Pension vs S&S ISA vs mortgage overpayments
Hey, I'm new here so I hope I'm not breaking any rules =)
I (28M) am earning £42k. I have £25k in emergency savings/day-to-day fund, £20k in a Vanguard S&S ISA, and three workplace pensions with £2k-3k in each. I have £195k left on my mortgage.
After mortgage/bills/food etc I usually have £800-£1000 to put away each month. At the minute I'm putting £600 into the ISA, £250 to overpay the mortgage, and anything left over just hangs out in my bank account.
I'm worried I haven't been prioritising my pension enough (I and my employer are making the minimum contributions but that's it). My logic has been that I'll get the benefit of the mortgage overpayments within a couple of years when we sell the house and upsize, and I'll get the benefit of the ISA contributions probably within the next 5-10 years, as opposed to in 40 years for the pension.
Is that a terrible idea? Should I start up a SIPP and cut back on the ISA/mortgage payments? I'm only just starting to properly get to grips with my finances so any guidance would be much appreciated!
Posted Dec 14, 2020, 9:44 AM UTC
The ISA is luxury, to an extent. You are paying for flexibility (to access it earlier) with the ISA over a pension, as the latter is a better financial decision considering you can take the 25% tax free, and some portion under your personal allowance without tax. Obviously necessary for shorter term goals, but just sounds like your short term v long term balance is off, personally.
The mortgage needs paying whatever, and that value can of course change, but clearing that outgoing by the time you retire makes sense. Does it need to be done before? Well, probably a luxury again, unless rates rise. As it stands, you will get more gain over a longer period with investing the money somewhere. There's an emotional aspect to paying down a mortgage though which can't really be quantified.
Your pension needs more attention. As for whether you up that or open a SIPP depends on the current arrangement (salary sacrifice, employer matches, fees associated with the provider, fund options)
!Thanks for your insightful comment! My employment contract doesn't have any bells and whistles like salary sacrifice or employer matching (above the minimum 3%) and my pension is with Nest, which has fairly high fees. I think I will probably cut back on the ISA and start a SIPP with Vanguard. Long-term I get that overpaying the mortgage isn't great, but my reasoning is that if I have a little more equity in my current house, I can afford a slightly nicer place when I move within the next couple of years.
Yep agreed, a SIPP sounds like a good option then.
Mortgage-wise it's mixed... You can of course just add straight cash to your purchase for the same effect at the point of your next purchase, rather than tie it up from the get go. It doesn't make any difference whether it's in the house already or not. What matters is what it is 'doing' in the period running up to it.
Mostly depends on timelines here but this is where money in the ISA can be useful. If you don't fill your allowance each year then in effect you can add what you'd put into the mortgage into the ISA instead. So long as it's beating what your mortgage was if you take it out then you've got a bit more out of that money than what you saved on the mortgage. The obvious risk is your mortgage rate is guaranteed, and your returns aren't (certainly where timescale becomes important), but then right now we are in a market where equities are booming and borrowing is at a low. Wouldn't be too worried anyway on the mortgage front, certainly give the pension some love though!
The one reason to prioritise mortgage over payments is where you are in a higher LTV ratio bracket, and by over paying you will be in a lower bracket when you come to re-mortgage (move). In that scenario it would be well worth over paying the mortgage.
What LTV are you at currently?
!Thanks for your comment. I'm currently at 54% LTV. I'm beginning to understand that mortgage overpayments are not a good use for my extra cash - thankfully I've only been doing it for a few months so not much lost! My logic was that the interest I could be saving on my mortgage was more than the money would get sitting in a bank account, but it might be better to bung it into a SIPP instead and just make withdrawals from my ISA if I need to when I move.
Investing or overpaying the mortgage is a psychological personal preference, and whilst from a pure mathematical perspective investments are likely to return more than paying back the mortgage (a few times the level of mortgage interest at 1.5%) there are no guarantees.
Additionally, there are other factors to consider, i.e. perhaps you work in an industry that has a high probability of redundancy, or perhaps you are self employed and the work less than regular.
Mathematically you are likely to be better off investing the money but, if you choose to focus on paying off the mortgage so as to sleep easy at night then that is perfectly fine for you. And, that is all we can do, to make decisions on our own personal considerations/tolerances.