Starting to save late but expecting a £20k windfall - should I catch up my pension or put it towards a deposit?

Question

I'm in my late 20s, working in London with a cheap living situation but no pension and limited savings. I'm now in a position to start saving but am unsure whether to catch-up on my pension savings (and the best way to go about that), or to save up a larger deposit for a mortgage.

Situation

• I have £10k saved, mostly in Moneybox Stocks & Shares and Lifetime ISAs
• Expecting to receive £20k in the next few months
• My partner has £100k saved to put towards a mortgage
• We're not planning to apply for a mortgage for a couple of years
• I have almost no pension savings (4%/6% matching)
• I should be able to save at least £1500/month
• My partner can save £200/month
• No debts or dependents

With that in mind

• How should I spend the £20k when I get it?
• What would be an advisable way to distribute the £1500+ I can save each month?
• To what degree am I playing catch-up for the several years I haven't been putting into a pension?

Edit: RonJohn raised a valid point, I should specify that an amount more or less than specified will eventually come to me, just that the timeframe is not certain. It may be worth my asking the following instead:

Should I be catching up on my pension before increasing my deposit, and would putting up to £20k into the pot 'settle' that difference? Or would the amount saved on a mortgage instead make up for the pension, provided I always maxed my pension matching?

Answer 1

How much pension is "enough" is pretty subjective. I see two possible benefits of pension savings: they are tax-advantaged, and, possibly, locking them away to reduce the temptation to spend them before retirement. So I wouldn't worry too much about "catching up" compared to some unknown level of pension that you should have, and instead focus on the relative merits of that and other savings based on where you are now.

Firstly, you should almost always max the pension matching (at least unless you get to a point where you could be affected by the "annual allowance" limit of £40K - less if you earn over £200K or so). That's basically free money even without the tax advantages. You're already doing that anyway.

Next you should think about your overall goals. Buying a house may or may not be a good investment in purely financial terms, but it gives you stability and also means you won't be paying rent in retirement. So think about how soon do you want to buy, and how much deposit you'll need. You can use your lifetime ISA for a first time house purchase, but not any pension money.

Given that you can save £18K/year, I'd guess that you're a higher-rate taxpayer so your pension savings will get you 40% relief (as long as your residual gross income is still above the higher-rate threshold). That's a pretty big advantage though you do have to pay some tax when you take money out of the pension. The government also keeps talking about reducing the tax benefits from pension savings so it'd hard to know how long the 40% relief will last.

Overall I'd be thinking about the £20K in the context of an overall plan, to both get to an acceptable deposit and use your tax-free allowances for pension, lifetime ISA and normal ISAs as effectively as possible.