Should spare cash be used to reduce mortgage debt or increase pension savings?

By Jonathan Watts-Lay, Director, WEALTH at work

“When it comes to securing our financial future there are often a number of decisions that must be made. A financial dilemma that many people consider is whether to prioritise reducing their mortgage debt or whether to increase the amount they pay into their workplace pension. However, there are many considerations to be aware of.

There are many benefits to saving more into your pension, including tax relief and the benefit of long-term compound growth, especially if your employer will match your payments. Generally, if the investment growth you are likely to get is more than the interest rate on your mortgage, then it might be a better idea to pay into your pension. This is especially true if you are a higher rate tax payer, and if your employer matches additional pension contributions, but individuals should make sure that they are not likely to exceed any pension tax allowances.

On the other side of the coin, when mortgage rates were low, increasing mortgage repayments may have been less attractive than it is today. Many people are now approaching the end of fixed rate mortgage deals, so they should review any decision made previously.

However, this decision isn’t just about financial returns. For many, there are other benefits to paying off their mortgage early, such as the freedom that comes with knowing that you own your home, especially if you are worried about job security, or health. It also depends on your attitude to risk. Investment performance is not guaranteed, and if there is not a lot of difference in the interest rate on your mortgage and investment growth, some people may prefer the peace of mind which comes with paying off their mortgage.

Also, for those with lower fixed rate mortgage deals that are coming to an end, overpaying on your mortgage before you have to renew at a higher rate could be a good idea. This is especially true if you are going to struggle to pay the new higher monthly rate, as you may be able to secure a better deal by paying more off in advance. Individuals should also be aware that when overpaying on a mortgage, this money could always be accessed again when you come to negotiate your mortgage deal. But when paying into a pension, this is only generally accessible from age 55.

In reality, all of us are different, and there are many aspects to consider before deciding what is best for you beyond interest rates and investment growth. A lot depends on your attitude to risk, financial situation, and need for financial security. In fact, some people will decide to hedge their bets and do both.

Many employers offer financial education in the workplace, to help their staff to understand their finances so they are better prepared to make decisions like these. Speak to your employer to find out what is available.”

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