Additional Pension Contributions vs Mortgage overpayment

Harkon321

Well-known Member
Reading through this thread, 'Good Salary vs Solid Gold Pension' got me thinking about my own situation. I've booked an appointment with a Financial Advisor but thought I'd also open this up to other people's experience and opinions.

At nearly 40 I have a LONG way until retirement and just over 20 years on the mortgage.

Does it make more financial sense to make small overpayments on the mortgage (limited to 10% due to fixed rate) or to make additional salary contributions to the pension scheme?

Mine and my wife's pension are both in the Teacher Pension scheme, I think I currently I pay in about 10%, although my wife's will be less as she works part-time.
I'm trying to get my head around whether the additional tax savings and matched employee contributions to the pension scheme (compounded over 20 years), can outweigh the potential interest savings by paying the mortgage off a little sooner.

Mortgage rates being so low at the moment is a another consideration.
 

Xenomorph

Member
Mortgage rates being so low at the moment is a another consideration.

For me this is key. I considered paying off the mortgage early, paid out of my S&S ISA which I've had for some time. It's a question of where the money will work hardest for you. In my case the ISA was a better option with the growth it was yielding. Although I would add that my mortgage payments have always been quite low as my initial borrowing was relatively small, in comparison with today's hefty sums.

My own view is that I would shovel as much as possible into the pension. But everyone's circumstances are different.
 

chief barker

Distinguished Member
If your Pension is salary sacrifice then it would make sense paying more into it for the Tax saved alone.


Salary sacrifice

Members have the ability to opt for salary sacrifice arrangements under the Teachers’ Pensions Regulations 2014.
 
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Desmo

Distinguished Member
I look at these things from a totally different angle sometimes. Paying my mortgage off meaning nobody can take my house from me should life go a bit pear shaped is worth far more to me than a few more £k in a pension pot. I'd rather be mortgage free as soon as possible personally.
 

The Dreamer

Distinguished Member
Looking at the worked example for buying extra years on that web-site above (Flexibilities - Faster Accrual) - that is amazingly cheap, and I'd be buying 1/45's every year for a start off. That's not much more than a 2% contribution for that - amazing value; it'd be 7 or 8 times that in the private sector!

Assuming you're already doing that though, I'd be maxing out any other pension options, AVC's - or even start my own SIPP. You could (potentially) use a SIPP to retire early, drawing down funds to empty the pot just as your teacher's pension kicks in.

Loads of options, which an IFA should be able to guide you through.
 

Xenomorph

Member
I look at these things from a totally different angle sometimes. Paying my mortgage off meaning nobody can take my house from me should life go a bit pear shaped is worth far more to me than a few more £k in a pension pot. I'd rather be mortgage free as soon as possible personally.

You don't have to pay the money into a pension pot though. If you hold it in an ISA, you get tax benefits, and also that money is available to help you with the mortgage, if needed.
 

ashenfie

Well-known Member
Hard to say without the number , which one is not wanting to post online. Reading what you have put, it looks like you have more pension that you employer would match? In that case I would consider that as first stop as it makes most use of the money and it like your not putting enough in your pension. The rest a monthly contribution to the mortgage would be an idea.

I currently put in 7% pension and it goes to 19% with the employers contribution. Anything over and above goes to the mortgage.
 

Field Marshall Eccles

Active Member
From a purely financial perspective it all depends on how much extra your final pension would be on retirement from AVCs versus how much less you would pay on mortgage repayments until you pay the mortgage off. It's not that easy to work out the extra pension though as it depends on how long you live.
 

Harkon321

Well-known Member
Looking at the worked example for buying extra years on that web-site above (Flexibilities - Faster Accrual) - that is amazingly cheap, and I'd be buying 1/45's every year for a start off. That's not much more than a 2% contribution for that - amazing value; it'd be 7 or 8 times that in the private sector!

Assuming you're already doing that though, I'd be maxing out any other pension options, AVC's - or even start my own SIPP. You could (potentially) use a SIPP to retire early, drawing down funds to empty the pot just as your teacher's pension kicks in.

Loads of options, which an IFA should be able to guide you through.

No, I've not already done that. This is the first time I've really looked in to it. We are at a point where we have no plans to move house for the foreseeable future, have no loans/credit cards or finance payments, so it seemed a good time to look.

I'm currently on the standard contribution of 1/57th.

I'm trying to work out how the different contribution amounts work: This is the example they gave for someone earning 30k:

Accrual Rate Pension Earned​

1/57 (automatic)£526 pa
1/55£545 pa
1/50£600 pa
1/45£666 pa
 

The Dreamer

Distinguished Member
No, I've not already done that. This is the first time I've really looked in to it. We are at a point where we have no plans to move house for the foreseeable future, have no loans/credit cards or finance payments, so it seemed a good time to look.

I'm currently on the standard contribution of 1/57th.

I'm trying to work out how the different contribution amounts work: This is the example they gave for someone earning 30k:

Accrual Rate Pension Earned​

1/57 (automatic)£526 pa
1/55£545 pa
1/50£600 pa
1/45£666 pa

It doesn't compute really, as you've already said you contribute 10% - where the above example the 1/45's contribution is only just over 2% of salary! Which, if it's accurate, is an absolute bargain!

Certainly worth talking to your pension admin team.
 

Judge Mental

Well-known Member
Even if financially, due to current low interest rates, it numerically makes more sense to add to your pension there up is something psychologically satisfying in seeing the size of your mortgage reduce. I was amazed how much, even at low interest rates, it was possible to save in interest payments overall by overpaying to the maximum. We had no restriction on overpayments and saved almost £30k in interest by cutting our mortgage term through overpaying. And once you are mortgage free if you are still working you can put that money each month into savings or add to your pension at that point. We took the view that having tax free savings to draw on to supplement a lower pension made sense in the reduction in income tax we would then see. Fortunately my husband is an accountant and able to model all the different scenarios.
 

RBZ5416

Distinguished Member
Probably a good case for doing both rather one or the other. Pension will almost certainly reap more reward but it's locked away, presumably until at least 55. As @Desmo alluded to, if life throws a curved ball at you in the mean time then that money remains out of reach. Overpaying a bit on the mortgage would leave your liability lower & so hopefully more manageable.
 

kav

Distinguished Member
In purely financial/cost terms, you can roughly figure this out for yourself by calculating how much you could save on interest by overpaying your mortgage, versus investing the equivalent into your pension and estimating the return on that. That should give you a starting point - if it's completely obvious that your pension return would massively outweigh the mortgage interest cost, you know where you stand, at least provisionally.

Pure cost isn't the only factor though, there's lots of reasons to consider, so I'd play around with those figures to get best and worst case scenarios, including a number of test cases based on how much money I have to throw in each month. For example, if I had £500 to put aside each month, I'd do a calculation with £500 into the pension, £0 into the mortgage; then £400 pension, £100 mortgage; then £300 pension, £200 mortgage; and so on. Somewhere in there would probably be a sweet spot where there's an ideal split for you between building up a nice pot and seeing a tangible drop in the time until your house is paid off.

I kind of like hedging my bets so personal preference would be to find a way to put a bit into both.
 

Tight Git

Distinguished Member
Interesting all the different views on this one.

Reminds me of the time I was on a motoring forum and asked for advice on the best tyres.

Six different people replied...with six different recommendations! :facepalm:
 

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