Stop pension conts & overpay mortgage?

october_road

Would welcome advice please. We have been looking at hubby's latest private pension statement and its dismal performance not only this year but for several years - and thats before the current debacle (!) When we took it out 7 years ago we were assured (which we naively believed) that the amount of our monthly contribution would give us a pension of £20000 when we are 65 (we are currently both 51) - and by the look of it its going to pay out less per month than we are paying in never mind being anywhere near that figure!! We are not very savvy when it comes to understanding investments which is why for years we had one financial advisor for pensions/mortgages/insurances. Since we found MSE we have got rid of him and gone it alone but we still have the original pension and some insurances he recommended. (BTW I will get a reasonably decent Civil Service Pension and lump sum so we are not totally without provision).

We have been working out how many years we could shave off our mortgage if we stopped the pension contributions and instead overpaid the same amount off the mortgage which currently has 17 years left on it. It looks to us like it could be the right thing to do for us as it rules out all this uncertainty and we know exactly where we stand financially and we could be mortgage free years sooner. It would also encourage us to save and throw even more at the mortgage and then continue to save once mortgage free.(Although I am sure you people can see pitfalls in our plan which we cant!)

If we chose to do this - how do we do it and would there be a financial penalty with the pension provider? I am assuming if you did this the pension still exists - it just doesnt grow. Would we still be charged the annual 1% it says they charge to manage the fund as I am assuming they would still be managing the fund as it stands? Or is it just frozen and not administered in any way? I dont even know if you can do it as there is no advice about this scenario in the original info which came with the plan. Sorry if the questions seem stupid - would really appreciate your opinions.

dunstonh

Would welcome advice please.

it is against board rules and FSA guidelines to give advice. What you see is information and discussion only. Never advice.

When we took it out 7 years ago we were assured (which we naively believed) that the amount of our monthly contribution would give us a pension of £20000 when we are 65

And what makes you think it wont? Events like what is happening currently have occured on average once every 7 years. This is the 8th one since 1956. The last stockmarket decline was 2000-2002 and was (at this point of posting) a larger drop than has occured so far.

Investments zig zag in value. Always have, always will. That is how they work. You see the value drop and you see the value rise. In bad times, the buying of more units cheaply (as is the case now) is a good thing as it is these that potentially make the most money in the long run. Long term regular contracts need events like this to give larger returns in the long run. Its only if the short term its bad. However, as you get to retirement your adviser (or you as you dont use one any more) would move the investments over to lower risk areas, such as cash and gilts, to avoid this happening as you retire. Some funds do this automatically for you.

If we chose to do this - how do we do it and would there be a financial penalty with the pension provider?

No.

I am assuming if you did this the pension still exists - it just doesnt grow.

It will continue to perform in line with the assets of the investments held within the pension. You dont actually mention what the investment funds are (which is the most important thing) but over the long term you would expect growth.

Would we still be charged the annual 1% it says they charge to manage the fund as I am assuming they would still be managing the fund as it stands?

yes.

Ok, your post raises a number of concerns.

1 - you are considering making decisions without knowing the options and workings of those options.
2 - the advice you were given was not bad. However, your understanding of the advice and the investments appears to be virtually nil. Lack of understanding and making assumptions is not what is needed when making important decisions like this.
3 - Why was the pension taken out? Have your aims changed?
4 - what is your mortgage rate, is it likely to drop?
5 - how is your money invested? is it in line with your risk profile? do you rebalance the investments annually and review the investments?
6 - what is your personal retirment provision (not just your husband) as retirement is a joint event and you get joint allowances?

There are other things but I dont want to swamp it. However, my biggest concern is your lack of understanding. A monthly contribution started 7 years ago wouldnt have had much time to build up a large enough figure yet to make much difference. It takes 10-15 years on a regular contribution to really start making a difference. You only have 7.

october_road

Thanks for that information (not advice!) You have answered my questions and also provided some reassurance about the pension. Sorry dont have the answers to a lot of your questions - we were signed up with Clerical Medical and have no idea where they invest the money - it just says 100% invested in Balanced Managed Pension Fund and its called a Stakeholder Plan. The Sep statement says that when we are 65 the amount of pension we can expect if contributions continue to be paid up to that date is £5750 per year- somewhat short of £20000!! Not blaming anyone else here - we know we should have paid more attention - we thought that the 1% we were paying meant that we were paying someone to act in our best interests and it wasnt necessary to understand how it all works - that was why we went to an IFA and let him find a product which would suit our needs.

Our long term requirements have not changed since we took it out but we did move house and take on a bigger mortgage. We are managing fine financially but the current climate has got us spooked about the future and we are looking at ways to own our house outright as soon as possible. We could save a ton of money in interest on our mortgage if we paid it off quicker and we felt that would give us more security. Plus we would own a very large house which we could
hopefully sell and downsize from in a hopefully better economic climate when we retire. If this forecast of £5750 is accurate it doesnt seem worth it as we pay £4668 a year into it which is made up to £6000 with tax relief. We will have paid this amount for 21 years so would have to live beyond 86 to actually get something back above what we have paid - as opposed to clearing the mortgage quicker and having those mortgage free years whilst still in full time work. Unless I am totally misreading how it all works - which is of course entirely possible!