Auto enrollment pension vs Overpayment on Mortgage

A question about : Auto enrollment pension vs Overpayment on Mortgage

Hi,

Just a quick one if someone could help me with some questions

I have a 150k mortgage outstanding which I pay ~Ј800 on a month and I am 37 currently with 23 years left on the mortgage.

1. If I choose to opt out of the auto enrolment pension and put that money instead in to overpayment I assume that the pension is still better? Due to the company contribution?

2. Pensions do not allow for early withdrawal correct? Say for example if I get a terminal disease tomorrow I cannot touch the money?

3. The company contributions will most companies this year who have to put it in place see this as part of a pay increase? Or does it come from some other tax relief from the chancellor so doesn't cost anything? I am just wondering if I opt out if I can then justify an increase or the contribution amount from the company? (being cheeky!)

Please bear in mind I don't like pensions due to an innate mistrust of financial institutions. If the bank collapses then I still live in my house, whereas my pension is just numbers on a computer screen!

Thanks in advance,

Richard

Best answers:

• Hi,
  Thanks for the answers it is as I expected.
  "A rather foolish position to take." - were you around in 2008?
  "No its not. The pension is just a tax wrapper that contains assets. Those assets have a value just as your house does." - those assets being shares, those shares are subject to market forces and collapses the same as anything in the free market. However I don't want to get into a debate here as I am no expert except to say a share in a mine in Africa is not the same as a roof over my head!
  Richard
• And what has that got to do with the pension tax wrapper? - it was merely an observation that financial institutions aren't exactly infallible
  Shares are invested are they not? Those investments can be in many things hence a rather arbitrary example I set it could just as easily be a software company in the UK
  A pension will also not give me an income it will allow me to purchase an annuity which will give me an income. I could do the same by selling the property or paying off my mortgage and then keep on paying that mortgage payment into a savings vehicle once it is done with.
  Anyway getting totally off point. You have answered my original questions thanks, it was more about them mathematics of it all.
• It is truly impossible to argue with someone so entrenched so I am frankly not going to even bother, I just wanted advice not an argument/discussion.
  Thanks you have given me a nice reminder of why I never really bother with forums
• I'm in the same position as the original poster; currently overpaying mortgage rather than contributing to pension and haven't yet decided how to proceed.
  Quote:
• "It has a benefit but one that is not as good as a pension with employer contribution."
  Which is why both of us came on to the board to check out the financial differences.
  Neither of us have said we won't have savings for retirement, we just wanted to know whether paying the mortgage off first and therefore saving the interest payments BEFORE saving money was a better use of what excess cash we currently have.
  I was hoping someone would give me a financial comparison and so on rather than the same spiel the government as most posters are putting up, I wanted to see hard figures and so on.
  And I would hardly call myself entrenched given that I am here to get advice, which I will probably be following coincidentally!
• So for example, now this is where I need the advice to see if this is all correct
  23 years left on a mortgage with ~150k left to pay and ~Ј800 per month
  Assuming a wage of 40k per annum
  Then the pension contribution for my part (0.5%) in the future is Ј167 per month
  If i put that Ј167 towards overpayment then using the calculate on this site then I shave off 5 years 8 months off the mortgage term.
  Now if I do a simplistic sum where I add the Ј167 + Ј800 over that period that turns out to be Ј65756 saved in that period
  For a pension pot assuming a start at 5% now then how much would that net me in the 23 years? Better than that amount?
• ok, though i'd put it slightly differently ...
  suppose the choice is to contribute 5% of salary to a pension, which also attracts 3% employer contributions (since those will be the minimum amounts for auto-enrolment pensions, after starting with lower figures), or to overpay the mortgage.
  if you overpay the mortgage, you first have to pay (at least) 20% tax on the Ј167, so the overpayment is only Ј133, which shortens the mortgage by 4 years 9 months.
  or, including employer contributions, you can have Ј267 paid into the pension each month.
  so you could either pay the mortgage off over 23 years, while you have Ј267 a month going into your pension over the same 23 years - total contributions of Ј73,600. and investment returns would probably make the pension pot larger. supposing quite low investment returns of 3%, a compound interest calculator ( https://www.candidmoney.com/calculato...uch-calculator ) says the pot would be Ј105,664.
  or you could pay the mortgage off over the next 18 years 3 months, while opting out of the pension. that would leave you 4 years 9 months to try to catch up. so suppose you join the pension at this point, and for the last few years, you pay in not just the 5% + 3% employer contributions, but you increase your employee contributions using the entire Ј800 which you no longer need to pay on the mortgage. with 20% tax relief, that means that you now have, not Ј267, but Ј1,267, going into your pension every month! after 4 years 9 months, that makes total contributions of Ј72,200. however, the money has been invested for a much shorter time, so the same assumption of 3% returns would make the pension pot only Ј77,632.
  bear in mind that higher investment returns would make the difference greater. 3% is a rather low assumption. it's a bit less than the mortgage rate (of 3.6%, according the overpayment calculator). i would expect investment returns to beat mortgage rates in the long run, though they may not.
  the decisive factor is whether you throw away the employer contributions for many years, or use them.