Home ownership and comfortable retirement are two iconic financial goals - which should you aim to smash first? If you're keen to invest extra money in your pension or mortgage, start here
Published on 29 Oct 2021Last updated on 17 Mar 20225 minute read
Written by Frances Bruce
You’ve got some extra money and you’re keen to invest it wisely. Extra mortgage repayments and topping up your pension contributions are excellent choices, yet you need to be aware of how your extra payments will play out so you can tailor your plans for the results you want.
Our straightforward summary sets out the pros and cons for each so you can make choices that work for your circumstances.
It all sounds so simple – let’s explore.
Check whether you can pay off more of your mortgage by switching to a better deal. If you’re on an interest only mortgage, switching to a mortgage that pays the capital and interest will mean you’ve cleared the loan by the end of the term.
The debt associated with a mortgage can cause anxiety, knowing the bank owns more of your home than you do. One solution could be focussing on clearing the debt to restore wellbeing to a healthier place. Yet it’s just as important to consider how effective extra mortgage payments will be in relation to what you get for your money.
The interest you pay on your mortgage is influenced by the Bank of England base rate, which increased from 0.5% (February 2022) to 0.75% (March 2022).
This increase is still a very long way away from the highs of previous decades. Think of the 1970s and the whopping Bank Rate of 17%. Or the early 1990s when the Bank Rate average 15%. Imagine trying to deal with interest rate hikes like that!
When you invest in your pension your money attracts potential tax benefits, employer contributions and investment opportunities. That sounds great, but what does it mean for your money?
Extra pension contributions can earn you free money. The important point is the Government actually tops up the money you pay into a pension – by 20% - it’s free money! If you’re a higher rate taxpayer, you get another 20% back on your tax return and if you are an additional rate taxpayer you receive 25%. You don’t get free money for overpaying your mortgage.
Understanding the way tax relates to your pension is crucial to goal smashing success. Our excellent three-minute read sets out how generous tax incentives reward your pension pot top ups.
It’s not just the Government who steps up to help when we top up our pensions. Employers usually match extra pension contributions up to a certain amount.
For example, if you pay 6% into your pension pot you could benefit from your employer matching your 6% contribution in addition to the tax relief benefit you receive - another return on your investment you wouldn’t get if you paid extra on your mortgage.
Ask your employer if you can make extra pension contributions via salary sacrifice. This means you sacrifice a fixed amount of your salary in return for a gross employer pension contribution.
Both you and your employer save on your National Insurance contributions as well as Income Tax. While salary sacrifice comes with some considerations and restrictions it’s regarded as an efficient way to contribute to your pension and make tax and National Insurance savings at the same time.
Remember: a savvy financial habit is making sure you have emergency funds tucked away and accessible, because if you choose to invest your extra money in your pension your money is locked away until you are 55.
Your pension is a long-term investment, and your pension savings are invested in the financial markets.
Try not to get caught out by thinking top ups to your pension fund “don’t work”. Extra pension contributions absolutely can work thanks to the wonders of compounding (the returns you earn on your returns). We’ve set out how extra pension contributions and compounding work together to deliver results, here.
The earlier you invest in your pension - and the more you invest with extra payments when you can - the more opportunity you give your money to grow so it can look after you later.
At Bestinvest we help people look after their money - because when you’re saving for the rest of your life, it helps to have a straight-talking expert with you every step of the way.
Our Best SIPP* delivers freedom and control over your pension investments – and a great range of investments to choose from. It’s easy to open an account online, set up monthly contributions or pay in lump sums. And you can transfer your old workplace or personal pensions into the Best SIPP too.
If you’d like to chat, make an appointment for a free pension review and one of our team members will give you a call.
We offer excellent ISAs and investment accounts if you’re keen to build up a separate nest egg - independent of your pension or mortgage.