worth asking ChatGPT your exact query, it will ask additional relevant questions and help you come to a decision.

If I had my time again, I would have either aggressively invested in stocks and shares ISA OR upsized my property and ridden the capital gain. However that latter option now makes no financial sense given the market is tanking.

A previous poster is right: investing in shares now through an ISA would give you the option to pay off lump sums once it grows.

I'd probably try to do some of each. There are big tax advantages to saving into your pension, but it's a long way off for you. And as another freelance, the security of knowing you are securely housed if work dries up is very comforting.

Just be aware that a private pension is taken off any benefits you may ever claim. While mortgage free, or having a low mortgage, you will always gain. As a single person you may need top up benefits in the case of illness/disability etc.

My elderly mum lives in a self contained annexe to our bungalow and although I don't want to think of life without her, when the time comes we would consider renting her bungalow as an Airbnb. When you're old, expenses for holidays/socialising/hobbies are far less than when you're young/middle aged. We've been there, done that, and now live a far more relaxed life which costs nothing!

Money and savings isn't a question of Maths alone we all have different ways of thinking for some the peace of mind from being mortgage free outweighs other things, the average age of death from birth for a woman is 80, however if you are in good health at 65 the average life expectancy is over 85, the vast majority of people reach pension age over 85%, (the 15%that don't includes infant mortality and accidents etcs)so saving for retirement is sensible

Paying off your mortgage makes no difference when it comes to moving, you would be a cash buyer.

Mathematically it is true that money in a stocks and shares ISA say a FTSe 100 tracker will grow at roughly 8%per year , this being the average annual growth of stock market over decades, will yield far more money than what you gain from repaying mortgage but being completely debt free matters more to some.

I would suggest a hybrid approach make some overpayments on mortgage but invest in a pension as it counts as before tax so the equivalent of 20% boost you can shorten term of mortgage so instead of 25-30years go for 15years .

If at all possible I would aim to be mortgage free by 55, if you are still healthy you have 10-12years to save that money for retirement, if you are struggling the lack of a mortgage payment could allow you to work less hours or even retire early

Money invested at 8% doubles roughly every 9years but at 3.5% the average savings account rate it takes 20years to double

Just in general, run the tax savings and compound interest on pensions - you can take it at 57 for a dc pot. I freelanced through my 30s and didn’t make pension contributions - I lost 10 years of compound interest on pension gains.
the average stock market return has been 8 percent pa in that time.

It doesn't have to be all or nothing.

Given you have 20 years until retirement, it's very likely that the right answer (from a purely financial perspective) is to put money into your pension- you will get the tax back on on it so it's immediately worth at least 25% more, and it's very likely to grow at a rate that exceeds the interest rate on your mortgage. This is the approach DH and I have taken- when we were younger we put everything into investments and let the mortgage just tick along. Now we are about 5 years off retirement we're overpaying the mortgage. Doing it that way round has been massively the right thing for us as we've gained a huge amount of investment growth which has compounded over 20 years.

However, there are things to consider other than the purely financial. The feeling of security that will come from paying your mortgage off is genuinely valuable and not to be discounted, especially as you are a freelancer.

In your shoes I think I'd probably make sure I had a decent emergency fund first (at least 3 months' expenses), then focus on the pension, but you wouldn't be crazy to overpay the mortgage as well if this would increase your quality fo life now by making you feel more secure.

What are/were the tax advantages of a mortgage? Can't think what they are if you are in the UK, unless you go back the the Thatcher years and MIRAS.

Have you overpaid at all?

If not, I'd consider doing that first so that you can take a mortgage holiday if you need to without affecting your credit rating if things were ever to get difficult.

I would split difference. Put some money into pension each month - treat it like a bill and use rest to overpay.

It depends on your income. Anything over 50k you can spare should go into your pension as you’ll get higher rate tax relief of 40%.

as a free lancer I would veer towards the 6 month end of 3-6 months expenses as you have no sick pay, work out how much money each month you can save (assuming you are debt free apart from a mortgage) then decide do you need to save for a new to you car in the next 2-3 years how much you shuld put in a pension
as you are 39, you have 16 years untill 55 140,000 mortgage over 16 years rounghly £1000 a month but over 10 years would increase to 1350 a month

if you invested 150 a month ( increasing by 2% inflation per year) for next 16 years compound at 8% you would contribute 36,000 but it would be worth £76000 continue another 10 years contributions total 64K pot 209K
contributing 250 a month would give contributions of 58,000 and a pot of 119,000 after 16 years but 26 years would mean contributions of 104K and a pot of 333K

if you take your house payment of 1000 you will have 10 years to invest it ( ages 55-65) you will contribute 120k and it will be worth 180K in 10 years at 8%

you need to decide with both your financial head combined with values your health and other goals to decide what is the best strategy for you to maximise returns and fulfill your dreams

your chances of dying before pension age are small do not let anecdotes weigh more than real data you know your family medical history

Pension growth is easier the earlier you start, so getting some in there as early as possible makes sense, as you also get the tax back from the government which tops it up.

You haven't mentioned the numbers as that will make a difference, but when me and DP (so I appreciate a different position from you in terms of we had 2 incomes to service said mortgage which gave a little more security) were looking at how to deal with a set of pay rises that gave us an extra 500 a month between us, we did 100 on the mortgage and 200 each into pensions monthly. Our mortgage interest rate was very low at the time which may also factor.

I'd (personal opinion, everyone's risk appetite is different) look to be mortgage free by 50/55 so using overpayments if necessary but not if you are already on that forecast, and putting the rest into pension. This will allow the pension the most time to grow, whereas the mortgage has a bit more of a finite end.

As you're 39, a LISA is definitely worth considering as part of your pension planning. Current rules are you need to have opened it before you're 40 and you can pay in £4000/yr and the govt tops up 25% and you can take it tax free at 60 (or to buy your first home bur not relevant to you).
When I was selfemployed I used my allowance each year and its invested into stocks and shares so has performed very well and my £30k is now worth £70k

I was mortgage free at 33. It was a bad plan. If I could have my time again I’d do my pension. Moneysavingexpert has a mortgage overpayment calculator that you might find interesting. An additional dimension is that when you pay off your mortgage you are then only getting appreciation on the asset, not a month by month predictable increase in your potential deposit for the next place or future investment. While you have a mortgage, the capital value is constantly going up, increasing your buying power for the next place, as you are saving into it every month. When you stop making those payments, the investment value only grows by the rate of increase of house prices for your type of house in your area. This is why we actually managed to reduce our property buying power by paying off our mortgage early and I no longer think it is a good idea. We have a mortgage again now (I’m 38) which really makes us pay attention to keeping our income high enough to pay it (which as a freelancer makes me think more about getting more clients etc instead of coasting).

Don't underestimate the impact of compound intetest. Paying off a mortgage is rarely the best choice long term. If you think you might need the money in 5 to 10 years for an upsize I would be investing it in a stocks and shares ISA. If a higher rate tax payer and you don't need to upsize a pension makes more sense.

It is roughly similar - either paying off a debt which costs the interest rate or paying to pension which adds interest rate. The difference changes over time based on the rates and state incentives (tax free, ...).

You can spend time or money to model and optimise.
You can understand what the most useful bonus is (tax free?) and make sure to use it at least a bit.
You can choose based on what will make you most happy.

I would probably prioritise the mortgage now - if you are single and don't care about leaving inheritance, you will always have the option to consume the value, maybe there will be some decent reverse mortgage/equity release while living there product available later, so the money will serve you twice this way.

@TheHedgehogCannotBeBotheredAtAll that makes no mathematical sense at all