Should I increase my monthly pension contributions through work, buy more company shares each month, pay off more on my mortgage each month, or just save this extra money each month?

I have recently had a pay rise at work. I am 46 years old with some savings in ISA's (36k) and about 7 thousand in personal savings. Should I increase my monthly pension contributions through work, buy more company shares each month, pay off more on my mortgage each month, or just save this extra money each month?

Hi M,

It might frustrate you to hear that the answer to this will very much depend on your personal circumstances! There are a number of things to think about here, such as how much you have already saved in your pension; how much of an emergency cash cushion you think you need; what your family circumstances are and whether anyone is dependent on you; whether the company shares represent a small or large part of your overall ‘invested’ money and what the prospects for the company are; and how much of your total spend your mortgage represents and what rate you are paying (to name a few!).

That said, I can give you some guidance that will be food for thought. To keep it simple, I think there are two ways to approach your question:
1) Strictly financial considerations;
2) More personal considerations.

Financial considerations (I have had to make some assumptions to illustrate this, which I have detailed at the end of the point)

Increasing your workplace pension contributions will give you the biggest immediate financial benefit – at least on paper. Using something called 'salary sacrifice' means that the contributions are made from your gross earnings and so do not have tax or national insurance taken from them. If your salary increase is, say, for £5,000 a year and you are able to 'sacrifice' all of that into your pension within your annual allowance (see below), you are straight away £5,000 better off. And although what happens next will depend on the investment performance of your pension, the immediate uplift in your pension pot is clear.

If, on the other hand, you decide to do any of the other things with your pay rise that you mention in your question, you will be paying for those from your 'net' salary. For the sake of the example, I will assume that you will pay basic rate tax (20%) and employee national insurance of 13.25% on the increased pay (note that the national insurance drops to 3.25% once your annual earnings reach a little over £50,000 this tax year). These deductions mean that, instead of having £5,000 to put into your savings or ISA or pay off your mortgage with, you will have only £3,337.50.

So, on this basis alone, an increase to your pension contributions looks like the 'best' thing to do.

[What I have assumed:
• Your workplace pension is what is known as a defined contribution pension, which is one where you are building a pot of money that is invested and that you will draw upon in retirement.
• You have some annual allowance left for putting more into your pension. The rule is that you are allowed to put a total of £40,000 per tax year into your pension (including anything your employer puts in) as long as this does not exceed your UK earnings in that tax year. There may be more complex elements to consider, depending on your circumstances.]

Personal considerations
So those are the purely financial considerations. However, there are a number of more personal considerations that can carry weight in this decision:

1. You are 46 and will likely have to wait at least 11 or 12 years before you can access the money in your pension. Whilst a nice long timeframe is considered good for investments, you might have more immediate needs that should take priority. For example, if you have short-term debt that is costing you more in interest than you can earn in a deposit account, it might be sensible to clear some or all of this as there will be an immediate benefit to the cash in your pocket. Also, removing the threat of a mounting debt might feel like more of a benefit than increasing your pension - and you could always divert the interest payments that are freed up towards your pension or savings.
2. You say you have £7,000 in savings - as well as ISA savings. If the ISA savings are in shares rather than cash (and so not as easy to get your hands on without potentially losing some value), you might want to consider increasing your cash savings as an emergency buffer. This might be needed, for example, if you were to be out of work for any length of time or if there were an unexpected expense. For some people - depending on their family circumstances - an increase in salary can offer an opportunity to buy some protection against ill health or death through an insurance policy.
3. Many people get a psychological benefit from paying off part of their mortgage early. Increasing your feelings of security and of being in control of your debt can be of greater significance than a pension increase - even if the pure financial benefit is not as great.

A combination approach

And finally, for some people in your situation, a combination of the options can feel like a good approach - perhaps using a bit to overpay on the mortgage, a bit to put into the pension and a bit to increase savings. The overriding principle should be one of needs and priorities – and it can help to talk to a financial planner to sort through these if you are struggling to make sense of it all.

I hope this helps.