Pensions, ISAs, mortgage

bournefree

kidmugsy wrote: »

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.

My current cash ISAs are 2% and 2.6% for the moment. I have 20K in cash ISAs as an emergency fund, e.g. redundancy.

atush

Being mtg free is enticing, but dont' cut off your nose to spite your face.

Put 100% of any earning over the HRtax limit (after taking into acct your current pension) and you can split what is left between S&S isas and mtg overpayment (if you must).

bournefree

QUOTE from kidmugsy:
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?[/QUOTE]

bournefree comment:
I've now looked into this more. Under the Teachers Pension you can buy additional index linked pension, in my case for £1000 per year it would cost 17,800 as a lump sum or £1,523 per month. Up to 25% of this £1000 pa can be converted into a lump sum. At the moment I can't afford to pay either a lump sum or monthly. I could pay less than £1000 (multiples of £250 are allowed).

Another possibility is AVCs from Prudential. This can be taken from salary and a lump sum is also possible.The scheme seems much more flexible, but they haven't performed very well in recent years. I'm not sure which is better, additional pension or AVC in terms of value for money.

Then there's another private pension, but I think overall I'd avoid that and go with added pension or AVCs. Any ideas which would be better?

I agree that with 20K in cash ISAs it's probably a good time to open a S&S ISA next financial year.

bournefree

atush wrote: »

Being mtg free is enticing, but dont' cut off your nose to spite your face.

Put 100% of any earning over the HRtax limit (after taking into acct your current pension) and you can split what is left between S&S isas and mtg overpayment (if you must).

Not quite sure I understand this. Do you mean 'Put 100% over the HRtax limit - where, into additional pension, ACS, another personal pension and possibly S&S isas?'

jem16

bournefree wrote: »

Another possibility is AVCs from Prudential. This can be taken from salary and a lump sum is also possible.The scheme seems much more flexible, but they haven't performed very well in recent years.

The AVC itself doesn't perform well or badly. It's the funds that you choose within the AVC that will decide its performance.

I'm not sure which is better, additional pension or AVC in terms of value for money.

They're totally different beasts really. The Additional Pension is guaranteed with no investment risk to yourself. The AVC has investment risk. Which do you feel happier with?

Then there's another private pension, but I think overall I'd avoid that and go with added pension or AVCs. Any ideas which would be better?

Additional Pension is good but seemingly more expensive as there is no extra employer contribution. I wouldn't go near AVCs in the TPS as there is no advantage with them as you cannot use it to fund your tax free lump sum.

With either of these schemes you are stuck with the scheme retirement age which at least for you will still be age 60.

If you go down the PP/SIPP route, you would be able to access this from age 55. Or you could wait until you have £20k of income from the TPS and possibly state pension then you could use Flexible Drawdown to take what you like from the PP/SIPP. 25% of it would be tax free and the rest subject to your normal income tax rate, preferably at 20%.

I agree that with 20K in cash ISAs it's probably a good time to open a S&S ISA next financial year.

The S&S ISA is also good for maximum flexibility if you can afford it. However as a higher rate taxpayer, the pension is much more favourable.

bournefree

Hi Jem, new here and don't know how to quote a sentence from what you wrote. You say that with either of the schemes I'd be stuck with the scheme retirement age which is 60.

Does that mean that they end at 60? I thought I could keep working beyond that?

I'm a bit concerned with work/life balance for health reasons. I wouldn't reduce my hours or take health-related retirement however, but as it's my 55th birthday next week I'm thinking about how long I will continue working. I'd quite like to make good any shortfall of say 4 years by buying additional years so that I could have 50% of my final salary. So I'm trying to weigh up the pros and cons of additional pension / AVCs / S&S ISAs (the last giving the greatest flexibility). I'm wondering what a good balance would be?

Also, how is the additional pension much more favourable as a higher rate taxpayer?

atush

bournefree wrote: »

Not quite sure I understand this. Do you mean 'Put 100% over the HRtax limit - where, into additional pension, ACS, another personal pension and possibly S&S isas?'

I don't mean additional pension or Avcs, as these you have to wait til scheme age to take, nor do I mean S&S isas for this part as you'll get no HRtax relief.

What you do is, figure out how much of your income (incl any income from savings/investments) is over the HRTax limit (after deducting your current pension contribs) THEN put this amount in a Personal pension. Every 60 you will put in will be worth 100, as you will get HRTax relief. I say PP over AVCs and Adit pension, as a PP can be taken earlier than your scheme pension. This is good if you wanted to retire earlier than scheme age. If you are Certain you won't retire before age 60, then you could use additional pension or Avcs.

Any additional cash you have After getting rid of HRTax, you could invest as you like, ie split between pension, S&S isas and overpay mtg.

jem16

bournefree wrote: »

Does that mean that they end at 60? I thought I could keep working beyond that?

You can continue to work after age 60 but age 60 is your normal scheme retirement age.

I'd quite like to make good any shortfall of say 4 years by buying additional years so that I could have 50% of my final salary.

Additional years is no longer an option in the TPS.

So I'm trying to weigh up the pros and cons of additional pension / AVCs / S&S ISAs (the last giving the greatest flexibility). I'm wondering what a good balance would be?

The only one of those I would discount are AVCs for the reasons I have given earlier.

Also, how is the additional pension much more favourable as a higher rate taxpayer?

You would be getting 40% tax relief and likely to only pay 20% in retirement. So an instant gain.

At the moment you are paying 40% tax on approximately £8k of your salary. Next year that will be a little lower as your main pension contributions are about to go up to around 12%. So if you can manage to pay that extra into a pension then you are winning.

bournefree

Thanks atush,

From 55 (in a fortnight) I can retire early, though with actuarialy reduced benefits. Additional Pension with the Teachers Pension Scheme doesn't have any risk, does it? whereas a Personal Pension would, wouldn't it, as it would involve an annuity.

At work there is a voluntary severance scheme at the moment, which I could take from 55 (not that I'm planning on it); we haven't got to compulsory redundancy yet.

Have been reading other threads about pensions being taxable when paid, versus the flexibility of S&S ISAs. Even if I had a pension of 27K I'd still be in the 20% tax bracket - so does that mean it's better to go for additional pension over an S&S ISA?

bournefree

'Additional years is no longer an option in the TPS.'

Yes, I know; they now call it additional pension, so it's based on paying in x thousand in tax to increase the pension. 17-18 K for £1000 per year seems steep - I wonder if it's worth it?