Pensions, ISAs, mortgage

bournefree

Hi, I'm 55 and have 31 years continuous service in a final salary pension scheme (Teachers). This will pay 50% of salary if I do 40 years, when I'll be 64. I don't have AVCs etc. The pensioni also includes a lump sum, 3 x annual pension, say 27K at 64. I might want to go earlier, say 60. I've got 20K in cash ISAs at 2%+ which I've been building up for the future. I overpay on the mortgage which 65K at 1.5% and due to be paid off before I'm 66. I overpay to lower the term so that it's paid off just before I'm 60, so I'm paying £1200pm at the moment. Is this a good balance? Any advice?

kidmugsy

bournefree wrote: »

Hi, I'm 55 and have 31 years continuous service in a final salary pension scheme (Teachers). This will pay 50% of salary if I do 40 years, when I'll be 64. I don't have AVCs etc. It also includes a lump sum, 3 x annual pension, say 27K at 64.. I might want to go earlier, say 60. I've got 20K in cash ISAs which I've been building up for the future. I overpay on the mortgage (I pay double to lower the term so that it's paid off just before I'm 60. Is this a good balance? Any advice?

What is the interest rate on your mortgage? Or rather, what is the lowest interest you could plausibly transfer your mortgage to?

I ask because a sensible scheme might be to plan to pay off the mortgage with your pension lump sum and to put surplus income now not into overpaying your mortgage but into savings. As for which sort of savings, four questions. (i) Do you pay higher rate tax? (ii) Would your employer allow you to pay AVCs by salary sacrifice? (iii) Is TPS one of those schemes where you can preferentially take Tax Free Lump Sum from your AVCs? (iv) Are you happy to look on your Cash ISAs as your emergency fund, which means effectively are they on instant access or short notice?

bournefree

Mortgage is 1% above base, so I pay 1.5%. I pay higher rate tax.
I don't know whether AVCs are worth it, or whether I could do this through salary sacrifice..
I don't know either if I can can take the tax free lump sum from AVCs.
I use the Cash ISAs as my emergency fund, yes.
In a perfect world, I'd pay off the mortgage, then have an investment ISA on top.

atush

HRTax means you could be better off not overpaying but paying into a new PP, plus S&S isas. Cash ISas are fine for emergency funds, but are actually shrinking due to inflation even at 2% interest.

use these (the S&S isas and new pension) to retire earlier, and help pay off mtg with any left over when you get your TPS pension.

AFAIK, you can't use AVCs for the lump sum like you can with the LGPS, so saving into a personal pension with extras (which can be taken at any time in future as you are 55) would be better. Every pound you earn that you pay HRTax on, put into the new pension, so every 100into your pension will cost you just 60.

kidmugsy

Golly, with your mortgage interest only 1.5%p.a., and you paying HRT, I'd stop overpaying and make a big enough contribution to some variety of personal pension to avoid HRT. If you have saving capacity left over, then use S&S ISAs - you could, for instance, invest rather defensively into index-linked gilts (ILGs) with a view to the final clearance of the mortgage, or a mixture of ILGs and Fixed Interest Gilts (FIGs).

Then versus the mortgage you'll eventually have the lump sum from TPS, the lump sum from your new pension, and the S&S ISA money.

Thinking about what might go wrong, the obvious problem would be a large rise in interest rates soon. That would bump up the mortgage repayments, and reduce the value of gilts and, probably, equities. A partial remedy would be for you to have bought gilts in your S&S ISA that mature just when you will need the money. That way your S&S investment will be indifferent to rising interest rates, while your Cash ISAs will gain from them. You could always balance-off such a conservative investment policy in your ISAs by having your personal pension largely in equities.

kidmugsy

What was I thinking of? I have omitted a favourite! If you don't fancy managing the contents of an S&S ISA yourself, you can subcontract the business by opening one with Personal Assets Trust.
http://www.patplc.co.uk

It might be worth your while reading through their series of quarterly reports so that you understand their attitude to investing.

bournefree

Thanks for your reply kidmugsy. This all sounds a bit complicated / risky for the likes of me. Getting rid of the mortgage is top priority, esp. as interest rates will inevitably rise sooner or later, as I can't retire until it's cleared - I don't want to pay out of my Teachers Pension lump sum for it and would rather invest the TP. AVCs don't seem worth it, and the cost of buying in added pension is astronomical for me aged 55. On the positive side, I've got continuous payments for lots of years and am on a good salary with a final salary scheme. The idea of cash ISAs is the use it or lose it, and while I'm earning money I think I ought to put money away there, or in S&S ISAS as well when I can.

bournefree

Should have said, the mortgage is for 65K and could run until just before I'm 66, in 11 years. So I'm overpaying big-time to reduce the term to 5 years, i.e. just before I'm 60. I can then retire mortgage free.

CLAPTON

are you sure you are a higher rate tax payers as the figures you have given aren't consistent with that


40% tax starts at 41,450 however assuming you pay say 6% into your pension then that means you need to earn at least 43,772 before 40% tax kicks in.

kidmugsy

bournefree wrote: »

Should have said, the mortgage is for 65K and could run until just before I'm 66, in 11 years. So I'm overpaying big-time to reduce the term to 5 years, i.e. just before I'm 60. I can then retire mortgage free.

It's not written in stone that you retire mortgage free. We retired with 6 years still to run on a cheap mortgage; instead of overpaying earlier, we had used the money to open ISAs and make pension contributions. This worked out very much to our advantage. Heavens, you can probably find Cash ISAs yielding better than 1.5%p.a., so why overpay the mortgage? As you say, with ISAs it's use it or lose it. Then when you do retire you'll find yourself with a lump sum that isn't tax-sheltered. And, for all you know, with new ISAs no longer existing. Sounds unwise to me.

bournefree

CLAPTON wrote: »

are you sure you are a higher rate tax payers as the figures you have given aren't consistent with that


40% tax starts at 41,450 however assuming you pay say 6% into your pension then that means you need to earn at least 43,772 before 40% tax kicks in.

I'm on 55K so 40% tax band and pay 10.1% into my Teacher's Pension.