Overpay the mortgage, or pay into a pension?

What overpaying and paying into a pension each do, the tax difference, and the questions that decide between them.

7 min read · Written for homeowners

What the comparison involves

Comparing the mortgage rate with the return a pension might earn leaves out two important factors: tax, and when you can get the money back.

Overpaying the mortgage gives a guaranteed saving equal to the interest you no longer pay, and the money is tied up in the house. Paying into a pension usually attracts tax relief straight away, and the money is locked away until a minimum age.

What overpaying does

It reduces the interest you pay for the rest of the mortgage. That saving is certain.
It can shorten the term or lower future payments, depending on how your lender applies it.
It is hard to get back. Money paid off a mortgage is not easily withdrawn again without borrowing it back.
Most fixed-rate deals limit how much you can overpay each year before an early repayment charge applies. Check your own mortgage offer before overpaying.

What paying into a pension does

Contributions usually receive tax relief at your highest rate of income tax, so a higher-rate taxpayer is typically putting in more than it costs them.
The money is invested, so its value can go down as well as up.
It cannot normally be reached before the minimum pension age, which is due to rise from 55 to 57 in April 2028.
Part of it can usually be taken tax-free later, which is why some people plan to clear the mortgage with it at retirement.

Questions to answer before you decide

What rate of tax do you pay?

The higher it is, the more valuable pension tax relief becomes.

How much of an emergency fund do you have?

Money in the mortgage or a pension is not easy to reach in a crisis.

When does your fixed rate end, and what might the next one be?

How old are you, and when do you want to stop working?

Does your employer match extra pension contributions?

If so, that match can decide the question.

Questions people ask

Can I do both?

Yes. You can split spare money between them. The right split depends on the answers above.

Is overpaying ever clearly better?

It can be where the mortgage rate is high, the person pays basic-rate tax, has no employer match and values certainty.

Is the pension ever clearly better?

It can be for higher-rate taxpayers, and especially where an employer matches contributions.

Does this change near retirement?

Yes. The closer you are to being able to draw a pension, the less the lack of access matters.

What to do next

Your mortgage broker can tell you what your mortgage allows you to overpay and what it would save. The pension half of the question is investment advice, and it needs a qualified financial planner.

Ask your broker to introduce you to one, so both halves are looked at together.

This article explains how things work. It does not take your circumstances into account. Your mortgage broker can introduce you to a regulated financial planner at Equity & General where the question needs one.