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Michael Brown

Content Writer
Published: 03/08/2022

Earning a little extra money each month, whether it is getting a pay rise or paying off a long-term debt, can be a great boost to personal finances. Although it can be tempting to spend the extra money, it may be worth thinking well ahead, and how this can help secure your long-term future instead.

Will you carry debt into retirement?

If you are struggling to decide where to put these extra funds, our preferred independent financial adviser company Kellands encourages consumers to align their mortgage term with their preferred retirement date. This is to ensure that consumers do not carry debt on their main residence into retirement.

Homeowners with a substantial amount left on their mortgage and who are likely to be still making mortgage repayments after their retirement would usually be better off putting any extra money towards their mortgage repayments and clearing this debt before retirement.

Alternatively, homeowners who have a small amount left on their mortgage often have more flexibility. The best course of action in these circumstances will be determined by their own finances and the current economic climate.

Potential returns on investments

Another factor to consider is when your pension contributions started. Those who started a pension early in their career, for example in their early to mid-20s, will likely find that they can contribute less each month and still enjoy a comparable retirement to those who started a pension later in their career. As such, those who began a pension in their 30s or 40s may want to consider increasing their pension contributions to enjoy a more comfortable retirement without having to work past the state pension retirement age.

Tax-efficient savings

One of the main benefits of making pension contributions is that it benefits from tax relief. This is a significant point to consider, as saving more can enhance your pension.

The tax relief paid on pension contributions in England, Wales and Northern Ireland depends on your rate of income tax. To find out your income tax rate, visit our page which discusses what you need to know about your tax allowances this year. In essence, it breaks down to:

Taxpayer bracket

Tax relief

Basic-rate taxpayers


Higher-rate taxpayers


Additional-rate taxpayers


It is worth noting everyone will get a 20% pension tax relief automatically added to their pot, but higher and additional-rate taxpayers must make a self-assessment for what is extra.

For those in Scotland, meanwhile, the pension tax relief is applied differently because the income tax structure is different. In essence, the biggest difference to note is for Starter-rate taxpayers, who will pay 19% income tax, but they could still earn 20% tax relief on their pension contributions.

Crucially, an annual allowance of £40,000, or 100% of your level of earnings if lower, which is eligible for tax relief applies across the UK. Anything else contributed to your pot during the tax year will be liable for income tax.

As well as this, under the Lifetime Allowance, pension savings up to £1,073,100 can be made and retain tax benefits, but anything over this limit is liable to tax which can be as much as 55%.

After taking this into account, pension savers should estimate how much their pension savings will be worth if they increase their monthly contributions. If it takes them over either of these allowances, then the extra funding could go towards paying off their mortgage instead.

Free savings and investments consultation

If you are considering whether to increase your mortgage repayments or your pension contributions, we encourage you to speak to an independent financial adviser who will be able to discuss all the options available. This will include considering the impact of tax on your decision and suggesting options that are right for your individual financial circumstances.

Those with a minimum of £100,000 in savings and investments can book a one-hour free consultation with independent financial advisers Kellands. The free consultation can be booked online here.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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