Bank of England figures for the first quarter of 2017 show that almost 16% of all new mortgages taken out were for 35 years or more,[i] leaving many people facing mortgage debt into their retirement years. So is paying into a pension really the best option?

With high house prices and longer repayment terms, you may be tempted to overpay your mortgage whenever you get a bonus or have some spare cash, in order to pay that debt down early. But the danger is that, when you reach retirement, if your pension isn’t healthy enough, you may own your house outright but not have enough income to live on.

The classic debt vs investment argument

Is it better to have a larger pension pot or the security of not having debt when you retire? It’s a tricky conundrum. Paying off the debt provides some welcome certainty – whatever happens in the future, you’ll have a roof over your head. However, without sufficient income, there may not be enough to pay the bills.

Pensions, on the other hand, are likely to involve an element of investment risk, which may provide a positive investment return. The main benefit of a pension is the tax relief on contributions which means that for every 80p you pay into your pension, the government adds 20p. The obvious downside, of course, is that investments don’t always perform as planned and your £1 might only be worth 50p in the future.

Finding the right balance for you

Ultimately, whether you should pay down your mortgage debt or invest in your pension will depend on your individual circumstances and attitude to risk. At Ascot Lloyd, we work with our clients to assess their income and expenditure needs now and in the future, using cash flow modelling to look at their life plan before and after retirement. We also discuss at length the level of risk they’re comfortable with.

The ideal solution for you is likely to involve a balance between both approaches, and we can create parameters to help you find that balance. For example, if you received a bonus of £10,000, the right solution for you might be to pay £4,000 off your mortgage and invest the rest into your pension. For others, it may be better to use the whole bonus to boost the pension, while continuing to overpay the mortgage in smaller amounts as and when possible.

Ascot Lloyd’s advisers will help you understand your projected income and expenditure, so that you can make the best financial decisions for your future. Talk to us for tailored advice that’s right for you.

[i] Bank of England: Financial Stability Report, June 2017, Issue No. 41.

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