Should I prioritise pension saving or overpaying my mortgage?

[lycheesalltheway]

I've just turned 39 and feel I really need to start taking control of my life and would like to put myself in a good position financially.

Just to say, I'm not married and no family so will never inherit anything. I am also a freelancer and my income is not particularly high although I'm working on that, I'm not sure how the next few years will pan out. I may end up having to pivot.

I'd like advice on what is best to do in my situation. I have a LISA with £32k in it and I own my flat that I live in and have £145,000 on the mortgage. At my current salary, it will take me 30 years to pay off probably.

Should I prioritise saving into a pension or pay off my mortgage?

I know no one can answer this but what is a good pension to have to be able to live comfortably? I grew up pretty poor but I'm more worried about the fact that I really will have to rely on myself when I'm older and whether I will be ok.

But psychologically, money off the mortgage means paying it off sooner and for me the piece of mind is worth more than a large pension 30 years in the future

until you are in the future
then you look back and realise actually - id have more coming in each month or retire a few years earlier if I had prioritised the pension over the mortgage and the mortgage would have been paid of anyway

What's your health like? When I was your age, I paid off the mortgage and went for ISA savings as I knew I could have ready access to the ISA money (if desperate) but wouldn't (until 55 plus) if I put the money into a private pension.

The government may change the age you can take money out of a private pension or may change the 25% rule - but equally they could change ISA rules!

If you are freelance, it is a very good idea to keep a big 12 month plus reserve fund and have critical health insurance if you can get it

For me it would be mortgage. Once you are mortgage free you will always have a roof over your head and be that every month better off

There will be a limit on how much you can over pay on your mortgage. Do that much for sure.

Do you have any savings except for your lisa? If you dont,. prioritise building savings over overpaying on your mortgage, or pension for now. You need a buffer.

Good luck. Well done for achieving buying a place.

We have been trying to be more sensible with money over the last two years as well .

im similar age to you .

I pay an extra £280 off the mortgage per month, as thats a months payment without interest.

we have a few months savings in a help to save account , and put £50 each a month into a Lisa and £50 into a sand s isa .

in theory between our work pension forecast and our state pension, we will be absolutely fine (better off then now) but obviously that could well change.

also to consider is your job if the state pension moves back further- for example I’m a teaching assistant, no way could I be chasing after kids who are kicking and hitting me at 70 years old! And husband is a bus driver- will he be fit enough to be driving then ?

our Lisa aim is to allow us to go p/t at 60 until state pension kicks in.

I do want us to have a better balance though, I am putting more money into savings- but I don’t want to do it at the expense of giving up any travel and experiences in my 40s !

It’s a very difficult one because nobody knows the ins and outs of your current situation or your aimed end-goal. As such everyone’s well meaning advice I would take with a pinch of salt. If you can it will be worth speaking to an IFA because they’ll be able to guide you probably on considerations to make.

I am your age and a couple of years ago had the same “better sort my finances out” moment. My IFA has been fantastic and I’m feeling a lot more confident having sorted out multiple things (critical illness to cover mortgage, ISA, wider investments as well as my child’s investments I want to manage. Consolidating pensions and whether that was worthwhile doing considering the management fees. My IFA now manages my pension and the rate of return has been worth paying him the fee I am!). He also sat down and did projected retirement planning. Asking what age I want to retire and we worked back from there so I can factor in ISA monthly payments, private pensions payments then government (honestly I’m considering this as non existent the way public finances are going and I don’t think we will have one!).

Compound interest is something the majority of people don’t truly understand so properly worth researching and understanding that too.

You can also use apps like Sprive to round up your card payments on everyday spending so it chips away in small amounts on mortgage over payments and you don’t notice.

Also use chatGTP like an IFA for forecasting pension for compound interest and to try and ascertain how much to save each month. It’s actually really good.

Put money into your pension. The younger you start the better. You can overpay your mortgage by £50-100 per month to pay it off quicker. I know working freelance is great but unless you’re going to make good money I’d seriously consider moving to employed. An employer paying into a pension for you is worth its weight in gold.

As you are freelance do you have an account? Have you asked them about which to prioritise?

a pension would give you tax relief along with an investment in your future, which you should believe in

the mortgage won’t give you tax relief and is the banks investment in your future, which the bank believes in as they lent you the money

prioritise the one you believe in first

Exactly this. We have prioritised savings and pensions, and benefitted from the tax relief, significant gains and compounding. We have made occasional overpayments to our mortgage but only after using all other tax efficient saving options. We should be able retire early and around the time our mortgage is paid off.

This is ir. None of us know what's going to happen in the future and whether we'll even have a chance to use much of our pension. My lovely work colleague died this year aged 66. Extremely healthy and fit guy.

There’s no right or wrong decision really as we can’t see the future. On paper, saving and investing wins over paying off mortgage. But for some people the security of owning their home carries most weight and that’s not something to be dismissed. I think a reasonable balance between the 2 is sensible.

100% pension now.
Max it as much as you can before the new legislation comes into effect.
That was my ifa advice and I agree with it.
Overpaying the mortgage is not something we are prioritising based on several factors.

You can sell / downsize/ move to cheaper areas to become mortgsge free.

Asset trapped in your home is going to stay flat / depreciate as houseprices are going no where fast.

Invest and save, houses are now the equivalent of putting money under a mattress.
Even if they appreciate slightly its going to be much lower than an average of 8% pa invested

Totally agree with you.

Pension first in my opinion. Compound interest.

I did mortgage first then pension. My logic was once the mortgage was gone I could save a whole lot more into pension and savings than I would if I was still sorting mortgage. I depleted all my savings 5 years ago to pay off the mortgage and in the time since I’ve resaved the value of the mortgage and my pension is worth that again partly due to contributions and partly due to investments so feeling pretty good and on track.

Start a pension now as it needs time to compound and there is tax relief on pension contributions - agreed you need an emergency fund too. I started investing couple of years ago just £100 per month but the returns so far outperform any savings. I also overpay my mortgage monthly which is slowly but steadily decreasing the amount owed.

If you are in the higher tax band then contributing to your pension is much better than paying off the mortgage. You’ll get the 40% tax rebate on your contributions. Then at retirement you could use the tax free lump sum to pay off the mortgage.

@Imisssleep88 I pay about £600 a month in interest on the mortgage and my pension doesn't make me £600 a month so I would pay off my mortgage with any spare I had tbh

Your mathematical reasoning is poor.

Since we’ve had a mortgage we’ve paid between around 1-5 percent interest rate. Over the same period our investments have made around 9% per year.

@lycheesalltheway well done for starting to think and plan now. I would suggest taking a look at “meaningful money” on you tube. He offers some courses too, one of which focuses on retirement. The guy is a certified financial planner, think the Rebel couple cover similar ground but are not professionals in the area. The personalfinanceUK flowchart on reddit is also quite useful.

I think in your situation I would be concentrating on pension for a few years at least. Give it lots of time to grow. Check out mortgage balances etc -are you on track to pay it off when you want to retire? If not would you be planning on downsizing at any point?

Well, it's not a binary choice.

Pay off any debts.
Get your 12m emergency fund in place.
Get budgeting for "events" (have a pot of £500 for car problems, save for holidays etc).
Then look at what's available to work with.

What I did, was pay into my pension to get the maximum employer contribution (I know that doesn't apply to you currently, but with being aware of), then I saved each month and paid a lump off the mortgage every year. That way, you are paying down the mortgage but not tying up the money every month, so it helps with liquidity in case anything happens.

I also invested.

I aimed to have investments matching outstanding mortgage by age 45, and then to pay off the mortgage by age 50.

You can only pay off your mortgage and save that money once, whereas investments (whether pension or ISA etc) keep working.

I'm now 58 and I like having some money in the ISA (some is cash, some is invested) and pension. Because I can draw from the ISA any time I like. I can now draw the pension but of course that triggers some new roles and I am actually still paying in so I don't want to trigger that yet.

That's why you go for S&S ISA and invest in index funds not individual shares.

I could pay my mortgage off but it's small and 3.84%, my S&S ISA is routinely doing 14%/15% annual growth on most basic index funds.

Pension is financially the best option, even if psychologically paying your mortgage off sounds more sensible.

Money invested will, over the time period of a mortgage, almost certainly outperform the interest rate charged on your mortgage.

It totally depends on what you're optimising for. I want to pay off my mortgage as soon as possible, because it gives me many more life choices. I pay into my pension, sure, as it's very tax efficient on my current salary, but I really prioritise the mortgage, by overpaying every month plus saving into a S&S ISA to hope I can pay it all off when my fix ends next time (although of course the AI bubble crash might happen first!). I bought a cheap house for this reason too, so that if I take a lower paid job I can still manage the payments.

My mum died at 60. I reckon that if I've got 20 years left, I'd rather have the freedom to choose my job, travel etc now. I highly value autonomy. The question for you is what do you highly value. What is the money for.

I second rebel finance school. It's free. There is no catch. They are not selling anything. It's just a genuine couple who want to help people understand finance.