best way to stop a pension

jimp74

Hi,

I have a pension with royal london and it seems that the best thing to do at the moment is stop it and use that money to start paying off my interest only mortgage.

they keep telling me in order to hit my "modest target pension" of £15000pa they need an extra £958 a month !!!! if I carry on at my with my current £140pm payment I will get about £2500 pa it seems like a very little reward for the loss of £140 a month at the moment.

is there a way to stop my pension and have it carry on being invested in a safe way?

thanks

Jim

rich010273

Your pension terms and conditions can tell you whether you can stop paying your pension for free or be charged for doing so.

£140 p/m for a £15000 p/a return is looking at a 10x return in investment growth which seems unlikely!

dunstonh

I have a pension with royal london and it seems that the best thing to do at the moment is stop it and use that money to start paying off my interest only mortgage.

That assumes you havent got any guarantees built into the pension. Royal London havent retailed pensions under the RL brand for quite a few years now and some of them have guaranteed annuity rates which are highly valuable. If you stop payments on these you cannot restart them again later.

they keep telling me in order to hit my "modest target pension" of £15000pa they need an extra £958 a month !!!!

On what assumption is that?

if I carry on at my with my current £140pm payment I will get about £2500 pa it seems like a very little reward for the loss of £140 a month at the moment.

On what assumption have they made those figures (probably lowest annuity rate possible - joint and indexation and in todays terms).

Clearly you need to do something about your interest only mortgage if you have no repayment vehicle. However, is robbing your retirement to pay for it the best option available?

Loughton_Monkey

You need to look at the policy with Royal London. If it is a long term contract with an annual (or monthly) commitment to pay regular contributions for a fixed period, then stopping it might involve huge charges. If, on the other hand, it is more flexible, then you could stop it without any significant penalty. The existing value would remain invested - however, expect certain annual charges/fees still to be charged - often in the form of cashing units.

You must 'invest' your spare cash, at the end of the day, in whatever you see fit. But I strongly suggest you also keep asking yourself "What am I going to live on when I retire?"

For every £100 you use to pay off your mortgage, you are effectively 'investing' it at your mortgage interest rate (whatever that is). For every £100 you put into a pension, though, is worth £125 instantly (assuming you're a basic tax payer), and will be invested at whatever rate is achieved by your long-term pension fund.

It's not too difficult to compare on a spreadsheet. On one side, model the scenario where you put £140 per month into the mortgage, and calculate the cumulative value of this going forward at the mortgage interest rate you're actually being charged. On the other side, do a scenario where you put £140 a month into a pension. Now add £35 instant tax relief and see how the fund rolls up at, say 5% (a reasonable assumption for a good long term pension fund).

At the same time, you might also try validating what Royal London are saying. As a very broad rule of thumb, just assume an annual contribution of £1,000. Add the £250 tax relief and roll £1,250 per annum up at, say, 5% until you are 65. Whatever "fund" you have calculated, multiply it by 6.5% (which is a rough benchmark annuity rate for 65 year old males) to give you the expected annual pension you would receive.

The results may surprise you. If (and I suspect you do) want to retire with an income of around 2/3rds of your final salary, then you will find that to achieve this, you (and/or your employer) will need to stuff away between 15%/20% of your gross salary for the whole of your working life!

This type of calculation certainly sharpens the mind! A more difficult question to answer is this: Assume I use all my money to pay off the mortgage, and will spend the rest, then when I retire, what state benefits will the few younger working people of the day be able to afford to pay all us doddery old pensioners? I suspect the answer will be 'very little'.

But at least you can sell the house, buy a caravan, and live on the proceeds.

bendix

jimp74 wrote: »

Hi,

I have a pension with royal london and it seems that the best thing to do at the moment is stop it and use that money to start paying off my interest only mortgage.

they keep telling me in order to hit my "modest target pension" of £15000pa they need an extra £958 a month !!!! if I carry on at my with my current £140pm payment I will get about £2500 pa it seems like a very little reward for the loss of £140 a month at the moment.

is there a way to stop my pension and have it carry on being invested in a safe way?

thanks

Jim

Great strategy. Instead of contributing a meaningful amount to pay for your retirement, give it up totally and concentrate on today.

You know it makes sense.

FATBALLZ

Loughton_Monkey wrote: »

The results may surprise you. If (and I suspect you do) want to retire with an income of around 2/3rds of your final salary, then you will find that to achieve this, you (and/or your employer) will need to stuff away between 15%/20% of your gross salary for the whole of your working life!

My employer said their final salary scheme was worth 40% on top of salary, I thought 20% was more like the amount you need for 2/3 average salary? That's what my target for payout and contributions is anyway, hope I haven't got my figures wrong.

It does amaze me though how all these people put in £100 a month from the age of 40 and when they see the pension forecast then declare that private pensions are worthless and a scam and demand higher state pensions because they were robbed. I mean come on.. you put in £100 a month for 25 years, and expect £20k a year for 30+ years of retirement... I thought it was my generation who couldn't do maths...

Loughton_Monkey

FATBALLZ wrote: »

My employer said their final salary scheme was worth 40% on top of salary, I thought 20% was more like the amount you need for 2/3 average salary? That's what my target for payout and contributions is anyway, hope I haven't got my figures wrong.

These figures can be defined many ways. My own calculation is based upon a 'normal' prgression of salary along one's career, and in effect takes into account a relatively low percentage in your first few years, rising to horrific figures in the later years. Depending upon the age profile, an employer with a more mature workforce could easily find himself putting in 40%.

When the scheme is literally final salary (as opposed to, say, average of last three years), you can count the full cost of a 10% pay rise in terms of multiples of a year's salary! No wonder these things are becoming extinct (except for the boys in Whitehall and Local Government of course).

All your other points are valid. If 30-40 year olds wake up now, they can begin to minimise any damage. But 50+ year olds must really be quaking in their boots if they haven't woken up. They probably think they can struggle along with the basic state pension, plus all the other 'goodies' and winter heating allowance etc. But how long are they going to last?

jimp74

Thank you for all your replies most of which where very helpful, and thanks also to the couple of slightly goading comments about what an idiot I'm being.

however it's food for thought it would seem the general consensus here is that stopping is not a good idea.

I was concerned but having my mind focus by all of you has made me think twice.

thanks again