What to do with my pension.

cpnick

As I am approaching 60 years of age soon I want some advice on how to invest my pension. I will have a lump sum of around £40,000 plus monthly pension of around £600. I want to carry on working for another three or four years in order to become debt free. My mortgage is my only outstanding loan. The options I see as being the following:

• pay the lump sum off my remaining £67,000 mortgage (offset - low interest)
• take out 'Buy-to-let' mortgage and purchase a flat to rent out
• enter into a hight interest savings plan or ISA (my wife and I each have an ISA already)
• an annuity

If you have any other ideas I would be grateful.

dunstonh

The options I see as being the following:

What about the other options?

Invest the lump sum or dont take the lump sum from the pension (can be best option with many defined benefit schemes)

What are your long term objectives? What is your risk profile? What is your tax position? are you married or have a partner? what is your (and their) health?

vax2002

How much will this £67,000 remaining mortgage cost to actually pay off.
The figure owing not the important one in ANY mortgage, it is the repayment value of that outstanding debt and that can easily wipe out any investments many times over.
My advice is always reduce the largest debt first, pay off as much as you can from the mortgage and if you keep working put the pension payments in to clearing the rest as fast as possible.
Once paid, you can put your feet up and relax at last and live off the pension with a few sacrifices.
Somehow looking at your list, I think you already know that.

cpnick

Firstly, thank you for your help. I will try to try to answer some of your questions.

1. Investing the £40,000 lump sum or reducing the £67,000 mortgage. The mortgage is an OFSET mortgage and we have some capitol and my salery paid into the account each month. Therefore, the interest per month on the loan is less than it would be under a normal repayment mortgage. The repayment debt comes to an extra £6,000 or so over the remaining term. Bank/mortgage interest rates are also low as you know.
2. My children are now adults thus no credits. I am married and we are both earning. I am a school teacher working in the public sector and my salery has not reached the 40% tax bracket.
3. I need to keep working because a £600 (gross) pension would not be enough to live on. So I may need to stay employed until 65 years of age when I can draw the OAP.

As my OFSET mortgage rate is so low at the moment, around 1%, I wondered if I would be better off investing in an ISA or savings plan that offer 2% or 3%. I am tempted to buy a property as I will have the deposit, and of course a rent for income, therefore if the rent is similar to the Buy-to-let mortgage payment it might not cost me much.
However, I accept your advice, for which I am grateful, that the best 'formula' would be to pay off my debt as soon as possible. I like that too.

atush

I think you may have misunderstood.

You say you have a 40K lump sum and a 600/mo pension. But if you didn't take the 40K, you would have a higher pension/mo/yr.

We are asking how high? Ie how much income per year will you give up for each 1K lump sum? It is called a Commutation rate, and your pension provider will tell you what it is. get back to us after.

Goldenyears

atush wrote: »

how much income per year will you give up for each 1K lump sum? It is called a Commutation rate, and your pension provider will tell you what it is. get back to us after.

Wouldn't it be the inverse commutation rate that they need and different to the commutation rate ? The OP should be clear what they are asking the pension provider for.

jem16

atush wrote: »

I think you may have misunderstood.

You say you have a 40K lump sum and a 600/mo pension. But if you didn't take the 40K, you would have a higher pension/mo/yr.

With the Teachers' pension scheme, you have to take at least the minimum of 3 x pension. However the OP's figures don't match up with that as £600pm would see a lump sum of £21,600.

We are asking how high? Ie how much income per year will you give up for each 1K lump sum? It is called a Commutation rate, and your pension provider will tell you what it is. get back to us after.

Commutation rate is 12:1 for the Teachers' scheme which is dire unless there are actual plans to spend the cash. The OP would find it very hard to make up for the lost pension by investing.

Goldenyears

jem16 wrote: »

With the Teachers' pension scheme, you have to take at least the minimum of 3 x pension.

I see, no inverse commutation is allowed - is that right ? I think NHS 1995 scheme is the same but some other PS schemes do allow it.

jem16

Goldenyears wrote: »

I see, no inverse commutation is allowed - is that right ?

That's correct.

For those in the scheme before 2006, the scheme is an 1/80ths scheme with an automatic lump sum of 3 x pension. You cannot reduce the lump sum below this amount but may take more at a commutation rate of 12:1. As I said the OP appears to be taking a higher lump sum based on the figures given.

For those who joined after 2006 it's a 1/60ths scheme where you have to commute part of the pension to get a lump sum if you want one. You can choose in this case not to have a lump sum.

I am assuming that the OP is in the earlier scheme given the NRA of 60 as the new scheme has an NRA of 65.

bigfreddiel

jem16 wrote: »

That's correct.

For those in the scheme before 2006, the scheme is an 1/80ths scheme with an automatic lump sum of 3 x pension. You cannot reduce the lump sum below this amount but may take more at a commutation rate of 12:1. As I said the OP appears to be taking a higher lump sum based on the figures given.

For those who joined after 2006 it's a 1/60ths scheme where you have to commute part of the pension to get a lump sum if you want one. You can choose in this case not to have a lump sum.

I am assuming that the OP is in the earlier scheme given the NRA of 60 as the new scheme has an NRA of 65.

the civil service classic scheme is similar i.e 3xpension as lump sum and its a 1/80ths final salary - you can how ever reverse commute the lump sum, but the rate is dire - it obviously depends on youe age - for me at 60 my lump sum of £25k would reverse commute to about £1000 pa pension

so simple arithmetic shows that after 25 years i'm ahead if i reverse commute

my pension will rise by cpi each year (4,5%) but lets use the gauranteed 2.5% then you make up £25k a few yearst sooner

oth if you save the £25k into a 5% cash isa with your partner you'll be gaining over £1k+ in a few years time

so basically its down to you and what works best for you.

in my case i'm taking the lump sum.

hope that helps

fj

cpnick

I understand a little of what you are saying. I will clear up what I know.

1. You are correct when you say that a my teachers pension would be around £21,000 lump sum and £600 per month. It coinsides with the maturity of a 40 year endowment maturing soon at £20,000. Hence £40,000.
2. I will be 59 soon so the suggestion will be to take my pension one year early. I will loose around £900 lump sum for this, plus around £300 over the year in twelve monthly payments. So, I will loose around £1200 taking my pension one year early. However, I will gain one years worth of pension e.g. £600 per month = £7,200. The loss on the monthly pension (if I waited until I was 60 year old) is smallish and will take about 20 years before I loose out i.e £7,200 / £300.

I am now thinking the best plan is use the money to cancell my mortgage and become debt free.
Hope this clarifies my situation.
Thanks again.