Final salary scheme closing - what to do

LEP

Been told today that my companies final salary pension is closing next Feb.

When it closes I will have built up an protected pension as part of this scheme that is equivalant to £6.7k per annum.

To compensate us the company is offering to contribute a pension supplement of 21% of pensionable pay from Feb 2013 to Jun 2016 and 16% after this date.

This is in addition to the 10% I currently pay in.

We will be auto enrolled into the money benefit scheme that all new employees join and will have to make a minimum contribution of 3% of the pension supplement (this rises after 2017 but is not really relevant to my plan).

The rest can be split between take home pay or going into the new pension. This can also be amended at the start of every year and the 10% I currently pay in can be added to this.

All contributions are salary sacrifice so benefit from being tax and ni free.

I have 2 mortgages, one of which is on consent to let at a rate of just 2.5%. Outstanding balance approx 54k with just under 13 years left to pay off.

I am considering joining the money benefit pension scheme and paying in just the 3% minimum and using the rest of the supplement to get the mortgage paid off in little over 3 years. Have worked this out if I overpay by £400/month (which I plan to start doing anyway from next month) + the money the company would pay me + the 10% I won't be paying in.

Once paid off I can then concentrate on buildling up an additonal pension pot in addition to what I have already guaranteed.

I am concious that whilst I am doing this I am essentially missing out of 3 years money into a 'traditional' pension scheme and perhaps more importantly missing out on the tax and ni benefits of the salary sacrifice but on the other hand I would own a property mortgage free (monkey off your back and all that!) and mortgage rates are only going to go one way so I'd get it paid off (hopefully) before they rise.

Anyone got any views on my plan, good or bad?

I am 38 years old by the way.....

jamesd

Your plan makes you financially worse off so in pure money terms it's a bad plan.

A better plan would be to use the pension contributions to get the maximum employer addition then at age 55 take a tax free lump sum from the pension or part of it to repay any mortgage that is still around in 17 years. That's probably after the end date for both mortgages, though.

Paying the mortgages off early is making a choice to retire later or with less money. Investments typically grow at a higher rate than mortgage interest rates. Today you can get 8% tax free interest within a pension or S&S ISA, though of course with capital value variations. Under current pension rules you can start taking pension money from defined contribution pots like the new one at age 55.

Ignoring investment as an option, can you get a higher after tax interest rate from savings accounts than your mortgage interest rate? If you can it doesn't make sense to pay money off the mortgage because it loses you more money from the lost savings interest than you save from the mortgage interest. You can get 8% taxable from the First Direct regular saver account on up to £300 a month so one easy and safe improvement is to use this for £300 a month. If you have a spouse that's £600 a month.

Getting the mortgage paid off before rates rise isn't a really good way to look at it. Getting the mortgage paid off only when the rates are higher than you can get elsewhere would be a more financially profitable way.

Linton

Are you a higher rate tax payer?? If not and I have correctly understood the arrangements ( what is this extra money the company will pay you that will help pay off your mortgage?) I dont see much wrong with your plan as you already have a valuable guaranteed DB pension and are due a very large company contribution to your new pension.

If you are a higher rate tax payer then it becomes less clear as it would be a pity to lose all the 40% tax relief you can get.

LEP

Linton wrote: »

Are you a higher rate tax payer?? If not and I have correctly understood the arrangements ( what is this extra money the company will pay you that will help pay off your mortgage?) I dont see much wrong with your plan as you already have a valuable guaranteed DB pension and are due a very large company contribution to your new pension.

If you are a higher rate tax payer then it becomes less clear as it would be a pity to lose all the 40% tax relief you can get.

This is clearly something I missed. When I take into account my rental income from the property I let out most of the money I received from the pension supplement in pay would be taxed at the higher rate to I don't think it is worth it.

I didn't realise the 40% bracket kicked in so low!

Eellogofusciouhipoppokunu

LEP wrote: »

This is clearly something I missed. When I take into account my rental income from the property I let out most of the money I received from the pension supplement in pay would be taxed at the higher rate to I don't think it is worth it.

I didn't realise the 40% bracket kicked in so low!

Is there any pressing need to pay off this mortgage in three years? Is there apossibility that you might become unemployed long-term and so want to minimise your liabilities and increase the disposible inome from your rental property?

If this isn't the case, then I don't see any advantage from pouring all your wealth into this single asset. All experts seem to agree that the smart thing to do is invest into a portfolio of assets, your BTL being on of them.

If I were in your position I would do as others have advised, invest the maximum into your pension plan to get the maximum employer contributions - no more, no less. With any money remaining, look at ISA returns and pay into them if they beat your mortgage rates or make mortgage overpayments if they don't. If you can pay off a mortgage in 3 years, then it doesn't sound as though you have a 'monkey on your back' or any worries about being able to service the mortgage debt.

Just make sure that you have enough emergency savings to cover yourself for periods of unemployment and your BTL for void periods. Let time take care of the rest. You need to gear your finances towards a comfortable retirement, nothing else really matters.

LEP

Eellogofusciouhipoppokunu wrote: »

Is there any pressing need to pay off this mortgage in three years? Is there apossibility that you might become unemployed long-term and so want to minimise your liabilities and increase the disposible inome from your rental property?

If this isn't the case, then I don't see any advantage from pouring all your wealth into this single asset. All experts seem to agree that the smart thing to do is invest into a portfolio of assets, your BTL being on of them.

If I were in your position I would do as others have advised, invest the maximum into your pension plan to get the maximum employer contributions - no more, no less. With any money remaining, look at ISA returns and pay into them if they beat your mortgage rates or make mortgage overpayments if they don't. If you can pay off a mortgage in 3 years, then it doesn't sound as though you have a 'monkey on your back' or any worries about being able to service the mortgage debt.

Just make sure that you have enough emergency savings to cover yourself for periods of unemployment and your BTL for void periods. Let time take care of the rest. You need to gear your finances towards a comfortable retirement, nothing else really matters.

I guess this makes sense.

It is my heart ruling my head I guess getting rid of one mortgage before interest rates start to rise.

There is also the consideration that by ridding myself of this mortage asap I have more disposable income for my family now. Of course this is at penalty of not having as much in my retirement as a result......but how much does a man need when he is 60+!

Thanks to everyone for their advice.

jamesd

At 60 he needs enough to live on for about 30-40 years. Multiply your desired income level by twenty to get a reasonable pension pot value, after deducting he work and state pension income. He'd also need something to provide more income between 60 and the start of the work and state pensions.

Your work pension scheme is still going to be one of the most generous ones available so if there's even a chance that you might change jobs you should be exploiting it as far as you can, while you can.

kidmugsy

......but how much does a man need when he is 60+!

[/QUOTE]

Remember that you may not have much welfare state to live off by the time you turn 60, since more things may be means-tested.

But you'll still have plenty of tax to pay.

Eellogofusciouhipoppokunu

kidmugsy wrote: »

......but how much does a man need when he is 60+!

Remember that you may not have much welfare state to live off by the time you turn 60, since more things may be means-tested.

But you'll still have plenty of tax to pay.

He'll have all his current outgoings, minus mortgage & commuting costs but plus additional heating and electricity and hopefully more holidays! Quite a lot to pay for with just a pension.

Linton

LEP wrote: »

I guess this makes sense.

It is my heart ruling my head I guess getting rid of one mortgage before interest rates start to rise.

There is also the consideration that by ridding myself of this mortage asap I have more disposable income for my family now. Of course this is at penalty of not having as much in my retirement as a result......but how much does a man need when he is 60+!

Thanks to everyone for their advice.

From my experience not very much less than when he is 60-.

LEP

Linton wrote: »

From my experience not very much less than when he is 60-.

I was hoping that sans a mortgage and kids to bring up I would be able to muddle along on a lot less