Pension, essential repairs and debt

warrior1960 · 29 March 2015 at 8:30PM

Hi. I'm 55 and was paying into a local government pension on and off, but it totaled about 8 years. I was on a fixed-term contract with my local council, but this expired 31 December. After a few months without work and on JSA, I have now found another temporary contract. Seems increasingly to be the way things are these days!

Here is my dilemma: We have a bank O/D of nearly £3.5k, which was exacerbated by me having no income, other than JSA ,for a few months. We have about £1.9K left on a credit card, although paying off monthly. Wife is in full-time work and I'm getting myself back on my feet with the new job, although pay much lower than the last job. Will not get first pay until 18 April.

As well as the debts, we have some urgent repairs needed in our roof as there is a small leak when it rains. These are expected to cost over £1,000. The questions is where do I find the funds? There is one possible source but I just want to get some soundings before I make a decision: my local government pension.

The rules change on 6 April which will enable over-55s like me to access their pension pots. I have been given 3 options by my pension provider: Option 1 - take lump sum now of about £4.5k and annual pension of over £1.5k (no conversion). Option 2 - take lump sum now of over £8.3k and annual pension of over £1.2k. On this one I can state the amount I wish to commute. The final option is leave the pension until my 66th birthday in 2026 when based on present figures, I would get a lump sum of over £6k and annual pension of £2.7k.

This is the dilemma I have. To access it now would give me the funds to repair the roof and pay for some essential electrical wiring needed in a part of our house (costing several hundreds). It would also enable me to massively reduce our debt. Yet, I don't want to do something that could have adverse implications for my later years.

Would welcome any advice or feedback before I make a decision.

Many thanks

sourcrates · 29 March 2015 at 9:07PM

Hi,
No dilemma, take the tax free lump sum, sort the roof, etc, worry about the rest later.
I have to wait 6 years till I'm 55, I have a personal pension that's worth in the region of 30k, not enough to provide a decent pension, but nice to be able to take lump sum payments, when you want, only dilemma for me is choosing the colour of my new Porche !!!!!

triple_choc_chip · 29 March 2015 at 9:41PM

If that's the only money available I would also use the lump sum because houses can deteriorate quickly if left in decline. Dampness could affect your health too. Some people use their lump sums to pay off the mortgage, or have a once in a lifetime holiday, your wish to spend it on your home is no less worthy.

You still have 10 years before state retirement age, there is every chance you could top up your pension fund again but either way, once you are relying on a pension income it will be much more difficult paying out for structural repairs.

jamesd · 31 March 2015 at 6:18AM

Really bad idea to take the tax free lump sum. It's hugely expensive to take pension money early, delivering lost income for life. Borrowing is far cheaper.

triple choc chip, this is a defined benefit pension. It can't be topped up later. Take it earlier than normal retirement age and the typical loss of income is 5% for each year it's taken early, with the reduced income lasting for life. The commutation rate of income into lump sum is also usually horribly bad, including for this particular scheme, where the break even time to start losing money is typically ten to twelve years vs a life expectancy typically of 30+ years, so 18-20 years of being worse off overall.

Taking defined benefit pension money early is usually a bad mistake and the same tends to go for taking lump sums fro defined benefit schemes, because of the horrible commutation rate. Taking the higher income then using that to pay the mortgage would be cheaper, over a longer term if required

triple_choc_chip · 31 March 2015 at 9:04PM

Thanks jamesd. I understood paragraphs 1 and 3 but you lost me at the end of 2!
My first thought was to direct OP to the pensions threads but they didn't seem to be considering further borrowing as an option and this could be the only available source of funds.
I can see that taking your advice would gain the best return on the investment, lets hope the OP can find another source of funding for the repairs.

dancingfairy · 31 March 2015 at 9:30PM

In this case I'd be tempted to incur further borrowing. It's not ideal but you obviously have to get the roof fixed before further damage is done.
Withdrawing your pension doesn't seem like a good deal to me as you'd end up with a lot less money overall. You'd end up with potentially 1.2k a year instead of 2.7k a year, you'd loose more per year than the cost of the repairs, over the life of your pension think how much less money you'd have if you took it early.
It seems to make sense in the short term to use your pension money for the roof but you'd loose out in the longer term.
df

Pension, essential repairs and debt

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