Households typically face the same “basic economic problem” – i.e. how to allocate scarce resources. When it comes to your disposable income, how much of it should be saved or invested? Should any of it be used to reduce your liabilities, such as your mortgage?

These are difficult questions and part of our role as financial advisers is to help clients address them confidently. Below, our team in Carlisle focuses on a specific part of this discussion – paying off a mortgage vs. boosting a pension – to help readers consider their options in 2024.

We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser here in Cumbria:

t: 01228 210 137`
e: [email protected]

The heart of the debate

The debate of “overpaying the mortgage or boosting a pension” often misses the underlying philosophical discussion about money. Namely:
Is it better to reduce your “liabilities” (e.g. outgoings, such as mortgage payments) so your existing income can stretch further?

Or, it is more worthwhile trying to boost your spending power so that it “outpaces” your liabilities (e.g. by building a bigger pension pot to provide a higher income in retirement)?

Here, a range of factors come into play. One is your personal circumstances. For instance, if your mortgage debt is abnormally high in comparison to your assets and income, then your finances may be resting on unstable foundations. Therefore, addressing this imbalance may be more urgent (in the short term) versus building up a pension.

However, another key consideration is your values. These are highly personal and differ from person to person. Some people will place high importance on being as “debt free” as possible.

Others, however, are happy to live with “good debt” (e.g. a mortgage with a competitive interest rate) provided that their overall wealth is growing over the long term. As such, contributing to a pension may be more attractive – for reasons discussed below.

Exploring the wider debate

In the years following the 2008-9 Financial Crisis, interest rates in the UK stood at historic lows (near 0%). As such, it was possible to find attractive mortgage rates – e.g. fixed-rate deals between 2% – 3%. In some cases, even below 1.00%.

Therefore, it was widely accepted that trying to clear a mortgage debt early was inferior to investing. The potential returns from the latter would likely far exceed the interest savings from the former. However, the debate started to shift in late 2021 when interest rates started to rise.

Today in March 2024, the Bank of England (BoE) base rate stands at 5.25%. The average 5-year fixed-rate mortgage is not too far off, standing at 4.84%. As such, some now argue that clearing a mortgage early could be as much financial beneficial to an individual (in real terms) as investing in a pension.

However, does this argument hold?

The case for investing

We do not believe that overpaying a mortgage is inherently unwise. There can be many cases when this can be a vital part of a client’s wider financial plan. However, even in today’s “higher interest rate” environment, there are still advantages to investing via a pension.

Firstly, there is the matter of diversification. Using a pension, it is possible to invest in many companies, markets and countries. This allows an investor to “spread out” their risk across multiple assets and mitigate the potential damage to their portfolio if one of them fails.

Concentrating wealth into a single property (your home), however, poses a higher “diversification risk”. As a whole, UK property has risen impressively in value over recent decades. Yet this has not been the case for every household.

There is always a risk that a property may not sell for its hoped-for value at the critical time, perhaps due to a market downturn. If this occurs, those with non-property assets (e.g. shares held inside pensions) are likely to enjoy better protection for their asset base.

Secondly, pensions enjoy significant tax advantages. This is in the form of tax-relief on contributions when paying in, and also by providing flexible tax-efficient income in retirement.

In 2023-24, an individual can contribute up to 100% of their earnings per tax year (or up to £60,000 – whichever is lower) and receive tax relief on their contributions equivalent to their highest marginal rate of income tax. Moreover, an individual can start taking pension benefits from age 55, including a 25% tax-free lump sum. A pension pot can also be passed down to beneficiaries without inheritance tax (IHT) upon the owner’s death.

This is not to say that paying off a mortgage is not worthwhile. Indeed, it can be very beneficial to own your home outright in retirement, since this will help your pension savings to stretch further (as it will not need to cover the large monthly expense of a mortgage). A family home could also be passed down IHT-free with some careful estate planning – e.g. using the Residence Nil Rate Band.

However, we believe there are good reasons to assume that most clients with a mortgage will benefit from investing via a pension – even when interest rates are high.


If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

Reach us via:
t: 01228 210 137
e: [email protected]

This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

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