Marvin OnumonuAnalysis from Rathbones found paying bonuses into a pension instead of overpaying the mortgage could leave people better off in the long run.
The analysis looked at someone with a £200,000 mortgage over 20 years at 4% interest, receiving a £10,000 annual bonus for five years.
It compared overpaying the mortgage with putting the bonus into a pension, assuming 7% annual growth after fees.
A 40% taxpayer who paid their bonus into a pension ended up with around £57,000 more in their pension after 20 years than someone who overpaid the mortgage.
The uplift was similar for 45% and 60% taxpayers, even though the mortgage was repaid in all cases.
Bigger gains came for people whose tax rate fell over time.
Someone paying 60% tax today, but only 45% in future, saw almost £86,000 extra in their pension after 20 years by paying bonuses into their pension instead of overpaying their mortgage.
Ed Wood, senior financial planner at Rathbones, said: “For anyone receiving a bonus and weighing up whether to reduce debt or save for retirement, the numbers show there can be significant long‑term advantages to putting at least some of that bonus into a pension now, rather than postponing pension saving until the mortgage is cleared.
“This isn’t just about investment returns. It’s about locking in tax relief at the highest possible rate and benefiting from long‑term compounding inside a pension.
“Recent falls in mortgage rates can also change the dynamic, possibly tilting the balance more in the pension overpayment as the debt interest burden eases.”
The research found pension contributions that reduce income below £100,000 could preserve eligibility for tax-free childcare and free nursery hours, which can be worth thousands each year.
A basic-rate taxpayer today expecting to become a higher-rate taxpayer later ended up around £23,000 better off by prioritising pension contributions over the mortgage.
Under a lower investment return of 5%, the pension-first approach still left higher-rate taxpayers around £16,000 better off in their pension.
The benefit rose to £43,000 for someone paying 60% tax today but only 45% in future.
For people moving from basic-rate tax now to higher-rate tax later, the mortgage-first approach could be the better option, leaving them around £16,500 better off, according to Rathbones.
Wood added: “Becoming mortgage‑free is a major milestone for many people and understandably central to how they define financial freedom.
“But there’s no single right answer when it comes to choosing between overpaying the mortgage and saving into a pension.
“Both can strengthen your long‑term financial position, and the right choice will depend on your goals, your mortgage rate, your tax position and your attitude to risk.”
He said: “For those weighing up the two, it’s worth remembering that this doesn’t have to be an all‑or‑nothing decision.
“Many people may find a middle ground works best, using surplus income to chip away at the mortgage while also building up pension savings, rather than prioritising one at the expense of the other.”
