Pay off mortgage or get a pension?

artificialhells · 2022-03-18T08:00:55+00:00

We have had an unexpected windfall of £90k. We have a £125k mortgage on a £400k property, no other debts, also no pensions. We are mid 40s and have one dc Should we reduce our mortgage now, or invest the whole lot in a pension? Or a bit of both?

GeneLovesJezebel · 18/03/2022 08:03

I personally wouldn’t put it in a pension, because I want to be able to get at my money if I needed it.
However you do both need to start one.
Thinking that you’d leave your house to your child might not happen if either/both of you need care in the future.

alwayswrighty · 18/03/2022 08:07

Personally I'd do 10k/20k in savings. Then a 50% split between mortgage and pension.

Ylvamoon · 18/03/2022 08:10

Pay mortgage and put the monthly savings into a pension. This way you have greater control over your money.

ThroughThickAndThin01 · 18/03/2022 08:12

I’d put some into savings, then split the remainder.

PlinkPlankPlunk · 18/03/2022 08:14

@Ylvamoon

Pay mortgage and put the monthly savings into a pension. This way you have greater control over your money.

This is the most sensible and leaves your options open.

Do you already have some savings, say to replace income if one of you losing your job? Setting aside £10k as a pp suggests would be good, if you don’t

DuckyNoMates · 18/03/2022 08:15

Bit of both. You really need to get started on your pension.

SeasonFinale · 18/03/2022 08:17

I would pay into pensions. It is surprising how much an earlier payment into a pension grows. If it goes in now at the age of 40 it would potentially make a massive difference to your pension whereas presumably you can continue to afford your current mortgage.

Ask an IFA to give projections on your pensions with and without that sum paid in - you will be surprised!

saleorbouy · 18/03/2022 08:19

You have 18 days to put 20k into a stock and shares ISA for this tax year you could do the same after April the 1st too (40k total) I'd then split the remainder between the pension and the mortgage. You would then keep 40k available if you'd require it.
I'd speak to a financial advisor as a few £ spent on some good advice will make £££ difference in the future.

Rayna37 · 18/03/2022 08:25

Mid 40s with no pensions, a proportionally small mortgage- the 90k should definitely go into pensions. If you have no savings keep some back for emergencies E.g. min 3 months of outgoings but if you're already ok for this and can still afford the mortgage if interest rates rise a bit then definitely the best return on your money would be to put it into the pension so it's got time to grow.

MaizeAmaze · 18/03/2022 08:48

Do you have any savings?
How much do you earn per year? You can't put more than your annual earnings gs I o a pension each tax year, so unless you get a move on, that could limit options.
The pension option increases the amount further, as the government will top it up with 20% tax relief. And if you pay 40% you can get that back through a self assessment form, I believe.

I think I'd nsure you have 3 months cash savings, put a lump sum into a pension each, and then reduce your mortgage (is this limited to 10%of the balance?). Drip the savings from the mortgage repayment into the pension.

NoSquirrels · 18/03/2022 08:55

@saleorbouy

You have 18 days to put 20k into a stock and shares ISA for this tax year you could do the same after April the 1st too (40k total) I'd then split the remainder between the pension and the mortgage. You would then keep 40k available if you'd require it. I'd speak to a financial advisor as a few £ spent on some good advice will make £££ difference in the future.

I’d do this ASAP.

You need to get started on a pension, you’re already late and you won’t make enough from the eventual downsize and sale of current house to fund you in old age, because you still need to live somewhere.

Pension growth needs time to accumulate.

Cocomarine · 18/03/2022 09:35

Are either of you higher rate tax payers?
That would sway the pension contribution decision.
I’m a huge advocate of pension savings, but I wouldn’t put any more in from the windfall than you’d get tax relief from.
I’d also act quickly as we’re coming to the end of the tax year.

titchy · 18/03/2022 09:36

Do neither of you have any pension provision at all?

notapizzaeater · 18/03/2022 09:37

I'd 20k into an ISA this year, the max you can put in your pension to get tax relief this year and repeat next tax year, use the rest to pay off a chunk of the mortgage.

Fuzzy303 · 18/03/2022 09:39

do you have a limit on how much you can overpay your mortgage for per year without penalty?

Original poster

artificialhells · 18/03/2022 09:57

We are both self employed, and we have tiny tiny pensions that we only started putting the minimum into about 5 years ago. We have substantial care costs for a disabled dc and don’t qualify for support because dh is a higher rate tax payer

So it sounds like putting some money into pensions now would be sensible - 40k before the end of the tax year? There is a penalty for paying off the mortgagee early but I don’t know whether it’s better to do this than risk huge interest rate hikes when our fixed rate comes up for renewal

OP posts:

fromdownwest · 18/03/2022 10:00

@artificialhells

We are both self employed, and we have tiny tiny pensions that we only started putting the minimum into about 5 years ago. We have substantial care costs for a disabled dc and don’t qualify for support because dh is a higher rate tax payer

So it sounds like putting some money into pensions now would be sensible - 40k before the end of the tax year? There is a penalty for paying off the mortgagee early but I don’t know whether it’s better to do this than risk huge interest rate hikes when our fixed rate comes up for renewal

Before you do this you need to read up on the annual allowance for pensions and google relevant net earnings.

Otherwise you would be making a costly mistake

Cocomarine · 18/03/2022 10:28

@artificialhells

We are both self employed, and we have tiny tiny pensions that we only started putting the minimum into about 5 years ago. We have substantial care costs for a disabled dc and don’t qualify for support because dh is a higher rate tax payer

So it sounds like putting some money into pensions now would be sensible - 40k before the end of the tax year? There is a penalty for paying off the mortgagee early but I don’t know whether it’s better to do this than risk huge interest rate hikes when our fixed rate comes up for renewal

Slow down.

There is no reason to pay into a pension over an ISA except for the (very good!) tax relief. Especially good when your husband is paying higher rate. You may also be able to claim CB depending on the amounts.
So before you lock away £40K for over a decade, you need to work out what tax relief you’re entitled to.
As well as checking what other need you would have for the money.

It sounds like it wouldn’t be the end of the world to miss the boat on current tax year, because if you might only be putting in enough for one tax year only.

I know I said be quick before - but I didn’t mean in a panicky way! Not quick to do it, but quick to decide.

EmpressCixi · 18/03/2022 10:43

@Rayna37

Mid 40s with no pensions, a proportionally small mortgage- the 90k should definitely go into pensions. If you have no savings keep some back for emergencies E.g. min 3 months of outgoings but if you're already ok for this and can still afford the mortgage if interest rates rise a bit then definitely the best return on your money would be to put it into the pension so it's got time to grow.

^This. Mid 40s with no pension means you have lost a good 15yrs of compound interest on pension savings. I’d put 50/50 in a pension for each of you. Your mortgage is low, cheap debt and you are on track to pay it off by retirement there is no sense paying it off and forgoing the higher interest you’d earn by putting it into pensions.

Original poster

artificialhells · 18/03/2022 11:18

Thank you for the advice not to panic! I feel very insecure about our future, especially when factoring in care costs which will only rise.

This is probably a stupid question but are all pensions the same? Or do some offer a higher return than others? Is there such a thing as an ethical pension?

OP posts:

fromdownwest · 18/03/2022 11:34

@artificialhells

Thank you for the advice not to panic! I feel very insecure about our future, especially when factoring in care costs which will only rise.

This is probably a stupid question but are all pensions the same? Or do some offer a higher return than others? Is there such a thing as an ethical pension?

Before you look at pension providers, you need to make sure you can pay into one.

What is your annual income (excluding dividends)

Cocomarine · 18/03/2022 11:53

Definitely don’t panic!
It might that in hindsight you find you could have made a better decision acting before the end of the tax year, but that doesn’t mean that waiting would have been a bad decision.

Once you make a pension contribution it’s locked away, so don’t rush.

What are your savings like (if any!)?
If you may need to access the money, then paying off mortgage / pension isn’t great. Of course you can re-mortgage - but that wouldn’t be easy if the reason for wanting the money was illness stopping you from working.

Good ways to hold the money still accessible are:

an ISA (and if you do quickly do that before the end of tax year, you can always take it out again anyway)
in an offset mortgage (but I see you’re tied in)

So first make sure you have accessible money.

On pensions… no-one can guarantee the return, so you can’t just pick one offering a higher return - they can’t offer it. But you can look at performance history or take advice - but again, no guarantee. As a general rule - higher risk pays more, but then the risk is it loses. What usually happens is you choose a pre-set portfolio (created by the pension company) which they assign a risk rating to. So the risk is spread among multiple investments, but as a group they can be high, medium, low. You can also choose ethical funds. I’ll try to find a link for you!

PiffleWiffleWoozle · 18/03/2022 11:58

Once your mortgage comes to the end of the fixed rate you shouldn’t have a repayment fee surely? Check t and cs

You might want to get some advice about paying into pensions - make sure you don’t overpay and that you claim any additional tax rebate.

PiffleWiffleWoozle · 18/03/2022 12:00

Highly recommend meaningful money podcasts which will help you understand a lot of the things you are asking about - these really helped me.

Cocomarine · 18/03/2022 13:03

Here you go:

www.aviva.co.uk/aviva-edit/your-money-articles/ethical-investment-looking-past-profit/

Aviva is a go-to site for me, as I have one of my private pensions there and find the website clear.

Remember that with ethical investment, you don’t do anything different - just choose their ethical funds product. In all ways, it’s managed the same way with how you pay in / get tax relief.

One thing to watch - you say you’re both self employed. In some situations you can get your company to pay in for you, which saves something… (I’m hesitant to say what, as a little knowledge is a dangerous thing!)
But I’ll just flag: it’s worth looking into that.

For questions, I thoroughly recommend MSE Pension forum.