Best thing to do with Pension Lump sum

jamesd

novice-saver, the trouble with the pay off and save approach is that you'll never reach the point you could have been at if you'd started out investing, because you miss years of compound growth at higher than mortgage interest rates.

It's not 5% gross that you can get from investments inside a S&S ISA but rather 5% net and growing the capital with inflation at the same time. Though more is readily doable, just not as nice for really cautious investment planning.

Pay off and save is OK and one of the best approaches available for those who just aren't willing to invest. But it's not the best approach available if you are willing to invest even some of the money.

novice-saver

I'll stick with my second paragraph:

"If the ammount you pay for the mortgage exceeds the taxed returns from sufficient savings to pay off the mortgage, surely you should pay it off."

hethmar

Im just so envious - "only £25k" for a lump sum left PLUS £32k a year!! My goodness she will be living in luxury!

jamesd

novice-saver, well, that's a clear don't pay it off result because the UK main stock market has had an average return greater than 10% plus inflation over the long term. Even really cautious investments will manage 5% plus inflation.

Unless you're restricting it only to savings accounts because that's the highest level of up and down movement you're prepared to take. If so, paying off is probably a better idea.

Fatenbread

Seumas wrote: »

My Mum has recently retired after 40years of teaching and has taken the maximum lump sum and a reduced annuity. The lump sum she received was approx 100k and the annuity is 32k per annum. She has 72k left on her mortgages with 5 years remaining to pay it off. Her monthly payments are quite high so she wants to pay her mortgage off completely. This would only leave her with 28k cash to enjoy her retirement. Is this the best thing for her to do or are there any other options she could take that would allow her to keep more of her lump sum so she can do some of the things she's always wanted to do in her retirement. Any ideas would be much appreciated.

If your mum has a tracker mortgage and is benefitting from the current record low interest rates, then don't pay off the mortgage. Stick it in a low risk investment and take the benefit of the differential between the mortgage rate and the investment account rate.

If she has a fixed or standard rate mortgage and is paying 5%+, then you are best off paying off the mortgage.

Presumably the annuity of £32k is taxable, which put your mum close to being a higher rate taxpayer. She would therefore be paying tax at the basic rate, if not the higher rate on the returns she makes from any investments, whereas the amount she saves in interest by not having a mortgage is effectively tax-free. She would need to be getting an investment return 25% - 50% higher than her mortgage rate to justify taking the investment route, due to the tax implications, which would come with a higher risk premium.

I am assuming that your mum, as a retired person, would be risk averse, as she has no way of earning back any money she ends up losing on high-risk investments, and may then be forced to make mortgage payments out of her annuity income, leaving less to enjoy retirement with.

High risk investments are only better than mortgages when there is no tax impact and you can expect enough years ahead of you to ensure that any short-term decreases in fund value can be rode out as the value of the mortgagte debt is eroded through inflation - ie when you are working and building a pension pot, rather than deciding how to spend a pension pot.

Fatenbread

jamesd wrote: »

novice-saver, well, that's a clear don't pay it off result because the UK main stock market has had an average return greater than 10% plus inflation over the long term. Even really cautious investments will manage 5% plus inflation.

Unless you're restricting it only to savings accounts because that's the highest level of up and down movement you're prepared to take. If so, paying off is probably a better idea.

In the long run, we are all dead. (JM Keynes)

bexster1975

I do love private sector employees getting at public sector pay and pensions. Don't worry, come the autumn we will be on the same p**s-poor deal you all are and then thousands will leave public service and you can have all their jobs!:D

bexster

jamesd

Fatenbread, dying is one of the few certainties in retirement planning. Still, there have been only a few 25 year periods where investing wouldn't have beaten paying off a mortgage and those require buying at peaks in the market or selling near the bottom of drops. We aren't in a peak at the moment, but rather the early stages of economic recovery, so that makes it a pretty decent time to be buying. Though not a good one for gilts and high quality corporate bonds.

Fatenbread

jamesd wrote: »

Fatenbread, dying is one of the few certainties in retirement planning. Still, there have been only a few 25 year periods where investing wouldn't have beaten paying off a mortgage and those require buying at peaks in the market or selling near the bottom of drops. We aren't in a peak at the moment, but rather the early stages of economic recovery, so that makes it a pretty decent time to be buying. Though not a good one for gilts and high quality corporate bonds.

You are entirely correct and I am not disputing these facts, nor am I paying off my own mortgage in my ealry thirties in preference to investing in an equity fund backed pension.

However, why would someone who has retired at 60 and wants to enjoy their retirement want to risk their house on the equities market, just to have a bigger pile of money to stuff their coffin with?