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Derin Clark

Derin Clark

Online Reporter
Published: 16/06/2021

Whether it is getting a pay rise or paying off a long-term debt, getting a little bit extra each month can be a great boost to personal finances. Although it can be tempting to spend the extra money, homeowners who already have an emergency fund saved may want to think about the long-term and consider putting the extra money towards securing their future instead.

For homeowners thinking ahead, often the choice is between using the extra money to pay off their mortgage early or boosting their pension contributions. Although choosing which is the best option, Kellands, an independent financial adviser company, said: “A starting point, is to align your mortgage term to your preferred retirement date, ensuring you do not carry debt on your main residence into retirement. Beyond this, allocating further income or savings to tax-efficient investment can make sense. The consideration is to balance a known interest cost of a mortgage, against the unknown and variable, but potentially higher return available from investing. Valuable tax allowances, particularly those offered through pensions and ISAs can help sway the argument. The consideration tends to be a personal one, factoring your wider financial position, and views on risk and towards debt in general.”

Two key factors to consider

Clearly, two main factors that will impact the decision are how much is left to be paid on the mortgage and the target retirement date. Homeowners with a substantial amount left on their mortgage and who are likely to 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.

Homeowners who have a small amount left on their mortgage that can easily be repaid before their planned retirement often have more flexibility. With mortgage rates currently competitively low, for example two year fixed remortgage deals at interest rates below 1%, homeowners may decide that their extra money would be more efficiently used being put towards their pension contributions.

Potential returns on investments

Another factor to consider is when the pension contributions started. Those who started a pension at the start of their career, for example in their early to mid 20s, will likely find that they can contribute less each month and still enjoy a comfortable retirement than those who started a pension later in their career. As such, those who started 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

Pension contributions benefit from tax relief, which means that by saving more into pensions can result in earning a greater amount of tax relief so that even more money is added to the saver’s pension pot. The tax relief paid on pension contributions depends on the highest rate of income tax paid, which, for those in England, Wales and Northern Ireland, breaks down to:

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

For those in Scotland, the pension tax relief is applied in a different way.
As well as this, under the Lifetime Allowance, pension savings up to £1,073,100 are tax-free. Any pension savings over this limit are liable to tax which can be as much as 55%. For more information about the current Lifetime Allowance read our story Will the Lifetime Allowance impact your pension savings?. Pension savers wanting to stay below the Lifetime Allowance should estimate how much their pension savings will be worth if they increase their monthly contributions and may want to use the money towards paying off their mortgage if it takes them near, or over, the allowance.

Free savings and investments consultation

For those considering whether to increase their mortgage repayments or their pension contributions, it may be worthwhile speaking to an independent financial adviser who will be able to discuss all the options available. This will include taking into account the impact of tax on their decision and suggesting options that are right for their 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.


Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time. Links to third parties on this page are paid for by the third party. You can find out more about the individual products by visiting their site. will receive a small payment if you use their services after you click through to their site. All information is subject to change without notice. Please check all terms before making any decisions. 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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