Financial Mess - Need to avoid rash Pension decision!

hugheskevi wrote: »

A single rate reviewed at each scheme valuation (say, it could be less frequently) is a layer of complexity?

Argh, yes!!! Anything beyond a single rate is an additional layer of complexity. Keep in mind members find it difficult to understand that their employer's contibution rate has no direct relevance to their pension benefits. Pensions geekery is for pensions geeks, not normal people!

I guess it could be the straw that breaks the camel's back, but in the world of pensions it would be one of the last things I'd be classifying as complicated.

You're funny... A flat rate of 1/12 means you only need to know the flat rate; anything else means you need to know there's a table to (a) understand (b) know where you fit.

Other complicated are things like members understanding the calculation of the annual allowance

Utterly irrelevant for 98% of LGPS members. OK, I've made that number up because I don't have a real one to hand. But with an LGPS fund of (say) 50K active contributors, the absolute number of people touching the annual allowance line is going to be counted on the palm of your hand, if that (he says, with direct experience of a fund of that size).

Things that can trivially be put into easy to understand ready reckoners (eg early retirement, added pension, etc) cannot be seriously argued against on the grounds of it all being too complex.

Going from a flat rate to an 'actuarially calculated rate' will by definition be a further complication. After all, what do we pay actuaries for...?

A nice way of saying you will be looking at just how much of a member's tax free lump sum the employer/fund can appropriate to maximise benefit to the employer/fund before too many members refuse to take the lump sum.

Yes - that's what I meant by talking of the (in)elasticity of demand. *This* should be the end-in-view of tweaking the commutation rate for a funded scheme.

It is a shame when members are seen as something to be exploited, but it is all too common in pensions

Huh? People retiring now with a final salary pension will have acquired benefits at a better rate than people in the future, be this in the public or private sector. You're 'it's a shame' is a clarion call for greater inter-generational injustice, at the risk of getting a bit poncy about things.

Ribin wrote: »

As for what we need to live on, not much - would say £1,000 net a month would do it. We just moved and cleared the mortgage and also bought a Passive House, so energy costs are about 80% less than a normal house

Sorry to read about the mortgage clearing. You now seem to be in the classic trap of being asset rich but lacking the money to live on because you blew capital on an unnecessary expenditure. If only you'd kept the mortgage, that would have provided you extra capital that could have let you last until closer to normal retirement age, using that capital to also make the mortgage payments.

An equity release mortgage is one option, since you're probably now unable to get another standard mortgage with both of you unemployed. The applicable type would be one that lets you draw on money gradually as you need it, so you slowly accumulate a mortgage debt that you can then start to clear and pay off the mortgage at a comfortable rate when getting pension income. When you get the state pensions would perhaps be the ideal time to do that, exploiting the extra income without reducing your income in the more financially stressed years. Unfortunately the interest rates on these are higher than for standard mortgages, but that's life.

If you have credit cards that do 0% balance transfer or 0% for spending offers, you might use one of those to increase your spending capability and the time you can last until you take the pension.

The reason I'm concentrating on use of borrowing is your pension situation. A big drop for taking it early that will reduce significantly for each year you can delay. It's big enough and for long enough - the rest of your life - that the cost of borrowing for a few years is substantially lower than the lost income from not waiting.

As jem16 noted, the commutation rate for pension income to lump sum isn't good enough to make a bigger lump sum worth doing and you should not take a larger lump sum than you have to take. In particular, don't take a bigger lump sum to clear a mortgage or debt, use the higher income to do that, else you'll hurt yourself substantially and unnecessarily in a second way.

You don't need to limit the use of credit to basic needs. It's entirely possible and sensible to borrow to hit your desired income, knowing that you'll later have the extra income to repay the borrowing.

But I do wish you'd left yourself with better options by not succumbing to the temptation to pay off the mortgage at a time when you weren't able to afford it.

Ribin wrote: »

So my conclusion from all the observations/suggestions are that it makes sense to take the pension early.

Bad idea, the same sort of short term thinking as was involved in clearing the mortgage.

You're due to retire soon and that gives you one huge advantage that someone younger doesn't have: guaranteed income from the work and state pensions. You can use that certainty in planning to considerably improve your position.

The pension has a cost for taking it early. Borrowing has a cost. The cost of the borrowing is lower than the loss to the pension. So the best choice is to keep or increase borrowing, then use higher incomes to clear the borrowing. That gets you a higher income both now and in the future.

Borrowing has the added short term benefit that it's not taxable income and not included in benefit means tests.

Lets say you take out a mortgage with 6% interest rate and draw down £12,000 a year for spending plus keeping your benefits to give you a quite decent lifestyle. I'll assume £1,000 arrangement fee and the amount to draw each year will increase to provide the funds to pay the interest, assuming you went for a type that doesn't just accumulate the interest. Here's how the numbers look, assuming all money is drawn at the start of the year for simplified interest calculation:

Age 57: income to take £12,000, balance £13,000, interest due 6% of £13,000 = 780 and interest on £780 is about £50, so amount to draw to cover income and mortgage costs is £13,000 + £780 +£50 = £13,830 as the end of year balance.

Age 58: income to take £12,000, balance £13,830 + £12,000 = £25,830. Interest on that £1,550. Interest on £1,550 at 6% = £93 so this year draw £12,000 + £1,550 + £93 = £13,643, end of year balance £25830 + £1,550 + £93 = £27,473.

Age 59: income to take £10,000 (only need ten months worth), balance £27,473 + £10,000 income to take = £37,473. Interest on that £37,473 = £2,248 and interest on £2,248 = £134. Total to draw this year is £10,000 + £2,248 + £134 = £12,382. End of year balance £27,473 + £12,382 = £39,855.

Age 60. Mortgage balance is £39,855 and you can now take the normal unreduced pension.

At this point you have some very nice options available to you.

The pension values will probably have all been in today's money, including the one at 60, so I'll assume 3% inflation for three years to get the actual amounts payable three years from now. That increases the £23,600 to £25,788 and the £20,875 reduced pension to £22,810. In this first year you have £25,788 - £22,810 = £2,978.

The basic state pension is currently £110.15 and I'll assume you can get it at 67, without checking that. After 3% inflation for ten years that will have risen to £148.03 a week, £7,697.56 a year.

1. You can leave the mortgage balance unchanged and pay £3,138 a year in interest. The £2,978 higher pension won't quite cover that this year, particularly after basic rate tax, though it will do that after a few more years. When you reach state pension age you can then start to reduce the mortgage balance using the basic state pension. £7697.56 after basic rate tax is £6,158 so that would clear the mortgage in just 6.4 years, though inflation-linked increases mean it'd take less time than that.

2, You can take a higher income and let the mortgage balance continue to increase to increase spending ability until you reach state pension age and use that higher income to start paying it off. Your wife's pensions will also be available to help with the clearing.

3. You could take some lump sum to clear the balance but the commutation rate isn't great and it's better to take the higher income and wait for the state pensions. Or maybe your wife would have a mandatory lump sum or a better commutation rate.

Now, I've been fairly pessimistic, assuming you need £12,000 plus the benefits. You may well need less than that, so the numbers would be a good deal lower.

Or, you could start with a higher income and accumulate a larger mortgage debt. Perhaps taking enough to get closer to what you will have from your and your wife's work pensions, then using the state pensions from both of you to reduce the mortgage balance. In that way you could simply retire now on quite nice income levels, even though the pensions haven't actually started yet.

The amount of money you can withdraw from equity release mortgages is limited compared to normal mortgages so you'd need to check that you have a property of sufficient value to allow the amount of drawing that you plan. The amount depends on property value and age.

So I don't really think that you have a particularly tough problem. You just need to expand the range of options you consider to exploit the certainty you now have about your future retirement income and use that to solve the problem.

Do remember to have enough life insurance in place to do any needed clearing if you die before your wife. or some on her life to help you if she was to die first and if you take a higher income that relies on some of her income to do repaying.

citricsquid wrote: »

The average UK male has a life expectancy of 79 with women having a life expectancy of 81

Sadly the calculations in your post were rendered useless by using grossly wrong life expectancy figures, which understate the true expectation by almost ten years for those who have already reached the age of the person asking the question. It's vital to use cohort life expectancy numbers when engaging in retirement planning or you get the number of years to be provided for dramatically wrong.

Ribin wrote: »

Thank you for taking the trouble to provide such an in depth analysis of borrowing costs v increase in pension value. Some serious 'food for thought' and will look at it over the weekend before making any final decisions.

Just FYI the mortgage repayment was necessary as we had our new house built from scratch, so at the point of sale there was nothing to transfer a mortgage to. Rented while house was built. Mind you the numbers worked very well - sold £480k and repaid mortgage £150k. Now have far superior house, super cheap to run, no mortgage and valued at £500k

I am curious. How much did the building cost? And the land plot? Were you able to cover both by the sale of the first home?

Cheers,
Joe

This is an interesting thread (more so than the usual lump sum / pension debates)

I would say that although I can see what jamesd is saying: we too made the decision to have a paid up, new, energy efficient and easy-to-maintain house. Cheaper bills make a difference + generating solar power (not sure if you do this, it wasn't mentioned?)
Also, one poster made the point about estimating life expectancy from a cohort - although this is correct in principle, OP hasn't been in good health.
Good luck