Mortgage or pension? Where should your spare cash go?
Best value for your spare cash? Add it to your pension every time.
Spare cash. It’s a phrase that would jollify the most doleful of beings. Conjuring up as it does, a veritable kaleidoscope of frivolous purchases with which to pamper our every whim.
Swap that phrase for ‘disposable income,’ and all lingering excitement fades.
In recent weeks, the CSO published its latest household saving figures, revealing an undeniable diligence among a firm minority, as in the 19.9 per cent of Irish householders that saved disposable income in Q2 2026. This figure compares favourably with that of ten years ago, when just 8 per cent of us were recorded as stashing what was surplus to requirement.
When it comes to deciding how best to manage that spending power, as in where the surplus to requirement spondulicks should go, many juggle thoughts of either paying off the mortgage or topping up a pension fund. This is an easy decision for the fiscally savvy and financially astute. For everyone else, it can be a veritable minefield. One best navigated with the assistance of financial advisors.
Kevin Elliott, managing director of wealth management firm Elliott, is one such professional. He says that when deciding whether to use spare cash to overpay the mortgage or top up the pension, the timeline to retirement should be the primary compass.
“The goal is the same either way,” he says, “enter retirement mortgage-free. If you are approaching retirement and the term stretches past your finish line, clearing the debt takes priority. Every euro of repayment after you stop working comes out of drawn-down pension income.”
For those whose retirement is 10 to 20 years away, Elliott says the numbers overwhelmingly favour the pension due to the "hurdle rate."
“Overpaying your mortgage is an investment where your return is simply your mortgage interest rate - guaranteed, tax-free, and immediate,” he says. “Boosting your pension combines two powerful engines: immediate 40% income tax relief upfront, plus decades of tax-free compound growth inside the fund.”
By way of example, Elliott considers a 45-year-old on the higher tax rate with a €300,000 mortgage at 4% with 20 years remaining. “You have €6,000 out of pocket to deploy,” he says. So ask: What is that €6,000 worth to you in 20 years, after tax?
“Opt to overpay the mortgage, and your €6,000 compounds at 4% tax-free, wiping out €13,150 of future mortgage interest payments.
“Should you opt instead to contribute to the pension, income tax relief turns that same €6,000 net cost into €10,000 invested. At 5% average annual tax-free growth over 20 years, the fund grows to €26,500. After taking 25% tax-free and paying income tax on drawdown, your net return lands between €18,500 and €22,500. Same €6,000 outlay. Same 20-year timeline. Both figures represent net cash in your pocket.
“Upfront tax relief is what does the heavy lifting. Because relief puts €10,000 to work for every €6,000 you give up out-of-pocket, the pension fund only needs to earn an investment return of about 3% a year to match a 4% mortgage, less than the mortgage interest rate itself. Anything earned above the 3% is pure profit.
“At the same cost to you, roughly 50% more wealth is generated even before factoring in any potential employer matching.”
Astutely, Elliott concludes: “Before deciding to overpay the mortgage or make pension contributions, ensure you have an emergency fund of three to six months of living expenses in liquid cash, and clear any short-term, high-interest debt first.”
