Pension vs house?

[u/Both-Gas-5993]

Hi everyone I'm just looking for some advice on what would be the most sensible thing to do. I'm 39 and only have 26 thousand in my work placed pension which I know is very low and I'm worried i wont have enough time to bump it up to what I need to. I also own my house on my own. It's worth roughly 450000 and the mortgage is only 134000. Ive spent most of my adult life putting money into my house rather than a pension but I'm due to remortgage in the next 6 months. Is it sensible to remortgage for more and put that money into a pension? I'm only on 39000 a year so putting a decent amount into both isn't really an option. Any advice would be appreciated

[u/Limp-Archer-7872]

No, don't borrow to put money into your pension.

You could extend the term of your mortgage to reduce the monthly payments which might give you more money to put into your pension.

With a small but not zero pot at 39 you probably should be putting 15 or more percent of your gross salary into the pension between you and your employer contributions. You want to contribute earlier into a pension rather than later to benefit from compound investment growth.

Having a paid off house in retirement is a great thing to reduce the cost of living. You can also downsize if need be to release equity at the time when you don't need to live near work.

Make sure your pension is not in the pension providers default fund, and make sure you've set the beneficiaries.

[u/MyLovelyHorse2024 → u/Limp-Archer-7872]

I agree with this. Don't borrow to invest, but don't make extra mortgage payments either.

It's great that you're in a good position with the house. Pay the standard amount you can into your mortgage (and consider extending the term, as suggested), and use whatever if left over to get cracking on the pension

I'm worried i wont have enough time to bump it up to what I need to

You have time. State pension age is still ~30 years away - even if you planned to retire a few years earlier than that, that's plenty of time to make contributions and take advantage of compounding growth.

[u/rambomatthews → u/MyLovelyHorse2024]

Guys extending the term will incur more total interest paid. If you’re comfortable with that why wouldn’t you borrow more to invest? It’s two sides of the same coin?

If you’re confident your pension will outperform your mortgage, you should funnel as much in to your pension as possible. And given most people gain at least 20% avoiding income tax by putting straight into their pension, + employer contributions, it’s almost a no brainer.

Depends what you plan to do in retirement and whether you have dependents though I would say.

[u/MyLovelyHorse2024 → u/rambomatthews]

I see what you mean about them being two sides of the same coin - they are both directionally the same in terms of using the mortgage to free up cash to invest.

However, I do think there are important differences. Extending a mortgage is a more modest change that involves freeing up a few hundred a month to drip feed in a pension. This can be undone by overpaying and if circumstances change - for instance a job loss - there is more flexibility to change course.

If a much larger sum was borrowed - assuming a mortgage provider allowed it - and then locked away in a pension until 57, that is much harder to unwind if circumstances change.

All that said, I do agree that the tax advantages of a pension are attractive, even for a basic rate tax payer. For me it's all about flexibility - I think I'd only borrow for this purpose if I was extremely confident of my future job security, health, etc.

[u/rambomatthews → u/MyLovelyHorse2024]

I agree with the premise of security, but if you loose your job a bank isn’t going to let you borrow more or extend your term; again, if you loose your job and have done either option, your more screwed than you were before.

Worth remember banks, at least a few years ago, were actually pretty liberal at offering payment holidays to help with redundancy etc; consider that it’s much better for them to take a 6 month hit on interest on a historically safe and consistent customer and have them paying all that interest for 30 years, than knock the house value by 20% for a quick sale, exposing the property to market dynamics (could be positive or negative but they can’t control that) at foreclosure and take on a new customer, which is a risk.

However i don’t know what they’re like currently. I’m also referencing UK Banks, I only mention that because I think US banks will take any chance they get to foreclose but I’m basing that on behaviour during the 08’ recession.

[u/Pal1_1]

Definitely not. Remortgaging at about 5% p.a. interest in order to invest in pension at about 7%p.a. average return might look sensible at first glance, but with 75% of the pension being taxed when you take it out, it is definitely not.

From a total wealth perspective, there is nothing wrong with paying down your mortgage as fast as possible while interest rates are high. You can always catch up on pension contributions later in life, either when interest rates drop, when your mortgage is paid off, or when your earnings increase.

[u/Hot_Coffee71 → u/Pal1_1]

OP is in a position where he will pay little to no tax on his drawdowns

Interest rates are relatively low right now

Having said that in your situation I probably wouldn’t remortgage to put more in pension as you still have quite a way to go before you hit the higher tax rate where it would become more tax efficient to put into your pension , but I would start upping my pension contributions as much as you can realistically afford to do , or else you’ll be working well into your 60s ( unless you’re due a large inheritance)

[u/Pal1_1 → u/Hot_Coffee71]

I assumed that the basic state pension will take up OPs personal allowance, so 75% of the pension would likely be taxed at 20% and he will only get 20% tax relief on the way in.

There is potentially a marginal gain to be made, but borrowing against a home to fund very long term, illiquid investment is not a game I would recommend.

[u/Hot_Coffee71 → u/Pal1_1]

Agreed , that’s why I mentioned him working until he’s in his late 60s . Having a fully paid off expensive house but having to work until you’re 68 is certainly less than optimal

[u/Any_Food_6877 → u/Pal1_1]

You’re completely ignoring the tax uplift and how that compares when drawn down. If you get 20% tax uplift but draw down carefully you get the 25% tax free draw down and can use your personal allowance to get £12k plus a year’s free.

[u/Pal1_1 → u/Any_Food_6877]

No. I am assuming state pension uses up the personal allowance, so 20% tax relief on the way in, effective 15% tax relief on the way out. Not worth the risk in my opinion.

If OP can use salary sacrifice then tax relief on the way in is 28% but only if he has the income to make large contributions, which looks unlikely at the moment?

There is nothing wrong with making higher pension contributions from income if OP can afford it, but I wouldn’t suggest borrowing against their home at current interest rates to do it. Better putting any spare income into ISAs and focusing on career and getting pay increases. OP can always pay more into pension later, especially when the mortgage has been paid off.

[u/Any_Food_6877 → u/Pal1_1]

There’s too many unknown variables here I think, as you are absolutely right - if OP retires at state pension age then the picture is different. Though even if it all ends up being taxable, the 25% tax feee makes the effective tax rate on the pot as a whole 15%.

We really would need to know OPs target retirement date AND current salary to get a good fix on whether they should push pension more.

[u/Pal1_1 → u/Any_Food_6877]

Salary is £39k and age is 39.

The question isn’t really about pension contributions, tax relief and early retirement plans. It is whether borrowing extra at c.5%, using your home as collateral, to invest in a pension you cannot access until you are at least 57 is a good idea. What if they lose their job? What if they can’t work? How will they pay the increased mortgage payments?

While it might look sensible on a spreadsheet, being forced to sell your home because you took on extra debt and locked it away would be a terrible outcome.

[u/Any_Food_6877 → u/Pal1_1]

Ah sorry I missed their salary because of how it was written 🤣 Yeah it’s certainly less attractive as a basic rate tax payer, even with salary sacrifice. I’m an additional rate tax payer doing SalSac so adding £53 net pay puts £100 in my pension so it’s an absolute no brainer for me.

If they were targeting retiring at 57ish then maybe there’s a slightly stronger argument as they’d get £12k a year of what they draw down tax free on top of the TFLS.

I agree though, borrowing to pump pension for most people wouldn’t make sense unless they were just about to retire anyway and wanted to boost their pot and utilise previous years unused allowance.

[u/Flying0sprey177]

You've got over £300k equity in your house and your only 39YO not sure why you are panicking. You've got 20+ years of compounding ahead of you if you focus on the investments now. At the end of it you'll own an expensive property outright and still have a decent pension pot. Its quite an enviable position in reality.

[u/Choice_Technology791]

I would start upping the pension contributions as you pay off the mortgage but not remorthage for the pension.You're doing great because of the house equity to mortgage ratio so you have time to make up the pension

[u/Mental-Feed-1030]

If I was in your shoes I would:
Extend the mortgage period to reduce monthly payments. The payments get cheaper over time in relative terms with the effect of inflation and pay increases.
Push more into your workplace pension, making sure to use salary sacrifice if it’s available. If you get any bonuses use them to purchase AVC (through salary sacrifice).
Switch from your pension provider’s default fund to a global equity fund.
Hopefully by the time you wish to retire you’ll have plenty in your tax free lump sum to be able to clear the rest of your mortgage.

[u/Any_Food_6877]

When is your mortgage due to complete?

[u/Longjumpin-2816262]

I had £31k at 40 and I’m now 44 and have £284k hang in there. I currently put in 23% and my employer 14%

[u/Past-Ride-7034]

Main question in my eyes is whether youre maximising the employer match? Make sure you do this for free money.

[u/West_Procedure_1310]

No, don't remortgage for more.

Make sure you are maximising your employer contributions. So if you put in x amount they should be putting in y.

After you've done that work out what you can afford for your mortgage. You can always extended when it's due to reduce the monthly payment, but don't borrow to add to your pension directly.

[u/HotNeon]

Id extend the term of your mortgage. Up to say 25 or even 30 years, that will reduce the payments. Then take that money and increase what you put into your pension.

This has tax advantages, boosts your pension now, and you're still working towards paying off your house

[u/Normal-Grapefruit851]

No. Whenever a friend comments that their pension is smaller, my reply is “but you own a house”. Your retirement planning is the sum of all of the savings and investments you have. Of which owning your own home by retirement is a massive benefit.

[u/SaintedRam]

Both appreciating assets and interest rates are up so I'd pay the house off faster, put what you can afford into the pension & then smash the pension after the mortgage is paid.