Future planning - pay off mortgage or add to pension?

[greyinganddecaying]

I'm a bit fixated on paying off out mortgage asap - we have ~£60k to pay in the next 5 years. Fixed deal ends next year and I'm worried that the rates won't be as good, so I'd like to repay as much as I can between then & now.
(I've looked at remortgaging now & it's not viable)

Then I'm looking at my pension pot, which looks ok but the annuity rates look very low, so wondering if I should try to pay more into this. I have another 12-17 years before retirement.

Any views on the best thing to do?

Massive tax benefits to paying into pension

As well as the tax benefit, the growth in a pension should exceed your mortgage interest rate, which should only be about 1-2%. Even low risk investments should comfortably beat this over 5 years, even before tax relief.

Don't worry about annuity rates, they're not compulsory any more and not the right choice for most people.

If you read the Money Saving Expert website advise is always to pay off debt first. Then have some emergency savings

If you became unemployed how would you pay the mortgage

I would pay the mortgage off first & over pay if you can

You can pay extra into a pension later

I agree with the advice to pay debts and have emergency savings first, but I disagree on paying the mortgage off over paying extra into a pension.

The compound interest benefits and tax relief on pension contributions mean that this is almost always your best bet. Especially if you only have a small mortgage (£60k is small, and presumably you have a good LTV ratio - in which case even with a rise in interest rates you should still be able to fix a good mortgage fix when your current deal comes to an end).

Pay into your pension.

Pension for the tax relief & growth. The sooner you pay into the pension, the longer it has to grow. Mortgage rates are so low at the moment that your money will work harder elsewhere.

£60k is quite a small mortgage, and given you’re planning to work for another 12 - 17 years, you’ve got plenty of time to pay it off.

I’d prioritise pension - the benefit you’ll get from growth over 17 years will massively outweigh the mortgage cost.

You could even really stretch the mortgage out to maximise pension payments and use lump sum pension to clear it

Thanks all - pensions seems sensible, although I'll make sure we have cash reserves just in case.

I have a Scottish Widows pension & a work pension. Is there a rule of thumb over which is best to pay extra into? I'm already getting the maximum employer contributions.

@greyinganddecaying

Thanks all - pensions seems sensible, although I'll make sure we have cash reserves just in case.

I have a Scottish Widows pension & a work pension. Is there a rule of thumb over which is best to pay extra into? I'm already getting the maximum employer contributions.

I'm not the clearest on how the tax piece works, but I think the best bet is your workplace pension as you get the tax break there, meaning that it costs you less to put more into your pension IYSWIM?

Mortgages are very cheap forms of borrowing (although do understand your concern re the different rates) and it's usually easier to maintain or even borrow more when you already have one compared to paying it off and then remortgaging if you need to. The point being not that you hope/plan to ever touch the equity/capital in your home but your house is a very illiquid asset, whilst we all hope and believe we are highly unlikely to be in the kind of situation where we need access to lots of cash (thinking job loss/critical illness/being falsely accused of a crime or being sued for a large amount of money type things), these things do happen and it's wise to not have all your eggs in one basket so to speak, particularly if house prices were to fall in your area. As others have said there are also more tax efficient ways to invest. So whilst it's not a bad idea to pay your mortgage down to a manageable level, once you are down to your kind of level other forms of investment make more sense to me - pension is one of them (although also a very illiquid asset), do also consider ensuring you have a readily accessible emergency fund and also perhaps consider putting some into index-linked or managed investment funds, this way if interest rates do rise your money will rise with it...

I would do the 10% over repayment entitlement on your mortgage both this year and next (presuming this is what you’re already doing?) Then assess where you are when you need to go into a new deal in 2023. Like you, I believe rates will go up a lot more so think it’s prudent to get your mortgage down as low as you possibly can.

@BackBackBack tax relief is the same whether you pay into a workplace pension or a private personal pension.

What can make a difference is:

• if workplace is via salary sacrifice, you save NI too, and some employers offer to contribute their NI saving too
• if a standard AVC style contribution, tax relief is the same and NI is irrelevant
• a pro can sometimes be more favourable annual management fee in workplace pension due to negotiating power
• you may have less fund choices (or rather you almost certainly will, but your employer might have enough options for that not to be a big deal)
• a negative may be a restriction on when you can take your workplace pension, especially if it’s AVCs alongside a DB element, as many won’t give you early access to AVC without triggering DB. A personal pension is more flexible.
• if a workplace pension is DB and paying more allows you buy extra years - that’s almost certainly better than a personal pension

So all in all, you can’t say a workplace pension is better - you need to know the details.

We prioritised paying into pensions and then used some of the 25% tax free sum to clear the mortgage.

I would consider putting it into ISAs as an optionthat way you get the better growth but they're more accessible. They'll mean you can go mortgage free in the future or otherwise have a substantial pot to rely on. There are also tax benefits tooyou can use a calculator to see the balance of pension--ISA that makes most sense.

@Flowers500

I would consider putting it into ISAs as an optionthat way you get the better growth but they're more accessible. They'll mean you can go mortgage free in the future or otherwise have a substantial pot to rely on. There are also tax benefits tooyou can use a calculator to see the balance of pension--ISA that makes most sense.

I would not do this, you are in essence giving up 20% growth on day 1.

Another vote to pay into your pension, even a big variance on interest rates on a £60k mortgage will be neglibable to you.

@fromdownwest it depends how old they are and when they might want to access the money though. If they’ll need it way before retirement the might want some in ISAs too?

I vote for the mortgage, that way you get the benefit now rather than waiting for retirement. If you are on the maximum employers contribution then your pension must be quite good.

My DDad died at 60 and FIL at 70 so neither of them got benefit from their good pensions which twists my thought process somewhat.

@Frenchfancy

I vote for the mortgage, that way you get the benefit now rather than waiting for retirement. If you are on the maximum employers contribution then your pension must be quite good.

My DDad died at 60 and FIL at 70 so neither of them got benefit from their good pensions which twists my thought process somewhat.

I also have this in the back of my mind. I'm late 40s, but hoping to retire between 60-65 as I have a health condition which may short my life/reduce my quality of life as I get older.

What type of pension is your workplace one? Is it Defined Benefit (based on final/average salary) or Defined Contribution?

Bear in mind that most people don’t buy an annuity these days, they use drawdown from their DC pensions.

Whilst putting spare cash into a pension pot does give 20% extra immediately, you will be taxed when it is taken, compared to an ISA where no tax relief is given when invested, but no loss when drawn out either.

Something else to consider, ISA money is included in Inheritance tax calcs, pension pots aren’t.

Money saving expert forum has a retirement section, you would get some good advice there. Most people on there who have retired early seem to have a mixture of ISAs and personal pensions, plus paid off mortgage!

Having no mortgage is the ultimate security.......so id pay that off. Then stash the money saved over the coming years into my pension. It's a win / win.

@BertiesShoes

What type of pension is your workplace one? Is it Defined Benefit (based on final/average salary) or Defined Contribution?

Bear in mind that most people don’t buy an annuity these days, they use drawdown from their DC pensions.

Whilst putting spare cash into a pension pot does give 20% extra immediately, you will be taxed when it is taken, compared to an ISA where no tax relief is given when invested, but no loss when drawn out either.

Something else to consider, ISA money is included in Inheritance tax calcs, pension pots aren’t.

Money saving expert forum has a retirement section, you would get some good advice there. Most people on there who have retired early seem to have a mixture of ISAs and personal pensions, plus paid off mortgage!

Thank you!

My work pension is defined contributions, but has quite good employer contributions (15%). I'm getting the maximum, so wouldn't get further employer contributions if I paid in more.

I also have an old previous employer pension (DC again) and a personal pension that I'm not currently paying into. I'm going to get financial advice about the personal pension because the fees seem higher than I remember.

I have a stocks and shares ISA but there's only £12k in that so not enough to pay off the mortgage sadly!

@TheresSomebodyAtTheDoorNeil

Having no mortgage is the ultimate security.......so id pay that off. Then stash the money saved over the coming years into my pension. It's a win / win.

That's usually my position, but it's the tax relief & the longer you pay into a pension, the longer it has to grow that is swaying me.