Apparently once a year I can opt into the company's "Smart Pension" which is an AVP scheme. Basically gross pay is reduced by the amount of the AVP, and the company pays this + 10% into the pension reflecting their reduced NI contributions.
Alternatively, I can continue overpaying my mortgage - at the moment I'm chucking in an additional £1500/month which is serving to reduce the term. So... should I use this opportunity to divert some of that overpayment into the pension (which already gets 6 + 12%)?
Can see a long, drunk, and frankly boring evening with Excel coming up...
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Bird in the hand and all that. I'd be looking at reducing your mortgage term, assuming your pension pot's got to purchase an annuity. If it's a final salary scheme (as if) then things become more complex.
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What's you're desired/required retirement age FF?
Presumably nobody wants pilots working 'til they drop
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My pension is OK but a laughingly titled "With Profits Annuity" gives me income which has halved in 10 years. If you have to buy an annuity, as part of your retirement plan, do a lot of research on where to invest it.
You can't reply on the publicity/information from the financial organisations. I have had a cash ISA mature and the letter I got 10 days before the due date said, "What do I do Now?"
Relax and your investment will roll over into our market leading XYZ ISA which pays 2.8%. I quickly moved in to a truly market leading one paying 3.3% elsewhere.
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Knowing how we're all losing out pension wise (if you're not already retired) then I'm inclined to say pay off the mortgage. You've got two properties if I remember rightly. Treat one as a pension fund. You could even put it in a real pension fund.
Last edited by: rtj70 on Tue 11 Sep 12 at 21:13
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Pay that mortgage off, once the gaff is yours they can't take it from you, they can't shift the goal posts as they can with everything else, they no longer have power over you, it is the most liberating day of your life when you receive that congratulations letter from the building society.
As Navy above, have no debts, not paying interest to others is an equally liberating act.
Last edited by: gordonbennet on Tue 11 Sep 12 at 21:20
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Tricky one.
If you reduce your mortgage, at some point you will have more money/borrowing power. What will you do? Spend it? Or save it? If you're going to save via a pension you might be as well doing that now - inflation may well erode your mortgage away for you, while your pension hopefully compounds up.
Annuities are shocking value at the moment, you'd need a million plus in your pension pot for a reasonable pension at 60, in today's money . Are you on track for that?
Your marginal tax rate is presumably at least 40%. Even at that, every £1100 of AVP will cost you only £600, if you include the company's 10%. And if the rules don't change, you could take £275 back tax free when you retire (ignoring growth) leaving £825 in the pot that will have cost you £325. It arguably makes sense to save in a pension with 40% or 50% relief and some employer contribution. Consider also that the rules in future might remove higher rate tax relief on pension contributions.
Again under current rules, you don't have to take an annuity - you can do drawdown, which can be a good option if you have a decent pot.
Lord knows what the rules or the annuity rates will be when you retire.
Of course there's always a third way. Which is to invest money elsewhere than the pension or the mortgage. You could do the full stocks and shares ISA allowance and split the rest between overpayment and pension to hedge your bets.
None of that is advice of course, just thoughts. Even if I were competent to give it, your circumstances and attitude to risk would need to be taken into account.
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The other thing to consider is although interest rates are low, and have been for a while, will they always stay low?
Bank rate 0.5% now but in October 1989, twas 14.875%
Last edited by: Slidingpillar on Tue 11 Sep 12 at 21:35
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If you have a mortgage with an offset account park the money in there - it will get the equivalent of your mortgage interest rate tax free (as the balance effectively reduces the loan you are paying interest on). You also retain the flexibility to take the money back out when/if required.
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In order to limit income tax avoidance, there used to be an HMRC limit on how much you were allowed to contribute into a pension scheme and how high an occupational pension you could draw. I've no doubt that, in one form or another, this still applies.
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Pensions are imo a waste of time: ISAs are as good and far more flexible..
Mortgages are debt: debt is Good when rates are low. Money is tight just now and rates are at record lows.. (Illogical? ).. So save tax efficiently earmarked to pay off mortgage.
That's what we did: paid off mortgage 10 years early.
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I suggested he should use his ISA allowance anyway.
Arguably any form of saving is a missed opportunity to invest. The problem is what to invest in.
I do agree that pensions as a vehicle are far too restrictive, but they do get more attractive for a proportion of your money when you add in higher rate tax relief and an employer contribution that's only available when you contribute yourself.
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>> Basically £50,000 this year, including employers contributions.
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Plus some unused entitlements brought forwards. There are complicated rules at present, but owing to a rare concession from HMRC there is a peculiar glitch in the b/f rules for this year only, effectively giving you a double maximum allowance.
It's something to do with the reduction of the previous maximum from £250,000 to £50,000.
My IFA seems to understand it.
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I'm no financial expert, but I thought it was a fundamental idea that an individual (but not necessarily a proft-making organisation) should get rid of debt before doing anything else.
I'd get the mortgage off my back asap. However, I am very averse to taking risks with money.
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It IS great not to have a mortgage!
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It is indeed. I paid mine off as soon as I was able to.
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Mine's been about £4 a month for 10 years. I have a sentimental attachment to it.
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I'll think you'll find that if you shop around, maybe using comparison websites, you might be able to get that down to around £3.75.
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I considered that of course, but nobody seems to want a £450 mortgage account ;-)
Maybe it keeps my credit score up.
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Pension
* You never know when you exactly get it back. The govt. will move on goalpost all the time.
* Inflation will reduce the value.
* You don't know what your fund provider doing with your money. They can invest in horse racing.
Mortgage
* You get immediate benefit
* You know where your money is going.
* You can calculate exactly how much you are better off.
Considering this, I'd say pay off your mortgage first.
UNLESS, you can can invest the money somewhere, which gives you a better return (against how much you can save by overpaying mortgage).
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>> UNLESS, you can can invest the money somewhere, which gives you a better return (against
>> how much you can save by overpaying mortgage).
...such as a pension pot, where he puts £60 in and the government adds £40 and his employer £10, making the year 1 return about 85% before any investment growth ;-)
That's why it's not a straightforward decision. Without tax relief and employer contributions I wouldn't touch a pension as a method of saving.
Neither would I touch one if I expected to have no savings on retirement, and a pension pot of less than say £200,000. Basically if you have nothing, then you'll get about £15,000 a year and if applicable your rent paid. £200k will buy you a pension that will just get knocked off your benefits so you might as well have piddled it away.
That's the downside of welfare - the best course for a lot of people is to throw themselves on the state, leaving a minority to pay for them as well as themselves. You either have to build up something substantial (pension or other assets) or forget it. The hope is that auto-enrolment will get more people saving for retirement in a pension and reduce cost to the state, even though they will be no better off. Makes you think...
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What I said above was a bit from the hip. But directionally correct I think.
A quick google unearthed this article (fairly lightweight but saying much the same thing) -
goo.gl/9CxDe
How depressing is that? I'm going to ride my bike and get some serotonin and endorphins generated.
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Just make sure that when you retire you won't get a large reduction in your income from when you were working. It's easy to increase your spending to take into account an increase in your income, but it's difficult to reduce your spending to take into account a decrease in your income.
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>>Just make sure that when you retire you won't get a large reduction in your income from when you were working
Not much hope of that!
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>> >>Just make sure that when you retire you won't get a large reduction in your
>> income from when you were working
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>> Not much hope of that!
>>
Perhaps I should have emphasised the word "large".
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My immediate response was to pay off the mortgage. As others have said a bird in the hand etc is worth more as compared to the pension some time in the future and it is the most liberating feeling to know you do not have that debt . It is surprising how quickly the debt comes down with regular overpayments.
You are also not committed to paying regular mortgage overpayments in the same way as you are when making AVC's
Try and find out how from the Building Society how long it would take to pay off the mortgage with regular overpayments of say £750, £1000 or £1500 per month. They should be able to tell you.
I would then go for the pension payments AVC's . I am assuming that you are a 40% taxpayer .Be sure that you claim the extra 20% back from HMRC.
Or why not just split your £1500 a month and £pay £750 per month to each?
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Exactly what I suggested considering. Eggs in one basket and all that.
I could have impoverished myself paying down my £7000 mortgage faster in 1977-83. Inflation soon got rid of it anyway. Maybe not likely to happen again but...similarly, cash savings can be wiped out by inflation, so a mix of cash and equities hedges that a bit, and the pension rules could change for the worse so don't do that at the expense of everything else either.
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>> Apparently once a year I can opt into the company's "Smart Pension" which is an
>> AVP scheme.
What does AVP stand for?
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>> What does AVP stand for?
Additional Voluntary Payments? The Civil Service scheme had/has AVC - additional voluntary contributions. A money purchase defined contribution wotsit to top up the FS scheme. Mainly pitched at late starters rather than those of us who'd been in since school.
The private sector partner in the late 90s was equitable life!!
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Here's an interesting paper about the effect of income changes (which is one of the things which happens when you retire) on happiness. tinyurl.com/8g77c8v
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I would dump the mortgage. A bird in the hand's worth two in the bush.
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I still say pay off the mortgage. I had a final salary pension until earlier this year - it was closed so won't get much I guess after 17 years. Replacement was a bit of an issue for agreements. In the end the company agreed to pay in extra. So I pay in 5% and they will pay 10% as you'd often see.... and on top of that another 10% from the company. So 25% is paid in annually but it's a pension so I'll probably get sod all from it in 25 years. But I don't intend staying on for too many more years.
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Pay more into pension or overpay mortgage? - bathtub tom
