Should We Pay Off Our Mortgage Or Start Saving Into A Pension?

1. Interest Rates and Returns

• Mortgage Interest Rate: If your mortgage has a relatively low interest rate, it might be more advantageous to invest your money in a pension or other investment accounts that offer a higher return.
• Pension Investment Returns: If you’re contributing to a pension the potential for growth over time through compound interest could significantly increase your wealth. Pensions often benefit from tax relief or employer contributions, which can make them a powerful tool for future wealth accumulation.

2. Financial Security and Risk Tolerance

• Paying Off the Mortgage: Paying off your mortgage early provides peace of mind and eliminates a monthly obligation. This can reduce stress, especially in retirement or uncertain economic times. It’s a risk-free “investment” since you’re not exposed to market fluctuations.
• Pension Contributions: Saving into a pension involves exposure to market risk, meaning there’s potential for higher returns but also for losses. If you’re early in your career, this may be an acceptable trade-off given the time horizon for recovery and growth. For those closer to retirement, this may be riskier unless you have other sources of income.

3. Tax Benefits

• Pension Savings: Contributions to pensions often benefit from tax relief which can enhance the amount you save for retirement. This means you’re effectively getting more for your money than you would by simply paying down your mortgage.
• Mortgage Interest: The tax advantage of pension contributions typically outweighs mortgage tax deductions.

4. Liquidity and Flexibility

• Mortgage Payments: Once you pay down your mortgage, that money is tied up in your home and is not easily accessible without refinancing or selling. The lack of liquidity could be a concern if you need cash for an emergency or other investment opportunities.
• Pension Savings: Pension funds are generally not accessible until the current age of 55 (except in specific circumstances). However, this can work in your favor as it forces you to save for the long term and avoid spending that money.

Other Considerations

• Retirement Needs: If your retirement is approaching soon and you have sufficient pension savings already, focusing on paying down the mortgage may be a smart move to reduce monthly expenses in retirement.
• Emergency Fund: Ensure you have an emergency savings fund in place before committing extra funds to either option. Having a buffer in case of unexpected costs is crucial.
• Employer Contributions: If your employer matches pension contributions, this can be seen as “free money,” which can be a compelling reason to prioritise pension contributions over paying down the mortgage, especially if the match is generous.

Conclusion