Why I'm Focusing On My Pension Instead Of Paying Off My Mortgage

Returning to full-time work after a lengthy career break brings financial opportunities—and dilemmas. With extra income now coming in, many people face the big question: Should they focus on paying down their mortgage faster or put more money into their retirement savings? For a couple in their mid-forties, this can be a pressing concern, especially if their mortgage stretches into their later years and their pension fund isn’t as robust as they’d like.

A Shared Struggle

Like many, my husband and I have a significant mortgage. We managed to get on the property ladder in 2001 when we were just 23, using savings from our first few years of work. However, soaring house prices and upsizing to accommodate our growing family have kept our mortgage hefty. Ideally, we’d like to pay it off before our retirement, but our current mortgage term could leave us making payments until we’re nearly 70.

At the same time, we face the challenge of shoring up our retirement savings. My pension took a significant hit during my years as a stay-at-home parent. While I saved diligently when I was working, a long career break to care for our four children meant years without employer contributions. Even when I did contribute small amounts, it wasn’t enough to make up for the lost time.

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Team Pension: Why It Makes Sense

Despite the weight of our mortgage, I’ve decided to prioritize our pension savings, and here’s why:

Tax-Free Pension Withdrawals: One compelling strategy is to build a sizable pension fund and use the tax-free lump sum available at retirement to pay off the mortgage. Currently, pension holders can withdraw 25% of their pension tax-free from age 55, although this will increase to 57 in 2028. This approach would give us the best of both worlds: a debt-free home and a healthy pension fund.
Investment Growth and Compounding: Long-term investing is one of the most effective ways to grow wealth. Contributions made to a pension fund benefit from compounding—where returns generate further returns over time. Historically, investments have outpaced inflation and mortgage interest rates, making a strong case for investing early and letting the funds grow.
Tax Relief on Contributions: Pension contributions get a generous boost from the tax system. For basic-rate taxpayers, every £80 contributed is topped up to £100 thanks to tax relief. Even non-taxpayers can benefit, meaning I could continue to contribute during my career break, boosting our retirement savings even when I wasn’t earning.

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The Numbers Game

Consider this: If you contribute £200 a month to a pension, with basic tax relief, that’s £250 invested. Assuming a 5% annual growth rate after fees, over 40 years, that investment could grow to £381,000, far exceeding the original £120,000 paid in. This kind of long-term growth can be transformational, particularly when starting early.

The Case for Overpaying the Mortgage

Of course, there are undeniable benefits to paying off a mortgage early. Eliminating monthly payments can provide immense financial freedom and peace of mind, allowing for more disposable income in retirement.

Interest Savings: Reducing mortgage debt early can save thousands in interest over the life of the loan, especially when interest rates are high.
Debt-Free Living: For many, the psychological comfort of being debt-free outweighs potential investment gains. Without a mortgage, there’s the freedom to live on less and perhaps retire earlier.

Why I’m Hesitant to Prioritize Mortgage Payments

For me, the challenge with focusing on mortgage payments is twofold. First, while I understand the benefits, I know myself: I’m not a natural saver. If our mortgage was paid off, I’d be more likely to spend that extra money on holidays or reducing work hours instead of topping up our pension. Secondly, investing later in life doesn’t give your money the same opportunity to grow. Delaying pension contributions can lead to a smaller retirement fund.

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Research and Expert Opinions

Interactive investor’s research highlights the importance of future interest rates and investment returns in making this decision. If your investment returns consistently outpace your mortgage interest rate, investing in your pension is the better bet. However, if interest rates rise significantly, paying off the mortgage could yield more savings.

Ultimately, if you’re fortunate enough to have extra cash, both options—overpaying your mortgage and increasing pension contributions—will strengthen your financial future. It’s about balancing your priorities and risk tolerance. For now, I’m sticking with Team Pension, but I’ll continue to monitor our financial situation to ensure we’re on track for a comfortable and secure retirement.