Use Pension to pay off Mortgage - Advice pls.

lanyroo

When I worked in the City before having kids I paid into a pension for 13 years. A couple of weeks ago I got in touch with them just to see if you could take it early and, if so, what was it worth?

I am nearly 56, have a mortgage (around £25,000) til I am 70. As I was divorced a number of years ago and had to re-mortgage.

I only earn £15,000 a year and I do struggle.

The pension people came back to me and to my surprise if I take it now I can have either £3,500 a year (with yearly rises) OR £2,500 a year and £19,000 lump sum.

I have asked various friends advise and they all differ. I don't know what to do.

Anyone out there with any ideas?
Many thanks.

Kaz2904

Hmm, £100 ish a month may not seem like a lot of money but when it's not in your pocket it will seem like less. How much are your normal mortgage payments? Would you be able to clear your mortgage early by overpaying? Would you be able to afford the mortgage when you are retired?

I have no idea the answer really but am sure someone will be along to advise shortly.

MABLE

I had a deferred pension with one of my previous employers and because of all the news about pension schemes not being able to pay out I decided to enquiry about mine. I am 56 years old and was offerd a pension of £3,700 and a lump sum of £27,000. I could have had a pension of £5,000 without a lump sum.

I like you have a mortgage and the interest rate is 4.8% fixed until 2015. I decided to take the lump sum and have put into isas and the remainder in a Building Society bond at 6.30%. The monthly amount I put into a regular savings account paying 8% for two years.

So I decided not to pay off my mortgage and at this moment in time did not seem sensible.

I know it is a difficult decision to make but you have to decide what is best for you.

EdInvestor

lanyroo wrote: »

The pension people came back to me and to my surprise if I take it now I can have either £3,500 a year (with yearly rises) OR £2,500 a year and £19,000 lump sum.

How much would you get if you waited until your normal retirement date (60?) rather than going early? How long would it take before you had made up the additional 4 years you had already received at the higher rate.

Another point: how much will you get for your state pension(s)? Forecast here:

https://www.thepensionservice.gov.uk

Note that after 2010, you will only need 30 yrears contributions to get the full basic pension, plus there's S2P on top.

Then there's tax: when you get the 65 the personal allowance for tax will be around 10k p.a. Pension income is taxed, so this will affect the decision on whether to take the lump sum or not.

If you can keep your state pensions plus company pensions below 10k, and then use the lump sum to pay off all or part of the mortgage, and afterwards saving the mortgage payment in your ISA every year, you could end up being better off when you retire than you are now.

lanyroo

Sorry, can't quite make out where you are going on that.

I don't know what I will get at 60, I can't retire until I am 61 and so many months (born between 50 - 55).

What I really want to know is how much I would save not paying interest on the mortgage for the next 14/15 years I suppose.

You have confused me even further.

But thanks for trying to help anyway

jamesd

lanyroo, the pension value is probably growing at a higher rate than the interest rate on the mortgage, so taking the pension early to pay off the mortgage is unikely to be a good idea. Better to wait until the normal retirement date.

Whenever you take the pension, do take an option that increases over time, otherwise inflation will gradually make you more and more poor. Note that at 3% inflation (yearly rises I'm assuming are 3%) the pension payments would be worth 1.5 times as much as it is now in 14 years. If the yearly increase is 5% it will be worth twice as much in 14 years.

I checked for a 5.5% interest rate on 19,000 (the lump sum) for 14 years and at that interest rate using the lump sum would reduce your mortgage payments by 162 a month, reducing the total to pay on the mortgage over 14 years by 27,286. You can check for your real mortgage interest rate by using a one penny overpayment amount to get the total payable, which in this case is the total saved.

Taking the 3500 with yearly increases pension and using that to overpay gradually looks like a better idea than taking the lump sum and lower pension without annual increases. But waiting and doing it at normal retirement date looks like a better option.

EdInvestor was trying to work out how you could be better off when retired. You'd get a personal and age allowance of about 9500 when you're 65. Sometimes taking a lump sum takes an income higher than that with tax to pay to one lower than that, saving you tax. You can then put the lump sum into an ISA and take tax free income from the ISA, leaving you better off. Whether this is good depends on your income when retired. The state pension forecast will tell you what you can expect from the state pensions.

EdInvestor

lanyroo wrote: »

Sorry, can't quite make out where you are going on that.

You need to find out if you will lose out by taking the pension early.This is a separate issue from the mortgage question.

I don't know what I will get at 60, I can't retire until I am 61 and so many months (born between 50 - 55).

That's for your state pension: but what is the retirement date for the company pension?They are not necessarily the same. Ask the company what you would get if you retired at the date origianlly planned.

In particular what would be the size of the lump sum if you waited?

[/quote]What I really want to know is how much I would save not paying interest on the mortgage for the next 14/15 years I suppose.[/quote]

You also need to take into account these other issues, and also the tax issue: If you take the money now you will pay basic rate, if you take it later you may pay no tax at all.

You have confused me even further.

Yes, pensions are like that, I know

lanyroo

The company pension matures when I am 60.

I was looking on this as a lifeline as I am fed up with being poor. Now you have given me "food for thought".

I also wanted to start working part time - which I could do if I didn't have to pay a mortgage and had an extra £2,500 a year.

I find it difficult juggling elderly parents and a full time job.

Oh well back to the drawing board.

jamesd

lanyroo, you could ask if you can switch to interest only until you retire. Then you could use a lump sum at normal retirement date to repay most of the mortgage and switch back to repayment for the small amount remaining. That would get you lower payments today and still keep the higher pension you can expect if you wait.

Alternatively you could see if your mortgage allows repayment holidays. Those extend the mortgage but not paying one or two months' payments each year could help.

What interest rate do you have on your mortgage? It's possible that there might be a better deal available, particularly if you're now paying the standard variable rate (SVR).