Should I increase my mortgage payments or pension contributions? How to choose where to invest

As you progress through midlife, you may be beginning to think about how your financial future will look.

If you have children, they may be leaving home in the coming years, signalling a shift in your lifestyle – and in line with this change, you could be reviewing your retirement options too. No matter your situation, it is likely that you are entering a new chapter.

One dilemma that many of our clients face when they reach this age is: “how can I prioritise my many financial responsibilities?”

Often, the same two options arise – increasing pension contributions before retirement, or prioritising paying off a mortgage loan over the same time frame.

Both your pension and your mortgage are critical components that could have an impact on your future quality of life, so it’s understandable if you are torn between investing more heavily in one or the other.

Keep reading to find out the pros and cons of prioritising mortgage payments over pension contributions, or vice versa, as you approach retirement.

Why you could consider prioritising mortgage payments in the coming few years

Being debt-free by the time you retire is often a goal for many homeowners.

Indeed, research published by MoneyAge has found that almost half of over-55s who still have mortgage debt are “worried about rising rates, continuing to meet repayments, and how to pay their loans off in full”.

So, for many people, paying off any remaining mortgage debt could be a priority in your final few career years. If your income has increased and you have a surplus you wish to spend wisely, allocating these funds towards repaying your mortgage could be helpful.

Doing so may:

· Help you pay off your mortgage loan more quickly

· Significantly reduce your living costs in retirement

· Offer huge peace of mind in later life

· Enable you to pass an entire property down to the next generation when you die.

Plus, while interest rates remain high, upping your mortgage payments could help you repay your mortgage more quickly.

The below table shows how increasing your payments in line with a rising interest rate could shorten your repayment timeline.

 Source: Halifax

Remember: overpaying your mortgage beyond the terms of your agreement could incur an early repayment charge (ERC). So, it could be wise to consult your Kellands financial planner before deciding to increase your mortgage expenditure in the coming few years.

Key reasons to increase your pension contributions in your final career years

If your mortgage is set to be paid off quite easily in the next few years, increasing your pension contributions could be a more beneficial way to set yourself up for the future.

This could be especially beneficial in the 2023/24 tax year, because as we discuss in our recent insights on delaying your retirement, the chancellor has ushered in two key tax-efficient pension saving opportunities.

Firstly, in his 2023 spring Budget, Jeremy Hunt removed the Lifetime Allowance (LTA) tax charge altogether. The LTA previously limited an individual’s tax-efficient pension wealth to £1,073,100, after which a tax charge of up to 55% could be applied upon withdrawal.

In addition, the chancellor pushed the Annual Allowance up from £40,000 to £60,000 for most earners. This means you can potentially save up to £60,000 or your total earnings, whichever is lower, into your pension each year while receiving tax relief on these contributions.

So, if you are looking to build your financial future smartly, opting to increase your pension contributions could be very constructive at the moment. The removal of the LTA tax charge could mean that you can save an unlimited amount without receiving an extra tax penalty – and the Annual Allowance provides up to £60,000 of tax-efficient contribution opportunities each year.

What’s more, building up your pension while you’re still working could have huge inheritance benefits.

Your pension does not usually form part of your estate for Inheritance Tax (IHT) purposes, meaning that you could pass any remaining pension wealth to the next generation without incurring an IHT charge when you die – unlike property, which may incur an IHT bill for some families.

Despite these IHT advantages, this doesn’t mean that prioritising pension contributions above mortgage repayments will be right for your situation. Discussing your options with a Kellands financial planner, who can look at your whole financial plan and advise accordingly, could provide you with a more accurate picture.

Aligning your mortgage and pension circumstances with your overall financial plan can help you make an informed choice

When choosing where to allocate funds between two key assets – your pension and your property – there are many factors at play.

The potential for return on investment, IHT elements, and the effect of these decisions on your future retirement income are all important aspects that you should consider carefully.

Working with a Kellands financial planner can help you here. Not only can we align your mortgage and pension strategies with your wider financial plan, but we can advise on:

· The potential tax implications of increasing your mortgage payments or pension contributions

· Which option might place your finances in more favourable conditions for retirement

· The time frame over which you want to increase your expenditure in these areas.

You’re never alone in making big financial decisions – we’re here for you every step of the way.

To discuss your mortgage, pension, or any other financial matter, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let (pure) and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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