Deciding where to prioritise savings is one of the most important but difficult ongoing decisions people will make in their lifetime.
As we age, our money is pulled in many different directions and there are lots of different options for where to put any extra cash.
Three of the most common are ISA accounts, a pension or to overpay a mortgage.
Following chancellor Rachel Reeves’ latest Budget, there are more questions than ever over which is best. Cash ISA allowances have been slashed and national insurance (NI) is going to be applied to salary sacrifice pension contributions. Meanwhile, interest rates remain elevated, with inflation running hotter than the Bank of England’s target.
With this in mind, Trustnet asked experts for the benefits of overpaying a mortgage, placing money in an ISA or adding to a pension and asked which should be the priority for most people.
Overpaying a mortgage – the psychological benefits
Typically, the advice for most people is to overpay on a mortgage when interest rates are high, while if locked into a lower rate, this is a less of a priority.
Anna Murdock, head of wealth planning at JM Finn, said: “If the mortgage was taken out and fixed when interest rates were a lot lower than they are now, it may well still be benefiting from a low interest rate and repayment may not make best sense.
“However, as the fixed period expires, it could well become more attractive to consider repayment if the new rate will significantly increase, but bearing in mind that is not usually easy to readily access this capital again if required (unless using some sort of offset mortgage).”
However, the non-financial reason to prioritise this is the peace of mind it brings people. Trott said financial decisions “aren’t purely mathematical, they’re emotional too”.
“Many people prioritise what makes them feel secure, even if it isn’t objectively the most efficient choice,” she said.
“For example, I wanted to pay down my mortgage early because I watched my parents lose their home when I was young. It wasn’t the most financially optimised route, but it was the right decision for my peace of mind. Now that my mortgage is gone, I can re-evaluate and shift my priorities – and that’s something everyone should do regularly.”
Pensions – long-term savings with additional benefits for top-rate taxpayers
Perhaps the biggest change in the Budget came in the form of a £2,000 cap on salary sacrifice for auto-enrolment pensions. This means any savings made above the cap will be liable for NI. But it shouldn’t put people off paying into their pension, the experts all agreed.
Daniel Hough, wealth manager at RBC Brewin Dolphin, noted the above change will take place from April 2029, however, giving savers plenty of time to allocate to their retirement fund.
“Pensions are still a tax-efficient long-term savings vehicle, albeit slightly less from 2029,” he said.
St. James’s Place head of advice Claire Trott added: “A key priority is not missing out on employer pension contributions. Many employers offer matched contributions, which is effectively free money if you pay in yourself”.
Murdock, added that maximising pension contributions will remain of particular value to those in the £100,000 to £125,140 bracket, where the personal allowance is tapered away.
“Pension contributions can help regain the personal allowance and also some child-related benefits (tax-free childcare, free childcare hours) for parents with small children, so in certain circumstances the combination of tax relief and retained child benefits can even outweigh the cost of the pension contributions,” she said.
Overall, Hough said pensions “could be sensible priority if you have a sufficient contingency fund and are comfortable with the age you can access this money”.
ISAs – the most flexible option
Another change in the Budget was the amendment to ISAs. From April 2027, people under the age of 65 will only be able to put £12,000 in a cash ISA, although they can still make use of the full £20,000 allowance, provided the remainder is invested through a stocks and shares ISA.
Murdock said ISAs are a “simple and useful way to save tax-efficiently” that can be used both for long-term targets, such as retirement, or shorter-term goals, such as house renovations.
Hough agreed, noting that the tax wrapper should be used as a “medium-term cushion” that gives people “added flexibility”. If they wish, savers can choose to divert money towards mortgages or pensions in the future.
“Maxing your ISA would be sensible when you have no mortgage and if you feel that access to your pensions is far away,” he said.
Is there a right order for most people?
Gary Steel, senior wealth planner at Canaccord Wealth, said people should always ensure they have an emergency fund in place of six months' worth of expenses in cash before looking to any of the above options.
After this, clearing down expensive debt is likely the first port of call, such as credit cards and loans.
In terms of pensions, ISAs and mortgages, experts agreed that a combination of all three was the best approach if possible.
Steel said an ISA is a good option for those looking to retire early or who need the cash in the medium term; pensions are for those looking to maximise their retirement income; and overpaying a mortgage is good for people wanting to be rid of debt sooner.
He said a rough order of priority for most people could be to overpay the mortgage, then top up ISAs and finally maximise pensions, although “ideally” people would do all three.
Trott added that “balance is essential” and noted that financial planning “isn’t one static decision”, so people should evaluate their circumstances and goals consistently. One option may work in the moment, but could change in the future.
All of our experts agreed that each individual’s financial decisions will be different and personal to their own situations, and therefore they should seek advice if unsure.
Hough said: “No solution is right for all and this will depend on your stage of life and current priorities,” while Murdock noted that “the order of preference for saving will depend on factors such as age, income and personal circumstances”.