Overpay your mortgage or pay into your pension?

Why pensions are a different game

Pensions aren't just investments, they're tax-wrapped investments. For most people, especially higher-rate taxpayers, the tax relief alone makes them hard to beat on a pound-in, pound-out basis.

The tax-relief boost

When you pay into a pension, the government tops it up:

• Basic-rate (20%): every £80 you put in becomes £100. That's a 25% instant boost.
• Higher-rate (40%): every £60 you put in becomes £100. A 67% boost.
• Additional-rate (45%): every £55 becomes £100. An 82% boost.

No overpayment strategy anywhere can match those numbers on day one. The question is only how much of that gets clawed back at retirement.

The 25% tax-free lump sum

When you reach pension age (currently 55, rising to 57 in 2028), you can take up to 25% of your pension as a tax-free lump sum. The remaining 75% is taxed at your marginal rate when drawn, but most retirees draw at a lower rate than they paid in, which makes the arbitrage even better. MoneyHelper has a full guide on pension tax.

Salary sacrifice multiplies the benefit

If your employer offers salary sacrifice, you also save National Insurance (8% for basic-rate, 2% for higher-rate). Many employers give you back their NI saving too (13.8%). That can boost the effective contribution by another 10–20%.

When overpaying still wins

• You're close to retirement and your mortgage term ends before pension age (you can't access the pension yet).
• You're at risk of being a higher-rate taxpayer in retirement (so no rate arbitrage at drawdown).
• You've already hit the annual allowance (£60,000 for most people, reduced for very high earners).
• You value being debt-free over a larger retirement pot.

Compare with other options

See the stocks & shares ISA comparison for the same investment logic with earlier access, or LISA for under-40s which combines elements of both.