Stop Pension - Pay Mortgage

ginger_hammer

Hi,

My Fiancé and I were discussing the best way to use our finances in regards to pensions and the mortgage. Here is what we were thinking:

I (35yo) have a pension for the last 8.5 years that will be more than adequate by the time we retire to cover our living costs.

She (same age-ish) only just started paying (5 months) into her own pension. We have decided to stop this and use the payments into the mortgage instead. For some ballpark figures, say she pays in roughly 200 quid per month, the value of the pension at 65 years old is actually less than what we would save in mortgage interest payments by putting that 200 quid into extra mortgage payments. Also we would benefit from paying the mortgage earlier, potentially 10 years off it, giving us a medium term investment instead of 2x long terms ones.

We considered all possible scenarios (interest rates/ECB/markets/death/divorce/etc) and still couldn't find a reason not to do this.

Are we missing something?? Obviously she would forgo the employer contributions, but as previously mentioned, it actually gets her less money for her money over the duration, plus she would have to live to 75 to get back the money in the pension she would have paid in.
Also the mortgage is 4%, whereas a pension is doing well if it returns 2%. Plus when we pay off the mortgage we will have all that capital if we want to sell, and don't have to wait until 65 to get any of our money back. Current market conditions also do not bode well for pension investments, even though house prices can crash also I would prefer to own the roof over my head than a potential pension return, provided we even get to that age.

Do banks have any options when you want to increase the mortgage repayments? Such as paying off interest vs capital? Not sure how that bit works?

Thanks for any advice!

Colm R

Interesting idea. What I can think of:

1. Does your pension die with you? For example, if you die at 66 but she lives on, does she just get a lump sum or can she continue to claim it back.

2. You mentioned that she would have to live to 75 to get what she put into it back. Would you not hope to live to 75 and then some more?

I guess, the question you have to ask yourself, is what level of income do you want from the day you stop working to the day you die. Yes, you might be able to sell your house but how long will that money last?

ginger_hammer

Hi, thanks for the response

1. My pension will all go to her if I die, tax free if I remember the small print correctly (might be wrong on that).

2. Well yes the pension would continue paying after 75 but what I was meaning is that to get back the money she would be paying in from now till 65, she would have to at the very least live until 75+ to get her own money back that she would have been paying in all the years from now till retirement. Hence the thought to pay the biggest debt first i.e. the mortgage, any leave my pension for us when we hit 65.
Although as I understand it that 65 age is only for public pension, we could take my private one earlier if it made financial sense.

phormium

Can't answer the pension bit but re the mortgage if you pay extra it comes off the combined capital plus interest. There are not two separate pots as such, the balance changes every month (or quarterly depending on bank) going up when the interest is added and going down when the repayments come in. If extra repayments come in then the amount of interest calculated reduces because the balance owing is less and the total balance reduces quicker as less interest is being added every month so the total outstanding is reducing at a faster pace.

ginger_hammer

Ah ok thanks, so the mortgage is just one big pot - the amount borrowed plus total interest.

It's crazy looking at the amount of interest to be paid to the bank (after income tax) so want to minimise this as much as possible. On svr at 4%.

whatnext

Did you think about the tax benefits on the pension contributions? Surely this would far out weigh the 4% odd mortgage interest saving?

I'm no expert but that's my initial thought

phormium

It's not total interest if you mean the whole lot for the full term, interest is calculated on a daily basis on the outstanding balance and added to the account either monthly or quarterly. You don't get charged interest for the future as such, it's like rent, you only pay every day you have the use of their money. If you paid off the mortgage tomorrow you would only pay interest up until tomorrow, you would not be charged any of the future interest for the remainder of the term.

It's only huge in the beginning because the amount borrowed is at it's largest, as the amount decreases so does the interest amount.

tomfoolery60

I would think carefully about giving up an employer's match - if you put in money and they match that it is an immediate 100% gain before tax saving. Factor in tax 40% and you're over 200% (costs you net 60 and you'll get 100 say, matched by ER => 200 for a cost of 60).

jonnybravo

tomfoolery60 wrote: »

I would think carefully about giving up an employer's match - if you put in money and they match that it is an immediate 100% gain before tax saving. Factor in tax 40% and you're over 200% (costs you net 60 and you'll get 100 say, matched by ER => 200 for a cost of 60).

Agree with tomfoolery60 I'd be reluctant to give up the employers contributions. Long term them plus the tax saving you make pensions are very lucrative.

crossvilla

Say you put in €100 and your employer puts ìn €100 to a pension i. e. €200. The net contribution you make is €60 because of the tax saving (assuming higher rate tax payer). That's €60 for €200 into a pension. Interest looks big on a mortgage but it is spread out over a long period and they rarely last the term anyway.

ginger_hammer

Thanks for the responses.

One thing we though last night is that the payment into her pension is tax free, so in the rough example if she now pays 200 quid into the pension, when she stops that payment it won't be 200 quid into her take home pay, as will be taxed at roundabout 50%. So thats a +1 for pension.

But I think the point still remains, in that why should we both pay into pots that we can't get for the next 30 years (approx) while maxing the interest payments on the mortgage (status quo), whereas we could pay into 1 pension and hammer the mortgage in the short term to reduce the principle as much as we can.

I'm going to do some spreadsheeting and try and get into the detail over the weekend. Using that extra mortgage payment calculator online, if we paid 400 quid extra into the mortgage, it would reduce 10 years (from 30) and we would save over 80k in pure interest. This is what is causing me to investigate this.

jonnybravo

The €400 is Net pay - if you put this into your pension it would equate to c.€700 into your pension (because of the tax benefit). If your employer matched that it would be €1,400 per month into your Pension. €400 against your mortgage or €1,400 into your pension - that's a no brainer. Can use similar examples for €200 against your mortgage would equate to c.€350 into your pension (€700 per month if your employer matched it).


The reason you put it into the pension (even though you can't get access to it for 30 years) is that the compound interest on the amount put into the pension should ramp up the amount in the pension pot (similar to the compound interest on your mortgage but in your favor this time). Long term returns on pensions should be above 2% - if that is what your pension has been performing at I'd have a look at it with a qualified financial advisor.

An option might be if you can afford it is to continue putting in money into the pension up to the minimum amount to get the full employers contribution and use any other excess funds against the mortgage.

yammagamma

your forgetting the cost of running the pension ,ie the pension fund managers take often 6% of every euro that goes in every month then an yearly 1% of total in your pension fund every year and thats not to say they wont loose half of it either but will still charge the fees also the government levy,also there are limits to amount of your wages at your age that can be put into a pension tax free the younger you are the less you can put in also most employeers have a upper limit of amount they will only match also most companies are getting out of DB pensions defined benefit if you are on 1 and switching to DC defined contributions so if you think you are on the pigs back with your DB pension be careful,,yea i used karls mortgage calc there is even a app now handy to look at that interest your paying,ie renting the house really off the bank and here is 2 things loads dont think about. paying off extra of mortgage means amount needed to be insured is less on your mortgage life protection so cheaper premiums but you have to reapply also your LTV will be coming down so you should shop around for a better LTV variable rate either from your existing lender or another lender and most give better deals to new customers and pay legal/give lump sums i myself saved 0.8% variable rate doing this also remember the TRS tax relief at source ie interest relief on your interest from revenue could be running out soon if you have it so get that capital down..

Henry Ford III

It's all to do with the net cost I'd suggest.

An employer pension as detailed above might mean a net contribution of €60 yielding a gross contribution of €200. That's 333%!!!!! I'm ignoring growth and charges completely here.

Your mortgage costs 4%.

There's really no comparison. I can't see how paying off a mortgage early can net you a return of any greater than the cost of the interest saved.

To the OP - 8.5 years contributions to age 35 won't cover a hell of a lot when you reach retirement. Wage inflation and CPI increses will see to that.

Market conditions are hard to call. There has been strong returns on equities over the last couple of years, and there's some scaremongering going on currently. As always over the longer term equities will tend to outperform all other asset classes.

You've ignored any tax free lump sum on retirement - up to 150% of salary.

Your pension won't all go to your spouse. If you die in service 4 x salary is the maximum lump sum payable. If you die after retirement an annuity will normally cease, but it may have a guaranteed period (so it's payable regardless of you being alive or other wise) of up to 10 years, although 5 years is more normal. The maximum residual annuity payable to a surviving spouse is 2/3 of the existing annuity.

You may have ARF options, but I won't get into those here as they are complex.

I really think you should rethink this, and get proper advice.

ginger_hammer

Thanks for the input, I'm going to postpone the decision a while.

I'm still not convinced that as a couple having a pension each while paying minimum on mortgage is the best approach. Having a big pot when (if) we reach 65-67 while paying out 200k+ interest over the mortgage term does not make sense. Why should we both save into a pension for 30 more years when there is massive interest coming out of mortgage (dead money that we can save on). Surely pay off debt before saving. Or a combination as I originally suggested to get best of both.

Will crunch some more numbers.

yammagamma

pension age moves upto 68 in 2028 for yea due to your age when they brought in the changes. also dont forget your pension is taxable income in all those years to come and who knows what tax rate it will be then ,also your pension is taken into account for a nursing home place ie the so called fair deal and they will take most of it off you to pay for the nursing home, and remember women live avg 7 years longer then us men we last until about 80 so that will be about 12 years for you from retirement age of 68 ill leave you on that chearful note..

Mrs OBumble

I would suggest reducing the amount paid into your pension, rather than stopping your fiance's, and using that to increase the mortgage.

If you happen to split up, then it's better for the woman if she has a pension plan in her own right rather than relying on the mans. Yes, the court would be involved in a fair distribution - but this would involve legal costs.

ginger_hammer

Yes that is certainly some middle ground - we could keep both pensions going and pay a small amount more off the mortgage instead. I think we are both paying the minimum x% of our wages into the pensions anyway.

Ace2007

Your saying that your pension which has been going for 8.5 years, will be more than adequate by the time we retire to cover our living costs. - How you have come to this conclusion i don't know honestly know. It is the DB or DC pension, what about inflation?

Also, your making a lot of assumptions on the value of your wife's pension in 30 years time.
for starters, she is paying in roughly 200 a month, which implies it's a % as oppose to a monetary amount, therefore as her salary goes up, her contributions will go up along with the employer contributions.

Assuming no growth and no salary increases over 30 years, and the company is matching the 200 euro contribution, the fund value at age 65 will be 144k. Add in some form of salary inflation of say 3%, and the fund value be approx. 230k. Higher returns are possible.

Just one other point to note, there is every chance that the state pension as we know it won't be there when you retire.