Overpay mortgage or put into pension?

[whereiscaroline]

I'm already paying into my pension the most possible in order to get my company's matched percentage.

I can pay more in (benefitting from income tax savings) or overpay mortgage. Benefit of overpaying mortgage as far as I can see means money is still available in some form via remortgaging if necessary. Pension wouldn't be accessible for many years. Plus mortgage paid off provides security of knowing house is paid.

Is pension always the obvious option? Or not? And why?

Mortgage every time

Mortgage.

Once it is gone, you have money to invest elsewhere.

Yup, mortgage.

mortgage

Pension I suspect is worth far more than the saved interest on the mortgage. But do the sums.

Agree, overpay the mortgage - but be sure that overpayments reduce the mortgage term, rather than the monthly repayments. I think it's MoneySavingExpert who has a calculator that shows how much interest you save by reducing the loan term, it can be tens of thousands

You need to do the sums.
If your pension payments will be accruing years' worth of interest as well as the extra tax contribution, whilst your mortgage will be paid off quite soon, pension might be better.
Is your pension pot designed to be healthy? Are the only payments being made the employers' contribution and yours into a stakeholder pension, and at bare minimum rates? Or do you have other workplace / employer pension or private pension?

I'm currently pondering this so watching with interest. At the moment I am edging towards pension as a result of the tax benefits - I'm a higher rate tax payer and upping my pension contribution would take me below the threshold - this might be worth taking into consideration OP.

For those saying mortgage, can I ask why?

We went for pension for tax benefits and because the interest rate on our mortgage was very low anyway. Pension is a bit more risky because value can go down as well as up but we felt the extra tax mitigated much of this risk.

Mortgage because...

• Pension funds are never fully safe from governments/stock market variations/companies etc
• Tomorrow is promised to no one, you may only get to see 5 years of pension payments to your account vs for example 10 years less of mortgage payments
• You may not be able to work for the whole of your normal working life, getting the roof over your head sorted before that happens makes sense
• A property is a saleable asset that you can access the money from at any point in your life. Your pension is not.

Pretty much doom and gloom answers but it's all about plausible risk and potential benefits. These are the reasons I'd prioritise clearing a mortgage faster than increasing my pension pot...but I'm not you.

Look at the general health of the generations ahead of you and think what would have worked best for them...then book an appointment with a financial advisor and see what they say.

Not knowing the figures involved in your situation, I judged it by my own.
I am paying a good amount into my pension, so is my employer. My mortgage is not massive, but it's not small, and it's currently a couple of years into a 10 year fixed-rate deal. My pension pot is already pretty healthy, and I have other savings in an ISA. DH and I channel surplus into reducing the mortgage term, to bring forward the time when we will have no more payments to make (with the security and choices that brings), and to reduce the amount of interest we will have paid by the end.
Your finances, salary, savings, mortgage, pension, etc. may be completely different

It's impossible to advise without knowing your personal circumstances, but personally I've opted for mortgage overpayments for the following reasons:

A) I am lucky enough to have a defined benefit pension which even without additional contributions should provide enough for a reasonably comfortable retirement.

B) DH is going to be a SAHD so all the burden of paying the bills is on my shoulders. Whilst my job is pretty safe and the sick pay is generous, I want to minimise our outgoings just in case something really terrible happens and it is also building up an asset which we would have available in case we ever needed to sell. DH is also naturally anxious and I suspect it might be easier to convince him we can afford a second child if our bills are low.

C) By reducing the outstanding debt we can get a lower monthly payment when we come to renew (nb I prefer this to reducing the term because we still have the option of overpaying 10% of the outstanding debt per year which gives us flexibility that we wouldn't have if we reduced the term). The lower bills mean that we might be able to afford for me to reduce my hours when my mat leave finishes.

D) Who knows what's going to happen with Brexit and more generally interest rates in the future? In theory we would be fine even if they shot up to 10%, but it wouldn't be easy and so the less outstanding the better.

E) We've got over 23 years left on the mortgage and I know that overpaying at this stage makes a massive difference because so much of the monthly mortgage payment goes towards interest (it is almost half in my case!) rather than capital.

F) This reason makes less sense but I just hate being in debt. I check my app frequently to see how much is left on the mortgage and enjoy making the overpayments and seeing both the outstanding debt and the wasted interest money reduce each month. I can still remember when I finished paying off my student loans (which incidentally I didn't overpay) and the mixture of relief and satisfaction that I felt.

In my case as a higher rate tax payer I definitely suspect I'd be better off on paper putting money towards the pension, but the short term gains and the peace of mind for me and DH are more important to me at the moment.

You have to base it on real numbers, but also on your personal comfort level with risk, and simply your personal preference.

Pension for me, because:

• I get HRT relief
• it brings my earnings down enough to let be claim CB
• I have a relatively low mortgage payment and other savings so I’m fairly comfortable about roof over my head in terms of change of circumstances
• I’m hoping (and planning as far as I’m able) to retire at 55 so I’m only locking it away for 10 years
• I personally have a fairly hopeful outlook on the stock market over the long term (some of the Brexit effect has already happened, there are other markets)
• I’m happy with risk (mainly due to the basic safety net of other savings
• I believe that 40% tax relief on pensions won’t last much longer, so I’m making hay whilst the sun shines!

I nodded along to @AllyMcBeagle even though I make the opposite decision!

Because markets and life are unpredictable, I think her point F is so important. Your choices have a value in themselves.

I’m putting lots extra into my pension. My cousin said “but you have an OK pension already, why not just spend it - you could die and never benefit from it” (leave aside child inheriting it)

But I might not die young - I hope not - and the higher pension gives me personally more peace of mind than a paid off house.

@Ellisandra's points are all good too. I think this shows that there are pros and cons to both, so it's really a question of thinking about your particular circumstances, doing the sums and also considering your priorities.

Of course you could hedge your bets (spread the risk) and do a bit of both!

- I believe that 40% tax relief on pensions won’t last much longer, so I’m making hay whilst the sun shines!

I agree with this.

Also you need to look at how much your pot is / will be and ensure you aren’t going to go over annual or lifetime limits. I know that’s unlikely for most people but it’s soemthing to be aware of.

At the moment I put in more into my pension rather than much extra off the mortgage to take myself out of the marginal 62% tax band.

Mortgage
then pension

OP you need to do your sums to compare the 2.

Saving LATER into a pension means you miss out on compound growth. What you save in interest on your mortgage may not be more than you make in compound growth and performance returns with a pension invested. Plus tax relief/ni and tax savings.

On the plus side you would expect your home to increase in value, but how likely is it that you’ll want to downsize to release that equity in retirement?

Once you get to the 60% LTV range then you can get better interest rates.

We’ve gone with pension over mortgage.

If you were looking purely financially then pension but there are strong psychological benefits to mortgage. If it was me, it would be mortgage as ours is massive and I want more of a safety net in the ‘now’ rather than having to wait until pension age.

"Once you get to the 60% LTV range then you can get better interest rates."

I hadn't realised that 60% was a key tranche for interest rates. I think we're about £9k from that (because Halifax disregard the 20% Help to Buy Loan), so it might be in my favour to overpay until that point, then switch to mortgage overpayments.

From what I've read online last night, I think for my personal circumstances - small house ergo low mortgage with low interest rate - it's likely to be more beneficial to plough into a pension and hope to benefit from compounding and value increases over time.

Thanks all, it's been interesting reading.

then switch to pension payments