It's worth doing the sums.
I definitely agree with SueEllen about spreading risk by investing in pensions, ISAs and paying off the mortgage, but from a pure theoretical point of view the pension route wins hands down.
I ran some figures a year or so ago based on having £5k net spare cash available each year and comparing what would happen if I used it to pay off mortgage or invest in a pension. I assumed a mortgage interest rate of 5% and pension growth of 7% over 25 years.
Putting it in a pension you end up with a pension pot of around £572k.
Paying off mortgage you reduce mortgage by around £239k.
Then if you assume you can take 25% of your pension as tax free cash, you can take £143k from your pension to pay off your mortgage. This gives you a pension pot of £429k with £95k additional to pay into your mortgage to get you in the same position as if you had paid off your mortgage early.
Or put another way you make £334k more by investing in pension than paying off mortgage.
Even if you assume mortgage rates and pension rates to both be 7%, the pension route still leaves you £256k better off.
Just to dampen that a little, you will have to pay some tax when you draw from the pension pot and your money is locked in to the pension which will probably force you to buy an annuity at some point.
I tend to invest equally in pensions and ISAs, and then start paying off mortgage capital. Always good to diversify investments and spread risk.
I definitely agree with SueEllen about spreading risk by investing in pensions, ISAs and paying off the mortgage, but from a pure theoretical point of view the pension route wins hands down.
I ran some figures a year or so ago based on having £5k net spare cash available each year and comparing what would happen if I used it to pay off mortgage or invest in a pension. I assumed a mortgage interest rate of 5% and pension growth of 7% over 25 years.
Putting it in a pension you end up with a pension pot of around £572k.
Paying off mortgage you reduce mortgage by around £239k.
Then if you assume you can take 25% of your pension as tax free cash, you can take £143k from your pension to pay off your mortgage. This gives you a pension pot of £429k with £95k additional to pay into your mortgage to get you in the same position as if you had paid off your mortgage early.
Or put another way you make £334k more by investing in pension than paying off mortgage.
Even if you assume mortgage rates and pension rates to both be 7%, the pension route still leaves you £256k better off.
Just to dampen that a little, you will have to pay some tax when you draw from the pension pot and your money is locked in to the pension which will probably force you to buy an annuity at some point.
I tend to invest equally in pensions and ISAs, and then start paying off mortgage capital. Always good to diversify investments and spread risk.
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