Pension or paying mortgage early?

J

jmurphy

Registered User
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I'm 28. I have a full-time job and I make 190k/year. I currently have a mortgage of 300k at 2.8%. I haven't started saving for my pension yet as I was trying to pay off my personal loans, credit cards, etc. I'm debt free now (except the mortgage loan).

My question is, should I start saving for pension or pay my mortgage early? I'm hoping to pay off my first mortgage in 2-3 years and then purchase another property for investment and use the rental income when retired.
 
What is the value of your property?
Do you intend to live in it for the rest of your life, or might you be trading up?
If you might be trading up, when would you be trading up?

Does your employer not have a pension scheme?

The choice should be between your mortgage and a pension.


The pension has huge tax advantages over property investment in your own name. Forget about buying investment property until you have maxed out your pension contributions.
 
What is the value of your property?
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Around 400k.

Do you intend to live in it for the rest of your life, or might you be trading up?
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Yes, my plan is to keep this property.

Does your employer not have a pension scheme?
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Yes, they offer a pension scheme but my I still have to contribute in order to receive their contribution.

The pension has huge tax advantages over property investment in your own name. Forget about buying investment property until you have maxed out your pension contributions.
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True! but if I start investing into my pension account right now, it would take 30 years until I can use that fund. On the other hand, if I invest my money into the property market, I'm confident I can purchase at least two properties in about 8 years time.

Sorry if my questions are a bit dumb. I'm still learning the basics! Thank you.
 
jmurphy said:
Yes, they offer a pension scheme but my I still have to contribute in order to receive their contribution.
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Hi J

This is absolutely the first priority. You must max your contributions to the pension fund to the extent that your employer matches them.
 
jmurphy said:
True! but if I start investing into my pension account right now, it would take 30 years until I can use that fund. On the other hand, if I invest my money into the property market, I'm confident I can purchase at least two properties in about 8 years time.
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Your confidence is misplaced, but it's a very common mistake.

People buy a home to live in.
It goes up in value.
They suddenly think that they "know property" and that they have some magic touch to make money.

Property can and does fall in value. Tenants can and do stop paying rent. If you have taken out a big mortgage to buy that property, then you could be in a very tight position.

As you are a high earner, it is likely that you are very busy in your job. You do not want the distraction of a part-time job, which is what property investment is.
 
75% Loan to value on your home is comfortable enough.

You can contribute 15% of your gross salary or €30k to your pension fund.
You will get tax relief on this at 40%, so the effective cost to you is €18k.
This will grow tax-free in the fund.
And when you retire, you can take 25% of it tax-free.

This is fantastic value. You should do this.

When you are 30, you will be able to increase the contribution to 30%.

After maxing your contributions, you will still have plenty of savings left over. Pay down your mortgage to get it below 60% Loan to Value.
At this LTV, you will qualify for the lowest mortgage rates.
 
If you really want to invest in property, then the right strategy is:

1) Maximise your pension contributions anyway. This is such great value, that there is no debate over this.

2) Don't overpay your mortgage. Keep the money in a separate account.

3) When you find an investment property, you will need a 30% deposit. If you have paid down your home loan, you won't be able to access the overpayments to fund the deposit.

Just to be clear, I am not recommending this. I think you should pay down your mortgage and not invest in property.

However, if you insist on investing in property, then don't pay down your mortgage.

Brendan
 
Got it! Many thanks @Brendan Burgess.

I always had this impression that investing for 30 years and saving into the pension account is not the _best_ plan for retirement. And honestly I'm hoping to retire very early and invest on my startup ideas, etc. that's why I thought a rental income can be a safe backup plan while I test my business ideas.

Follow up question: will I have access to my pension funds before the retirement age?
 
Savings via a pension fund is really the best way to fund your retirement. The tax advantages are such, that you really shouldn't be looking at anything else even if you can't access it until you are 65.

If you set up a business and it doesn't work out, you are going to have some comfort that you have safety in retirement.

If you plan on setting up your own business, then you definitely should not invest in property.

You need a flexible investment without any borrowing. If your savings are tied up in a property, you might find it difficult or slow to sell the property to access the money. Whereas if you have a portfolio of shares, you will have the cash in a few days.

Also, if you need to borrow to set up your business, the existence of an investment mortgage will make it harder to get a business loan.

So my revised advice is:
1) Max your pension contributions - this is the right thing to do, whatever the scenario.
2) Pay down the mortgage on your home until about 5 years before you are ready to set up your own business
3) About 5 years before you are ready to set up your own business
  • Continue maxing your pension contribution
  • Stop overpaying your mortgage and start building up a fund for your business
If you clear your mortgage, invest in your savings in a portfolio of shares. They will go up and down, but the potential upside outweighs the potential falls.

About a year before you set up your business, consider converting your shares to cash, if a stockmarket crash might leave you without enough to set up your business.

Brendan
 
Brendan Burgess said:
You can contribute 15% of your gross salary or €30k to your pension fund.
You will get tax relief on this at 40%, so the effective cost to you is €18k.
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The tax relieved pension contributions are limited to 15% of 115k.

jmurphy said:
My question is, should I start saving for pension or pay my mortgage early?
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Earning 190k per year, you should really be able to do both if you want to.
 
Brendan Burgess said:
Just to be clear, I am not recommending this. I think you should pay down your mortgage and not invest in property.
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Oh yeah absolutely. My first plan is to pay down my mortgage and then think about any forms of investments.

Brendan Burgess said:
2) Pay down the mortgage on your home until about 5 years before you are ready to set up your own business
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Got it. Yeah, I guess my main question is whether to pay the mortgage fully (in 2-3 years) first or max out the pension account.

Thanks a lot @Brendan Burgess.
 
jmurphy said:
My first plan is to pay down my mortgage and then think about any forms of investments.
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But my point is that if you have used up all your excess income to pay down your mortgage, then you won't have the deposit available for an investment property.

However, if you decide to invest in property, then maybe that is a good strategy.

1) Maximise your pension contributions €17k gross, net cost to you - €10k.
2) Clear your mortgage
3) Build up the deposit to buy an investment property
4) Buy the investment property

That would be a balanced, low risk option.

Brendan
 
@Brendan Burgess is there a threshold at which point you should stop putting money in a pension pot? I thought there was something about once the pot reaches 1 million that there is less tax / lump sum advantages? Also is there a bit of planning to ensure that your annual pension income keeps you on the lower tax rate?

I'm just wondering at the Ops level of income whether that is a factor for the op to consider when planning now? If he puts in 17k plus his contribution and matches employer contribution it could be 30k a year and that would quite quickly ramp up.
 
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