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Your Money > Pensions Articles > Mortgage Overpayments Versus...
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By Jane Baker
If you're lucky enough to have a little spare cash floating about, what should you do with it? Should you overpay your mortgage or top up your pension? Of course, it's sensible to clear your debts before you think about investing. But it would be crazy to put-off your pension until you're mortgage-free. After all, what pensions love most is plenty of time to grow. So I've done a little number crunching to see which route really does make more sense. Overpaying your mortgage by £50 a month Firstly, you'll need to check your lender allows you to make overpayments. Most lenders do. To calculate how much you could save by overpaying your mortgage, I'll need to make a few assumptions. These are:
So, let's compare the difference between sticking with your original repayments and making overpayments:
Likewise, if your pension only grew at say 5% a year -- instead of 7% -- then again it may be a better bet to clear your mortgage early rather than stock up your pension fund. Inflation and tax The figures shown don't include inflation so the amounts saved on your mortgage or accumulated in your pension fund would actually be reduced in real terms. What's more, 75% of the pension fund will probably need to be converted into an income using an annuity when you retire (as per current pension rules). The income from an annuity is taxable under normal income tax rates, so you will need to think about that deduction too. Certainty There are no guarantees but I think it's safe to say once you reach the end of your mortgage term your debt should be repaid and the property is all yours. You may think the sooner that day arrives, the better. But the same guarantees don't come with a pension. The fund itself isn't directly available to you. Most of you will only be able to take pension benefits using annuity. Don't forget your annuity normally dies with you. If you don't survive for very long after buying the annuity, then the lion's share of your pension will be lost and all the extra top ups will have been wasted. Access You can't access money from your personal pension fund until you reach 50 (or 55 from 2010). While this means you can't fritter, your money could be locked away for a very long time. However, by overpaying your mortgage you would build up a reserve over time, which means you may be able to underpay later on if you fall on hard times. Mortgage options The Foolish among you will probably remortgage several times before your debt is cleared. As you know, the credit crunch has forced many lenders to tighten up lending criteria. These days borrowers with more equity in their homes tend to qualify for better remortgage deals. So there's a strong argument for paying down your mortgage as soon as you can. As with most financial dilemma's, there isn't an easy solution. You'll need to find a way clearing your mortgage and planning for your retirement. Of course, you may intend to use your property to finance your twilight years, rather than going down the traditional pension route. But that isn't clear cut either. Useful links:
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