Overpay mortgage or add into civil service pension?

[Zorra]

After much frugaleering and a new job, I'm in the great position of having around £900 to spare each month. Should I overpay mortgage, currently £144k remaining of a £155k mortgage, (house worth £340k if that makes any difference). Or pay more into my civili service pension which started in September? I have £12k total in a pension so far which is making me nervous...

FYI I can overpay £15k per year on the mortgage and £6600 on the pension without penalty. I'm 38 and a single mum. It's a very hard won financial situation and there's a chance my job won't last forever (permanent contract but civil service is a dynamic old place these days) so I want to make the most of it.

Thanks!

I'd over pay the mortgage. This will get your monthly out goings down year on year. Any debts should be a priority I think.

I would split it up maybe £500 to the mortgage, £200 to pension and £200 to accessable savings (unless you have reasonable savings).
That way the mortgage is down, pension is up and if there's ever an emergency you haven't got all the money tied up.

I'd go for the pension. Interest rates on your mortgage are likely to be very low - take advantage of this while you can! Whereas (hopefully?) your pension should be showing a better rate of return.

But to be truthful, I think this is one to ask a good IFA.

Have you got an emergency fund already?
I'd do 1/4 to the mortgage
1/4 to the pension
1/4 ISA (equities, for long term but more flexible in case you need it.
1/4 to fun
How old are you op?

It's a tough one. As a single mum, putting everything into a pension isn't necessarily the best option, but you do need to prepare for retirement. Is your civil service pension still defined benefit?

I would do half and half.

Or if you have £900 to spare how about a buy to let? Will provide you with an income now and you can also use it as income when you're retired?

That's quite a tricky actuarial calculation. You need expert advice if you're talking about about £1k per month.

Unless your mortgage interest is high how much is it?), I'd be 99% sure the civil service pension is a better bet. Depending a little on your employer Co-contributions and tax band.

You know 12K pension fund so far which will last you less that a year in retirement. You really need to Max out the tax breaks available to boost this. Tax breaks that are expected to be reduced still further next year.

Research from Oxford uni published in guardian last night suggesting state pension age for your age band likely to be 70 due to change in demographics post brexit.(google "Hard Brexit means retiring later, Britons warned" for full article).

I'd overpay the mortgage.

Check exactly the T&Cs of your pension plan to see what higher payments into that would yield if they don't change the T&Cs and yes, the Govt can force changes.

Presume you have career average/final salary type pension and you'd be buying AVCs?

I'd split a third AVC, a third mortgage and a third savings. Be proactive about remortgaging every couple of years to get the best rate!

I'd look into the pension and and a stock and share ISA. Mortgage rates are very low at the moment. If you are 38, you should also qualify for the lifetime ISA.

I'd be thinking about flexibility. Both pension and mortgage repayments are quite inflexible as in that it is tricky and expensive to release the money should you need to.

Thanks, lots of good advice. I realise I also know nothing about pensions (the questions on AVC etc are things I don't understand) so will look into this before making a final decision.

Re savings I've got a sticks and shares ISA of £10k and £10k accessible, so I'd like to boost both but paying down elsewhere is more of a priority. No debts other than mortgage.

I do have an IFA who helped me set up the pension and ISA last year so v sensible suggestion to ask him!

If you go on the CS pension website there should be a calculator which shows what you'd get back for additional contributions. Last time I checked it wasn't worth my while but admittedly I wasn't looking at putting £900 a month in.

Not sure what scheme you're in but as a new starter I'd hazard a guess at Nuvos? The career average scheme? In which case the way to look at it is you get (I think) 2.32% of your salary for every year worked rather than £12,000 in there (apologies if you're in a diff scheme and I'm confusing the situation). If you're on an okay salary though you should be able to build up a decent pension just by years of service without overpayments.

One thing to keep in mind though is even if the calculators show it's a good bet I would never put all my money into the CS pension....It's now linked to state pension age which is only going to go up (obviously depends on your age but I'm fairly young) and therefore I came to the conclusion it's all very well getting a decent pension but not so good if you only get it at 70 unless you take a deduction. I don't want to work till I'm 70 so am aware I need something to bridge the gap between the age I want to retire and when I'll get my C's pension....For me at my age now , I'm concentrating on overpaying the mortgage as I'm 30+ years away from state pension age.

The other thing I'd advise you to look into is if you were to die before you get your pension, o think dependents only get a portion of the pension back and this may be the case of overpayments too (you'd need to check...Having never overpaid I don't know) whereas if it's gone on your mortgage instead obviously any dependents would get it back.

I imagine the answer is a combination of the two but like I say I think the CS pension website will help you make your decision.

There is an excellent mortgage overpayment calculator on the moneysavingexpert website which shows you how much interest you save, reduction in mortgage term etc.

Whether you are paying higher rate tax will make a big difference to which is financially better.

www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

Sorry just seen you're 38. Depending on your salary that gives you plenty of time to build a decent pension if you're in Nuvos even without overpayments. But like I say I came to the conclusion if I can't access it until I'm at least 68 without deductions then I need other options (parent died in their 50s so very conscious I may not get to 68). If I do it's nice to know it's there and I'll be okay but I need money for before then too.

You can get your CS pension earlier but you lose 5% for every year you take it earlier I think. So you'll need to do the sums using the calculators I mentioned earlier.

Thanks Frozen, really useful. I'm 38 so far away enough to focus on mortgage but close enough to panic! I'll definitely look into the website, I'm a new joiner so I think it's called Alpha? Will do a bit more research.

And in general, the moneysavingexpert website is fantastic for all things financial and there is a chat forum with lots of financially v well informed posters.

Ah sorry you're right Alpha is the new career average scheme. Thats the one where you build 2.32% for every year worked (just got the name wrong the info was correct). Nuvos is the old career average (I joined too late for final salary pension). A lot of Civil Servants don't like the new career average but my own opinion is it's still very generous.

I would focus on getting the mortgage paid off first, then you'll have a sizeable lump of spare money each month to concentrate on the pension. Having no mortgage is a great feeling.

CS pension isn't what it once was. I would build up a small cushion of savings in an ISA and overpay your mortgage. Plus take some time to enjoy life while you are young and able!

Pay down the mortgage so you can reduce the term. You'll save quite a bit of interest. Them start saving extra pension.

I would pay in a different pension that you'll have more influence over. Presumably you're quite a high earner to have this much money left over. If you're a higher rate payer, then you could put 1k per month into the pension (out of gross salary) which would reduce your take home pay by 600. That would mean you'd still have 300 to overpay the mortgage. I'd do sth along those lines as I think reducing mortgages and saving for retirement are both very important.