Bonus episode: Mortgages vs. pensions update

The Pension Confident Podcast

by , PensionBee Content

at PensionBee Content

13 Nov 2023 /  

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The following is a transcript of a bonus episode of The Pension Confident Podcast - Mortgages vs. pensions update. You can listen to this bonus episode or scroll on to read the conversation.

PHILIPPA: Hello and welcome to a bonus episode of The Pension Confident Podcast. Today, we’re revisiting a popular debate: should you pay more into your mortgage or your pension?

The cost of living crisis and high interest rates are creating a major mortgage crunch for borrowers. According to debt charity StepChange, people with a typical-sized mortgage are now paying £300 more every month than they were in September 2022.

We’ve spoken about this on the podcast before. In episode four, former Host; Peter Komolafe was joined by CEO and Founder of The Humble Penny; Ken Okoroafor, former CMO at HABITO; Abba Newbery and PensionBee’s VP Brand and Communications; Rachael Oku. They discussed the pros and cons of investing in property and pensions, because one in four of us is planning to use property investment to fund our retirement. Does that sound like you? Listen up as our guests share their thoughts.

PETER: The question is, do you believe that from a financial point of view, long-term, that paying off your mortgage, faster and quicker, is a better retirement solution than a pension? I’m going to start with you, Rachael.

RACHAEL: So, I think the desire to use your property to fund your retirement’s quite a common one. But I think sometimes people overlook the practicalities of that. I think if you’re an investor, you have buy-to-let properties, then it’s quite different. You sell them off, maybe as you approach retirement, or you keep generating that additional income. But when you’ve got on the ladder and you’ve finally ended up in your dream home, the thought of actually having to vacate that when you get to 55,65 or whenever it is that you want to retire, I think can actually be quite difficult for some people. Because if you want to free up some or all of the money, you can’t stay in the property, usually. And I think that presents some challenges, especially when someone has worked for their whole life and they’ve finally achieved it. I think downsizing just isn’t always what people actually want to do by the time they retire. And then, of course, if you’re unfortunate enough to be coming up to retirement age when the market is in a decline or it’s dipping, then you’re quite hamstrung on what your options are. If you need that immediate cash, you may have to sell your property for a reduced price whereas a pension would still have more opportunity to grow.

PETER: What about you Abba, what do you think? Do you think that property may be a potential faster or better way of actually acquiring a pension fund versus maybe a tandem approach?

ABBA: I think lots of things related to this question. I think the first thing is we’re talking about retirement as if it’s something that’s going to happen at 60 or 65. It’s not. If you take the statisticians’ [view], the generation of these guys sitting next to me are going to live to 90+, probably to 100. So, your attitude towards pensions and saving, I think, has got to fundamentally change. I grew up with parents who taught me that you’re going to get a final salary pension, so don’t worry about that. You’re going to get a State Pension, don’t worry about that. And that was kind of the 80s generation, so pour everything into property. If you’re thinking about retirement being something to do at 65, you now need a pot of money that’s going to last you for another 35 years, practically half the life you’ve already lived, again. And so, I don’t think of it as a binary question. And I totally agree with your point about downsizing. I think one of the real fundamental blockers in the property market at the moment, which is hindering first time buyers’ getting onto the market and holding up the prices, is people living in their big family homes, that they now no longer need. But yes, older people aren’t selling their homes as their retirement fund, and that’s in part because they’ve got their final salary pensions, they’ve got the state-funded pension. But that’s not going to be the same for my generation or for your generation going forward, which may end up being a very good thing.

PETER: What about you Ken?

KEN: Obviously property gives you this gratification. You can see it, you can touch it, you can even paint it. You can shift rooms around, you can do whatever you want. We need to get better at helping people visualise the benefits of their pensions. So, helping them to actually see, like, “Man, this is really worth my while”. Because a lot of people say, “Nah, forget that. Pension? No way man! Not putting money into that”, because they see it as “I can’t access the money, so therefore there’s no point”, when in actual fact, that’s an advantage.

PHILIPPA: If you’re thinking about using property to fund your retirement and you can afford to increase your mortgage payments to pay it off earlier, you might be tempted to do that. Sounds straightforward, but there are some things to be aware of, let’s hear what the guests had to say on that.

PETER: Why was paying off the mortgage the most important thing for you?

KEN: For me, that mental freedom was a big thing. The second was, it reduced our cost of living and gave us more financial freedom. Essentially for us now, it’s Council Tax, it’s light and heat, and things like that, and obviously travel and the things we find to be fun. But beyond that, our cost of living is much lower and it’s giving us that capacity to take more risks than we would have if we had something hanging over us.

ABBA: You’re in a fantastically fortunate position. But for most people, the struggle is to get on the property ladder. The struggle is paying into a pension and saving up for the deposit on a house. So actually, I guess, possibly because the average age of our customer is 42, we’re seeing that end of the struggle more than the overpaying struggle.

PETER: Ken just mentioned there, obviously paying off his mortgage allows him a little bit more freedom. I wonder, is that something that would appeal to you in your own personal circumstances at all, Abba?

ABBA: No, I’ve chosen not to pay off my mortgage early. I think the opportunity to use your house as leverage is important. And the lifestyle I’ve chosen to live with my family means that, yeah, I could have bought a much smaller house and be mortgage-free, but I’ve chosen to live a slightly different lifestyle. I’m incredibly lucky. I live in London; I own a house in London. I’ve seen an enormous increase in that property. I managed to get on the ladder about 20 years ago. So, I’m a very, very lucky person.

PHILIPPA: So the temptation might be to pay more into your mortgage - and stop paying into your pension - until you’ve paid it off. But Rachael Oku had thoughts on why it’s important to keep up those pension contributions.

RACHAEL: Investment growth is one of the key aims of investing. You want your pension and any savings to grow over time. But with pensions, that’s only really part of the story, there are lots of incentives. So, if you have a workplace pension, your employer, as you said, with Auto-Enrolment, is obliged to contribute. So, you’re effectively getting free money from your employer, which is why you shouldn’t opt out unless there are extenuating circumstances and you really, really have to. But your pension will grow a lot faster if you remain opted in. And then there’s also tax relief that you get on your personal contributions. So, most basic rate taxpayers will get a 25% tax top up. So, if you paid £100 into your pension, the government would add £25 and you’d have £125. So over time with regular contributions that just snowballs. It just grows and grows, and then you also get tax-free withdrawals when it comes to taking out your pension. So, from the age of 55, the first 25% of your pension - you can withdraw as a tax-free lump sum. There are also incentives when it comes to passing on your pension. So, pensions sit outside your estate for inheritance tax purposes, which means unlike the cash in your bank account, you don’t have to pay tax on it in the same way. So, with a pension, if you pass away before you’re 75, your beneficiaries can, in most circumstances, take that tax-free. And then if you’re over 75, your beneficiaries will pay tax at the nominal rate. And that’s with defined contribution pensions, which most modern workplaces and personal pensions are.

PHILIPPA: And finally, Abba Newbery shares her tips on the pros and cons of investing in property and what to think about if you’re buying your first home.

PETER: So Abba, I was going to ask you, when you invest in pensions and global markets, you typically get a little bit of diversification because you’ve invested in different areas. With property, it’s almost as though you’re putting your eggs all in one basket. Are there any other risks for the property side of things that you can think of, or that come to mind that you think might be important to this conversation?

ABBA: I guess if you look at it holistically and you see property as a long-term investment, it’s a pretty darn safe, long-term investment in this country. So obviously, particular postcodes haven’t all seen the same kind of increase. But if you’re looking to borrow over 25 years - for most people in those 25 years, that house that they live in has grown in value, if you kind of look retrospectively. As you said, it’s 100% every 10 years. I think you said that Halifax said it was 200% in 20 years. So yeah, property’s a reasonably safe investment. Obviously, that does mean you’ve got to keep up your mortgage repayments and that kind of stuff, and with that comes, you know, if the roof blows off or the boiler blows up, that becomes your responsibility. So, having your emergency fund is pretty important. And obviously picking the right area with the right kind of school because, I guess the other thing that’s quite interesting about property is we have this notion of a property ladder in the UK. Where you buy your first house, then you buy your next house and it’s bigger, and of course, that very notion costs you a lot of money. Be it more remortgaging costs, conveyancing costs, legal work costs and obviously Stamp Duty. So I guess if I was going to give someone advice, which I’m not allowed to do - buy the biggest house that you can in the best area that you can and then try and never move. Then put that money that you would have paid on Stamp Duty to the next house, into overpaying your mortgage or into your pension. But don’t keep moving because it costs a fortune!

PHILIPPA: We hope that’s been helpful. Stay tuned for all that’s coming up on The Pension Confident Podcast including our next episode, where we’ll be talking more about property. This time we’ll be looking at the rental market. Why is the cost of renting a home so high? And can you even afford to rent?

Stay on top of all your financial questions by subscribing to The Pension Confident Podcast and we’d love it if you’d give us a rating and a review while you’re there. We always want to know what you think of our series - and what you’d like us to cover next! Thanks for listening and you can catch the next episode on 26 November.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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