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Pay off the mortgage or buy additional pension?

Discussion in 'Retirement' started by diddydave, Jul 13, 2020.

  1. diddydave

    diddydave Established commenter

    Ivanhoe and PeterQuint like this.
  2. Prim

    Prim Occasional commenter

    I agree and if you consider the piece of mind aspect to doing this sooner rather than later it outweighs the future benefits. Money spent on the mortgage can then be re-invested or saved. We already have a very good scheme that is topped up by a state pension. As I have said before you are only young once, sensible saving and then enjoy yourselves :)
    Lara mfl 05 and PeterQuint like this.
  3. PeterQuint

    PeterQuint Lead commenter

    Mortgage, every time.

    When it’s done it’s done.

    Shove comes to push you can sell up and downsize.
    Rach05, wayside34 and Lara mfl 05 like this.
  4. lindenlea

    lindenlea Star commenter

    I would have guessed pay off the mortgage first. Why pay the interest.
    Marshall and Lara mfl 05 like this.
  5. Lara mfl 05

    Lara mfl 05 Star commenter

    Paying off mortgage every time for me. If you then save the same amount every months your savings will accrue, but offer you more option where to put them.
    Marshall likes this.
  6. Ivanhoe

    Ivanhoe New commenter

    Assuming that CPI mirrors the mortgage interest rate and using Diddydave's data for a 20 year old taking a pension at 60, it looks like the additional interest accrued would be equalised by the additional pension payments in 3 years. If you expect to live beyond 63 then the additional pension is more beneficial purely in monetary terms.
  7. diddydave

    diddydave Established commenter

    Mortgages have tended to be a couple of % higher than CPI over the last 40 years. So to make the comparison I'd look at the mortgage of 4% against the pension of 2%...so more like 10 years for a 20 year old and 30 years for a 50 year old
  8. Ivanhoe

    Ivanhoe New commenter

    I have also not included covering the £8000 payment into the pension - so that would add more years. Thus paying the mortgage off is the better option unless you have a very low interest mortgage and are guaranteed this for the lifetime of the mortgage or you are a 40% tax payer.
  9. diddydave

    diddydave Established commenter

    Thanks for noting the incorrect data on the savings which I have now put right (I hope)...makes a big difference.

    From my calculations (which are not guaranteed) it would, for a mortgage rate of 4% and a CPI of 2% (the gap between them is the average gap from the last 40 years), take between 5 and 8 years for the pension to overtake the mortgage savings. However, once you've paid the money to buy the additional pension you cannot retrieve it and should interest rates jump - particularly the gap between mortgage rates and CPI - it could be a wider gap.

    Note that the widest gap between CPI and mortgage rates since 1980 was nearly 9%.
  10. cornflake

    cornflake Senior commenter

    So, if you are aged 47+ and considering retirement at 55, it's almost definitely better to clear the mortgage? Have I got that right?
  11. diddydave

    diddydave Established commenter

    there's no way to be able to tell that as it depends on the future path of inflation/mortgage rates/legislation/taxation...

    I've also found an error in the costs of additional pension so have upated the presentation.

    My personal opinion is that it is better to clear debt now rather than hope to gain something in the future.
    Also if you go at 55 your additional pension will also be reduced by 18.9%

    However other points to consider:
    1) You could get a fixed rate mortgage for the next 8 years - that removes one variable, current 5/10 year rates are around 3%.
    2) You will have the lump sum in 8 years time that could be used to pay off the mortgage

    As Ivanhoe mentioned it could well be that if you are a 40% tax payer then buying the pension becomes a better option as the £10,000 used to buy the pension would equate to only £6,000 of your mortgage.

    For a 20% tax rate payer the £8,000 paid off a 3% mortgage would save them £2,134 over 8 years.
    For a 40% tax rate payer the £6,000 paid off a 3% mortgage would save them £1,600 over 8 years.

    That £10,000 used to buy additional pension would buy, for a 47 year old, £593 of additional pension (it can't buy that exact figure because you buy it in £250 blocks but for comparison it's easier)

    £593 x 81.1% (for taking it at 55) = £481

    The £481 is taxed @20% (presuming your pension is over the tax-free allowance)
    £481 x 80% = £385

    The time to recoup the lost mortgage savings therefore should be:

    20% tax rate payer now: 2134 / 385 = 5.5 years
    40% tax rate payer now: 1600 / 385 = 4.2 years

    However you still have the £8,000 (or £6,000) to pay off the mortgage - that would take another 21 years!
    cornflake, letap and Lara mfl 05 like this.
  12. diddydave

    diddydave Established commenter

    (and I forgot to note that to be 'fair' there would also be an interest charge on the £8000 over that time)...

    So looking at those numbers I'm fairly confident in saying that paying off the mortgage is better value than additional pension (almost definitely).
  13. lindenlea

    lindenlea Star commenter

  14. stopwatch

    stopwatch Lead commenter

    Mortgage every time. Not only financially more astute, but the knowledge that you own your own house gives great peace of mind.
    Prim and Lara mfl 05 like this.
  15. diddydave

    diddydave Established commenter

    Thank you for the offer, I think that I'm fairly comfortable with my planning and have a reasonable handle on how to proceed.
    Prim, stopwatch and lindenlea like this.
  16. cornflake

    cornflake Senior commenter

    Thanks diddydave! Good to know that what seems sensible, probably is so according to your calculations too!
  17. diddydave

    diddydave Established commenter

    LOL....yes, it did feel a bit like looking into something that feels so bleeding obvious that it shouldn't need to be done...though of course, if I'd taken my mortgage and invested it all in Microsoft back in the 80s I may have been better off...

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