Mr YFG’s favourite day of the year is April 6th. Not his birthday, nor Christmas, or our wedding anniversary, no – the start of the tax year floats his boat. He even woke up early on April 5th only to realise what day it was and, disappointed, crawl back into bed.
He likes this day because (other than portfolio reorganisation and maxing our ISAs) we get to decide our savings plan for the next year. Once we max our ISAs on April 6th, the question is what to do with the remainder of earnings saved. Mr YFG offered to open me a SIPP and I refused. He was initially confused, as he has a couple of private pensions. I insisted that any additional money should be put towards the mortgage.
I would rather put money towards paying off our mortgage than into my pension or open a SIPP, and here’s why:
Paying off a mortgage is a double win
It reduces your future predicted expenses at the same time as increasing your future net worth. The reduction in your expenses is more than the amount paid off because you also won’t have to pay interest on that sum. The mortgage capital reduces, and so your net worth goes up comparatively. Now you need less net worth in order to hit FI because your expenses are lower. This double whammy boosts you forward.
Whilst paying into a pension increases your net worth, it doesn’t affect your expenses.
I value my house more than my pension.
My house has a chance of increasing in value and percentage terms more than my pension. [Mr YFG: not sure I agree] Its value is much more liquid than my pension and I can genuinely appreciate its value. It is my dream home and I love it dearly. House prices have gone up.
My home being nicer, more valuable gives me a fuzzy feeling. Paying off our mortgage reduces our debts. It makes me feel more secure. The balance in my pension, accessible in 20-30 years(?!) doesn’t give me either of those feelings.
I maximise my employer match, and nothing more. I like free money. But I don’t want to put in more money without getting it topped up by the Firm in return, as I don’t value that.
I don’t trust the government
Since I’ve been paying into a pension the entire pensions landscape has changed. Tax changes have been aimed at me and my colleagues – making them less generous and less certain. I have no doubt that at some point the tax relief I currently enjoy will be cut. I suspect I would have been better off putting it into my ISA.
I am in real danger of hitting the Lifetime Allowance at some point in my life if I keep working. The Lifetime Allowance has been on a downward trend since it was introduced. Only the past few years have provided a mediocre uplift. With compounding over the next 30 years it’s not a completely ridiculous thing to think about. I also don’t trust the government not to cut the LTA for the next 40 years to a point where I can’t avoid hitting it.
I have to wait 30 years for it
I can’t guarantee I will be alive when I want to take my pension. While this is morbid, it is absolutely true. The minimum pension age is 57 for me and Mr YFG, and will likely be nearer 60 once we actually wanted to use it. An ISA and our home are accessible now and for most of my lifetime.
Mr YFG doesn’t agree
He thinks it’s worth putting money into a pension. The tax relief, as it stands, for higher rate taxpayers is very generous. Likewise, left to its own devices in global index tracker funds, the money in a pension will compound into a substantial sum. Hopefully more than enough to cover a long and happy retirement.
He’s also bit a sceptical of bricks and mortar. He sees our home as both his castle but also a big immovable illiquid asset. One equally vulnerable to the whims of Government (through restricting housing supply, development rules and government largesse to homeowners).
Finally, he also feels that the current low rates on mortgages offer an opportunity for arbitrage. At a paltry 2.25%, our mortgage is reducing in real terms as inflation outstrips it. Money put into paying off the mortgage is money not put into the markets. Where returns have easily trumped our interest rate.
We don’t have to be rational
Mr YFG is of course right. On a pure rational financial perspective. It would be irrational to ignore the twenty-pound notes just lying there on the street. There are better opportunities out there than paying down the mortgage.
But life isn’t always rational. Things don’t always make sense. There are lots of people who do fancy calculations that show what would happen if you maximise this, minimise that. But except for some very odd people, nobody actually does those things. Who has actually just left their entire investment portfolio in a single tracker fund for 40 years – never touching it?
That’s why we don’t preach on the internet about the decisions we make as if they are the right ones for everyone. They are the right ones for us.