Personally, I think that may be a mistake.This makes me feel a lot better about not starting a pension until my mortgage is history.
Not in this circumstance Brendan -Are you suggesting that he should contribute to a pension even if he is getting only 20% tax relief?
I think that prioritizing pension contributions (at least where the tax relieved is at the higher rate), over paying down a mortgage ahead of schedule, becomes compelling.
I would prioritize maximising pension contributions over paying down the mortgage ahead of schedule, at least to the extent that the pension contributions benefit from tax relief at the higher rate.Can I make this a real example?
Higher rate tax payer, 36 y.o., with a pension pot of 190k, and a mortgage of 445k (3%, 29 years remaining). No lump sum unfortunately.
Pension or mortgage?
I think that prioritizing pension contributions (at least where the tax relieved is at the higher rate),
In priority to paying down a mortgage (or any loan for that matter) at a rate equivalent to the risk free rate +3%? No.Can you clarify whether you think that someone should contribute when their tax relief is at the 20% rate?
Can I ask a different scenario for the purpose of discussion?Are you suggesting that he should contribute to a pension even if he is getting only 20% tax relief?
If so, I don't agree.
Should a lower rate earner contribute?
Yes, some clear examples:
- To the extent there are employer matched contributions
- To the extent they can receive the entire pot tax free on retirement - particularly those getting close to retirement age
- If they don't hold any debt, or need the money in 5 year horizon, to the extent they will get the pension tax free. Particularly if they are otherwise likely to 'waste' their money.
That seems very sensible to me.Also, in my case, I was saving monthly into a fund anyway, so it made sense to switch to a more tax-efficient vehicle (AVCs). As I am 13 years away from retirement and already have a cash fund so don't need the money in the short to medium term. And a tracker mortgage of ecb + 0.5
Thanks again. I find it very instructive that there isn't a simple yes or no to my original question and so much depends on whether you are paying the top or lower rate of income tax.
This confirms my suspicion that although the tax benefits of starting a pension are real, they are also considerably exaggerated in some quarters.
One other point, from the viewpoint of somebody who likes to keep their financial affairs as simple and stress-free as possible:
Paying a lump sum off your mortgage is quick, straightforward, risk-free and delivers immediate benefits that are easy to see and understand.
Managing a pension is slow, complicated, involves at least a little uncertainty and won't deliver any benefits for many years to come.
This makes me feel a lot better about not starting a pension until my mortgage is history.
Anyway, I see there is a 'Key Post' about all this so I will go and study that. If anybody thinks I am wrong about any of the above, please feel free to put me straight.
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