Paying off your mortgage earlier could increase your pension pot by over £50k

Nick Cheek
Written By:
Nick Cheek

Many homeowners are looking for longer mortgage terms as interest rates have risen sharply, but if you do manage to pay your mortgage off earlier, there are potentially huge pension benefits, according to research from a pension provider.

Analysis from pension provider Standard Life revealed that those who began work on an annual salary of £25,000, and paid the standard monthly auto-enrolment contributions of 8% of salary from the age of 22, could accumulate a retirement fund of £461,000 by the age of 66, not factoring in inflation.

If you were to top up your pension contributions by 4% for ten years from the age of 55, after a 25-year mortgage term taken out at the age of 30 had been paid off, then your pension pot could increase up a £513,000.

Overall £52,000 more than if no tops up were made.

Standard Life also calculated that if you boosted your pension pot by 1% between the ages of 55 and 66, then your retirement nest egg would be boosted by £13,000.

Impact of longer mortgage terms

Dean Butler, managing director for retail direct at Standard Life said: “Interest rates have rocketed since the middle of last year and so it’s understandable that people are looking for longer mortgage terms to ease the monthly strain.

“It won’t be possible, or even sensible, for everyone to stick to a shorter mortgage term, however it’s worth considering the potential retirement impact of any decision. There are obvious benefits to being mortgage free in retirement itself, but additionally having the option to swap mortgage payments for pension contributions in those valuable years leading up to retirement can have a significantly positive impact on your pot, and as a result on your standard of living in retirement.”

He continued: “Having a think about what you’d like when you do retire is an important first step to inform your financial planning, and helps to visualise decisions like these. The Retirement Living Standards tool from the Pensions and Lifetime Savings Association can help, which shows what life in retirement looks like at three different levels – minimum, moderate and comfortable.

“As well as everyday costs, the tool factors in what’s needed for extras – gifts, holidays and large purchases etc. – as well as the one-off expenses that come up through life.”