What the over 50s do with their money once the mortgage is paid off

Britain’s over 50s are splashing their extra income they receive once they’ve paid off their mortgages on holidays, home improvements and gifts for their children[1], while less than one in four are using the money to top up their retirement savings, new research from Saga Investment Services has found.

The investment and financial planning service surveyed homeowners who have paid off their mortgage in full to discover what they have subsequently done with the money in the run up to retirement.

Over 50s who own their home outright reported an average monthly income increase of £322. Asked how they used the money once their mortgage had been repaid, half put some of the money into a savings account, while 45% paid out for home improvements. Some 40% spent the money on holidays, while 27% bought a new car[2].

The survey also uncovered the gap between paying off a mortgage and retirement. The average retirement age[3] for those surveyed was 62, and this group paid off their mortgage at an average age of 55 – a seven year period of mortgage-free income.

Pensions low on the priority list

Less than one in four (23%) diverted the mortgage repayment ‘pay rise’ into their pension. Of those that did do it, an average of 40% of their additional income was put into their pension.

Pension contributions attract generous tax relief from the government, meaning their savings get supercharged as they head towards retirement. Up to 25% of the fund can usually be taken as a tax free amount and any additional withdrawals from the pension are taxed at the savers marginal Income Tax rate. Alternatively, the money can be invested in an ISA, which grows free of Income, Dividend and Capital Gains Tax and can be withdrawn tax-free. However, contributions to an ISA do not enjoy tax relief.

Calculations carried out by Saga Investment Services show that if homeowners had diverted 100% of their monthly mortgage repayments into a pension until their retirement age, attracting basic-rate tax relief, a homeowner could have saved an additional £40,000 towards their retirement[4].

Saga Investment Services also surveyed homeowners who are still repaying their mortgage. They reported an average gap of three years between paying off their mortgage and retiring, generating an additional monthly income of £428. Using the same calculation methodology as above, Saga’s figures suggest that they could build up almost £21,000 by placing all of this into a pension.

Repaying a mortgage is one of life’s biggest financial achievements, and it’s understandable that people want to enjoy the income boost that they’re finally getting after decades of debt repayments. But this often comes when there’s limited time to build up as big a nest-egg as possible for retirement. In our survey, a third of people said they were able to retire earlier than planned because they’d made the effort to put their extra income into their pension, while 44% said they have ended up with a higher retirement income than they originally expected.

Making the most of your finances in the run up to retirement is vital to ensure you have a comfortable life once work is over. Professional financial advice for people at this age can help formulate a plan to get the income they need. That’s why it’s good to see the Government backing greater access to advice by giving people early access to their pension to pay for the help they need.