Do I need an IFA?

Linton

Muppet81 wrote: »

Both our pensions are final salary pension
They are both index linked
The commutation rate is 1;12

Our mortage is at 2.5%

Our initial way of thinking was to reduce our monthly outgoings by paying off the mortgage. I do see what several of you are saying and that we would probably be better hanging on to the £20k

Having done more thinking today, I have come up with the following idea:-

We had intended paying off the £20k mortgage which has just under 6 years to run
In 2 or 3 years we intend to change our car and would be doing that with a loan.
It would make more sense to perhaps pay £10k off the mortgage, leave the other £10k in a fixed term savings account then use that to buy a car outright in 2 0r 3 years.
That would mean we would pay the mortgage off 3 years 3 mths early and save £2229.00 in interest (according to a calculator I used)
We would have a car we own outright
We would off course have to carry on making mortgage payments for 2 years 7 months but as I had, in my piggybank accounting system, allowed £190.00 per month to accrue towards a deposit on the replacement car, this could be used toward the mortgage payment.

I am beginning to see that we need to think differently about our finances now. I tend to think of 1 month at a time and making ends meet. We are now looking at a capital pot which we intend to live off whilst we need to and which we need to manage carefully and avoid paying any avoidable fees/tax.

The commutation rate isnt generous, but seems to be much the same as other people who have posted on this forum have been offered.

Perhaps you could find it useful/interesting to use your Excel spreadsheet to investigate the implications of taking the lump sum or not. I think you might have second thoughts, especially using your planned inflation rate of 4.5%.

Muppet81

Neverland wrote: »

The one savings product that is worth considering is each taking out 3/5 index linked NS&I saving certificates which gives you guaranteed inflation protection over the term

If you each got a 3 and 5 certificate that would protect £60k from inflation

Of course at the moment NS&I isn't issuing any index linked certificates...

P.S. I think you would be best off trying to do some part time work, that would make your sums much much easier

Thank you. I have registered on the NS&I site to be notified if/when they start to issue these again.

You are of course right ..... a part time job would make the finances a bit easier.

But, we currently have friends who put things off and who died or became seriously ill. We both feel that we would like to try living whilst we are fit and well. We may live to regret that in the future but hopefully not. We will monitor carefully.

PS Just in case you are all thinking "idle pair". We both do voluntary work. I do a day in a charity shop and also run their internet sales and do the financial recording for the internet sales. OH is a Magistrate, is also on the Drugs Rehabilitation Panel and is applying to be a Prison Inspector. All done on a voluntary basis.

So, not exactly idle but just doing what we want to, not what we HAVE to do. After working for 28 years, I still feel I have to justify myself to those who are still working. Probably daft but that is how I feel.

Thanks again all of you for your invaluable input.

Muppet81

Linton wrote: »

The commutation rate isnt generous, but seems to be much the same as other people who have posted on this forum have been offered.

Perhaps you could find it useful/interesting to use your Excel spreadsheet to investigate the implications of taking the lump sum or not. I think you might have second thoughts, especially using your planned inflation rate of 4.5%.

A very valid point. I initially thought it best to not enhance the lump sum but to take the maximum pension. If we both lived to be 90, we would be better off having done this and would be fairly wealthy BUT how much are we likely to be wanting to do at 90?

I have used my spreadsheet to check both options and we still seem need to enhance the lump sum in order to have enough capital to keep us afloat.

I guess it is a gamble. If we take the enhanced lump sum . Enjoy life and die before 80, we would have done better out of it.

If we live to be 90 or more, we will be drawing a reduced pension for a long number of years and will have lost out but will have hopefully enjoyed our late 50s, 60s and 70s.

silvasava

Muppet - just read through your thread & the advice you've been given. My husband & I are in a similar position although we are already drawing our pensions. We put some of our pension pot with an IFA & to be honest its done b*gg*r all over the last 4 years. I could have got better returns with ISA's & BS savings. In fact - when I spoke to our IFA a few weeks ago & made this observation he told me he was recommending putting as much as possible into ISA's!! At the very least you will have control of your own money and you can always adjust your plan to suit your life

Good Luck & Happy Retirement

Muppet81

silvasava wrote: »

Muppet - just read through your thread & the advice you've been given. My husband & I are in a similar position although we are already drawing our pensions. We put some of our pension pot with an IFA & to be honest its done b*gg*r all over the last 4 years. I could have got better returns with ISA's & BS savings. In fact - when I spoke to our IFA a few weeks ago & made this observation he told me he was recommending putting as much as possible into ISA's!! At the very least you will have control of your own money and you can always adjust your plan to suit your life

Good Luck & Happy Retirement

Thank you for sharing your experiences with your IFA. So sorry that you are in that position now.
Certainly seems that for our somewhat limited capital pot an IFA would be unnecessary.

If we were in a position where we were able to hang on to our capital pot and live from our pensions and income generated from capital pot, it would be a very different picture and I think we would have to use the expertise of an IFA.

Hope you get sorted and thanks for your kind wishes for our retirement. It is all very exciting but also scary!

jamesd

Muppet81 wrote: »

Both our pensions are final salary pension ... They are both index linked ... The commutation rate is 1;12

That's an extremely poor commutation rate.

Ignoring the index linking for the moment, a 1:12 commutation rate takes 1/12 * 100 = 8.33% interest rate to even match it. The inflation linking adds perhaps another three percent to target equivalent interest rate, taking it to 11.33%.

Muppet81 wrote: »

Our mortage is at 2.5%

So it should be clear that it's a really bad idea to reduce the pension income to clear the mortgage, because leaving that part of the money in the pension and using the income to pay the mortgage each month makes you better off.

Muppet81 wrote: »

We had intended paying off the £20k mortgage which has just under 6 years to run
In 2 or 3 years we intend to change our car and would be doing that with a loan.
It would make more sense to perhaps pay £10k off the mortgage, leave the other £10k in a fixed term savings account then use that to buy a car outright in 2 0r 3 years.
That would mean we would pay the mortgage off 3 years 3 mths early and save £2229.00 in interest (according to a calculator I used)

Now put an interest rate of 11.33% into the calculator. That'll tell you roughly how much you're losing by taking the money out of the pension, except that the pension loss continues to increase for life, not just the duration of the mortgage.

Muppet81 wrote: »

I am beginning to see that we need to think differently about our finances now. I tend to think of 1 month at a time and making ends meet. We are now looking at a capital pot which we intend to live off whilst we need to and which we need to manage carefully and avoid paying any avoidable fees/tax.

Yes, you need to alter your way of thinking to include the effect on income of what you do. taking a lump sum hurts your income more than it saves you in interest. It's not a case where a focus on saving spending is key because to get the lup sum to do that you give up a more valuable income.

Looking at your numbers, the pension lump sum would be £111,000, with £32,000 redundancy. At a 12:1 commutation rate the £111,000 represents this much extra income, assuming 3% inflation:

year 1: £9,200
year 2: £9,527.50
year 3: £9,813.33
year 4: £10,107.72
year 5: £10,410.96
year 6: £10,723.29

What happens if you put those numbers into your calculations? That's a lot of money that can be saved to buy a car or used to make regular overpayments on the mortgage.

Taking just the part of that income that is equivalent to £20,000 mortgage lump sum, in six years the income you're giving up is £10,771.68. that continues increasing each year for life. So it's more efficient to do something like increase the mortgage term and use the income to pay it all over time. The mortgage part for the first six years is:

£1657
£1716
£1768
£1821
£1875
£1932

Say you adjusted the mortgage term so that it was costing you £138 a month, the first year part. In the second and later years you'd be able to keep up that payment and also have this much extra income each month:

59
111
164
218
274

Looking at your pension income levels, here's the total income from taking no lump sum and also how the initial £1500 (I'll assume 20% tax, so I'll use £1875 a month, £22,500 a year) looks:

year	1	9,200	31,700	767	2,642
year	2	9,528	32,651	794	2,721
year	3	9,813	33,631	818	2,803
year	4	10,108	34,639	842	2,887
year	5	10,411	35,679	868	2,973
year	6	10,723	36,749	894	3,062
year	7	11,045	37,851	920	3,154
year	8	11,376	38,987	948	3,249
year	9	11,718	40,157	976	3,346
year	10	12,069	41,361	1,006	3,447
year	11	12,431	42,602	1,036	3,550
year	12	12,804	43,880	1,067	3,657
year	13	13,188	45,197	1,099	3,766
year	14	13,584	46,553	1,132	3,879
year	15	13,991	47,949	1,166	3,996
year	16	14,411	49,388	1,201	4,116
year	17	14,844	50,869	1,237	4,239
year	18	15,289	52,395	1,274	4,366
year	19	15,748	53,967	1,312	4,497
year	20	16,220	55,586	1,352	4,632

The columns are just the income from 111,000 lump sum commuted at 12:1, total of both that and the pension you were planning to take, monthly versions of each of those. All before tax.

Looking at your income target or £2630 pm you start out with £2642 before tax pm. After tax the income is £26,981 a year, £2,248.41 a month. That's a shortfall of £393,59 a month, £4,723 a year.

If you have only a lump sum of £32,000 then over the next 9 years you'd need to spend £42,507 from it, so you couldn't hit your spending target if you were getting no more than inflation from the lump sum.

In 2021 he'll get the state pensions and probably something like £140 a week, £7,280 a year more before tax. That's £5,824 after tax and immediately means that you no longer have an income shortfall. A stat pension forecast can tell you the more accurate number.

Then four years later you get your pension and you suddenly have a large surplus income.

This leads me to think that your best option is to fund the extension and current mortgage with a longer term mortgage using one of the lenders that'll lend into retirement, perhaps taking out a 25 year mortgage. Initially that'll use much of your income but over time the pension increases with inflation and the new pensions will make it increasingly easy to overpay on the mortgage and get rid of it well before the 25 years are up. The 25 years is just to keep the initial repayment cost down.

atush

silvasava wrote: »

Muppet - just read through your thread & the advice you've been given. My husband & I are in a similar position although we are already drawing our pensions. We put some of our pension pot with an IFA & to be honest its done b*gg*r all over the last 4 years. I could have got better returns with ISA's & BS savings. In fact - when I spoke to our IFA a few weeks ago & made this observation he told me he was recommending putting as much as possible into ISA's!! At the very least you will have control of your own money and you can always adjust your plan to suit your life

Good Luck & Happy Retirement

Silva,

I have to say you are being unfair to your IFA. He doesn't have a chrystal ball does he? How would he have been able to predict the credit crunch and world banking crisis? The BOE didn't nor did the US treasury.

You invested at a bad time. My father died in 1987 before Black October, and lost 35% of his insurance and death benefits. It happens when you invest a lump sum at a particular time. but she made back that and more in the following decade.

atush

OP i also think you should perhaps revisit the extension to your house as I don't think you can really afford it.

Unless you took the view to both of you only semi retiring. At 56, 57 you are still very young and could live for more than 3 decades. So a part time job each would give you income plus more time to relax and enjoy life.

Muppet81

jamesd wrote: »

That's an extremely poor commutation rate.

Ignoring the index linking for the moment, a 1:12 commutation rate takes 1/12 * 100 = 8.33% interest rate to even match it. The inflation linking adds perhaps another three percent to target equivalent interest rate, taking it to 11.33%.

So it should be clear that it's a really bad idea to reduce the pension income to clear the mortgage, because leaving that part of the money in the pension and using the income to pay the mortgage each month makes you better off.

Now put an interest rate of 11.33% into the calculator. That'll tell you roughly how much you're losing by taking the money out of the pension, except that the pension loss continues to increase for life, not just the duration of the mortgage.

Yes, you need to alter your way of thinking to include the effect on income of what you do. taking a lump sum hurts your income more than it saves you in interest. It's not a case where a focus on saving spending is key because to get the lup sum to do that you give up a more valuable income.

Looking at your numbers, the pension lump sum would be £111,000, with £32,000 redundancy. At a 12:1 commutation rate the £111,000 represents this much extra income, assuming 3% inflation:

year 1: £9,200
year 2: £9,527.50
year 3: £9,813.33
year 4: £10,107.72
year 5: £10,410.96
year 6: £10,723.29

What happens if you put those numbers into your calculations? That's a lot of money that can be saved to buy a car or used to make regular overpayments on the mortgage.

Taking just the part of that income that is equivalent to £20,000 mortgage lump sum, in six years the income you're giving up is £10,771.68. that continues increasing each year for life. So it's more efficient to do something like increase the mortgage term and use the income to pay it all over time. The mortgage part for the first six years is:

£1657
£1716
£1768
£1821
£1875
£1932

Say you adjusted the mortgage term so that it was costing you £138 a month, the first year part. In the second and later years you'd be able to keep up that payment and also have this much extra income each month:

59
111
164
218
274

Looking at your pension income levels, here's the total income from taking no lump sum and also how the initial £1500 (I'll assume 20% tax, so I'll use £1875 a month, £22,500 a year) looks:

year    1    9,200    31,700    767    2,642
year    2    9,528    32,651    794    2,721
year    3    9,813    33,631    818    2,803
year    4    10,108    34,639    842    2,887
year    5    10,411    35,679    868    2,973
year    6    10,723    36,749    894    3,062
year    7    11,045    37,851    920    3,154
year    8    11,376    38,987    948    3,249
year    9    11,718    40,157    976    3,346
year    10    12,069    41,361    1,006    3,447
year    11    12,431    42,602    1,036    3,550
year    12    12,804    43,880    1,067    3,657
year    13    13,188    45,197    1,099    3,766
year    14    13,584    46,553    1,132    3,879
year    15    13,991    47,949    1,166    3,996
year    16    14,411    49,388    1,201    4,116
year    17    14,844    50,869    1,237    4,239
year    18    15,289    52,395    1,274    4,366
year    19    15,748    53,967    1,312    4,497
year    20    16,220    55,586    1,352    4,632

The columns are just the income from 111,000 lump sum commuted at 12:1, total of both that and the pension you were planning to take, monthly versions of each of those. All before tax.

Looking at your income target or £2630 pm you start out with £2642 before tax pm. After tax the income is £26,981 a year, £2,248.41 a month. That's a shortfall of £393,59 a month, £4,723 a year.

If you have only a lump sum of £32,000 then over the next 9 years you'd need to spend £42,507 from it, so you couldn't hit your spending target if you were getting no more than inflation from the lump sum.

In 2021 he'll get the state pensions and probably something like £140 a week, £7,280 a year more before tax. That's £5,824 after tax and immediately means that you no longer have an income shortfall. A stat pension forecast can tell you the more accurate number.

Then four years later you get your pension and you suddenly have a large surplus income.

This leads me to think that your best option is to fund the extension and current mortgage with a longer term mortgage using one of the lenders that'll lend into retirement, perhaps taking out a 25 year mortgage. Initially that'll use much of your income but over time the pension increases with inflation and the new pensions will make it increasingly easy to overpay on the mortgage and get rid of it well before the 25 years are up. The 25 years is just to keep the initial repayment cost down.

You have gone into a tremendous amount of detail here and I am very grateful. I am though a bit ( a lot) confused.

Have I managed to state our situation clearly I wonder?

When OH retires, he will have 2 options:-

1) He will receive £32k redundancy - this is seperate to the pension and lump sum

He can choose to take his lump sum unenhanced £69,000 with an annual penion of £27,425 - monthly £1950 after tax

2) Receive £32k redundancy

Enhance lump sum to £143,698 which reduces annual pension to £21,555 - monthly £1550 after tax

I am not sure where you get the figure of £111,000 from?

I have tried to follow the detailed figures you have provided but am very confused.

I see that at 2.5% the mortgage is the cheapest possible form of borrowing.

I can see the logic behind doing the extension and keeping the mortgage by way of perhaps extending the mortgage by way of the amount and the term. But I do not see how we could survive month to month whilst paying the mortgage payment.

The monthly outgoings I said we needed were assuming the mortgage had been paid off.

I do not see how we could meet our monthly expenses and pay a mortgage payment for a £70,000 mortgage from OH's monthly pension of £1950. We would have the £69k unenhanced lump sum accruing interest and we would have the £32,000 redundancy invested but being drawn down each month to meet the shortfall. Could this work? My brain has turned to mush now I am afraid

silvasava

atush wrote: »

Silva,

I have to say you are being unfair to your IFA. He doesn't have a chrystal ball does he? How would he have been able to predict the credit crunch and world banking crisis? The BOE didn't nor did the US treasury.

You invested at a bad time. My father died in 1987 before Black October, and lost 35% of his insurance and death benefits. It happens when you invest a lump sum at a particular time. but she made back that and more in the following decade.

I appreciate that funds have to be deposited for a while to see returns - it just really bugs me that we've saved all our working lives into pensions funds & then the government tells us we have to have either an Annuity or put it in a Drawdown scheme - are they so frightened that we're going to blow it all & then claim benefits - I dont think so. Anyway my beef is not with my IFA 'cos I know he's doing the best he can in the current climate. Rant over - & plenty of good advice here for Muppet :T