Overpay mortgage ur save into pension or isa?

[EmeraldIsle81]

Hey Mumsnet,

Need help with finances, is it best to overpay mortgage or save the money into an isa or save into a pension?

Advice appreciated, thanks!!

Do you have savings anyway?

Firstly paying into a pension has major tax advantages and if your employer does matching, it's free money. ALWAYS take that over mortgage overpayments.

Firstly do you have a mortgage that will allow overpayment? Many do not.

For many of us paying off the mortage gives us peace of mind that market investments will not. On the flipside, in recent years returns on market investments have consistently beaten mortgage interest rates, but will that continue? Nobody knows.

Once you've paid into an ISA you have tax free earnings for life on that account plus profits - for high earners (who can max out their ISA allowances each year) accumulating ISAs is a great way to avoid the new lower pension caps, for retirement investment.

Another consideration is that money into a pension can't be retrieved without heavy penalties until you are at least 55 or possibly older.

Most mortgage overpayments can't be retrieved either. If you needed the money, you could get it back from savings including an ISA, but obviously if it's a S&S ISA, there's the risk of the market being down rather than up when you need the money.

So I wouldn't lock money away until you have a good chunk of cash savings, including any for planned large purchases like new cars or home improvements, or even house moves.

If you are a high earner, it's worth being aware of lifetime limits on pension contributions.

But before you overpay your mortgage, it's worth checking that it actually will save money. People will rattle on about how 'you could save thousands' if you overpay your mortgage, but if you have a decent interest rate, it can be beaten by fixed rate savings products, or even basic instant access accounts, so it actually costs you money to overpay.

So what are your financial goals? How good is your pension so far? What’s the LTV on the mortgage and tax bracket?

The government return 25% on your pension investment and you will pay about 3% on your mortgage. If neither your mortgage nor your pension are anywhere £1m then put into your pension.

How old are you?

Ensure you have enough savings to cover your costs for 6 months should you lose your job and savings to cover any upcoming expenses.

Pension is then the best idea as you should get a better return.

That said I admit to overpaying my mortgage in preference to paying more into a pension. This is more to do with wanting the feeling of security of having a home that cannot easily be taken away. I intend to reverse this once I have enough equity to feel that I can downsize should it all go to pot. I am about to remortgage and have also gone down an ltv band which means that I get a lower interest rate which is a positive too.

Ultimately though if you are in a position to be making this sort of choice you are not going to go horribly wrong making any of these choices.