Pensions, ISAs, mortgage

jamesd

There are up and down movements in investments but you get to choose the investments and can even just choose to hold cash in a personal pension if you want to. That can get you a nice tax gain with no investment risk.

From age 55 you can take money out of a personal pension. You wouldn't really want to do it then but would wait until you have more in the pension pot. Here's an example to show you how big your gains are:

Pay £800 into a personal pension. Pension provider adds £200 to give you basic rate tax relief, leaving £1,000 in the pension pot. You tell HMRC and they adjust your tax code to give you the other £200 of your higher rate tax relief. You now have £1,000 in the pension at a net cost to you of £600.

At some later time you take a 25% tax free lump sum from the pension. £250 that you use to do some mortgage paying off. Leaves £750 in the pension pot that you can use to produce an income, either by buying an annuity or by investing and using income drawdown. You can take this income and use it to pay money off the mortgage if you like.

Say you were to choose the risk free option again and buy an annuity at age 55 with the 75%. At the moment a single life level annuity at age 55 with five year guarantee can pay at 5.039% of the lump sum. So the 75 would buy an annual income of £37.79.

You wouldn't actually be able to buy an annuity like that with just £750, you'd really want to wait until you had a few tens of thousands, or perhaps £50,000. About £5,000 minimum to get that sort of rate, just due to the administrative overhead of the smaller sizes.

Using more realistic numbers, say you paid into a pension £10,000 a year of higher rate income for five years and chose the no investment risk option of cash inside the pension they buying an annuity at age 60. Here's what you'd end up with:

Paid in £50,000 over five years, so all numbers above get multiplied by 62.5 (50,000 / 800 = 62.5). You get £12,500 income tax relief from HMRC via your tax code, £2,500 worth a year, so your net cost is £37,500 after that tax relief during the years. You have £62,500 in the pension pot. You take a 25% tax free lump sum from this, £15,625, and use that to pay off some mortgage, leaving £48,670 in the pension pot. Level annuity rates today for 65 year olds are 5.486% so that buys a lifetime income of £2,571.50.

So: pay in net £37,500. Pay off £15,625 from the mortgage. Get lifetime income of £2,571.50 - at a remaining cost to you of just £37,500 - £15,625 = £21,875

That income is taxable, I'll assume you retire as a basic rate tax payer so it's £2,057.20 a year after tax. £21,875 / £2,057.20 = 10.6 years to get ahead, ignoring the mortgage interest cost. Life expectancy at age 60 is currently around 28 years so you're getting an effectively free income for say 17+ years.

But you'll get a Teacher's pension of at least £20,000. That means that you can use flexible drawdown, and aren't forced to buy an annuity or use income drawdown. Instead you can take the money out of the pension pot as fast as you like. After the initial 25%, the amount you take out is added to your taxable income, so I'll assume that you have around £10,000 a year of basic rate income available.

Start out by taking the £15,625 tax free lump sum. Now you have £46,875 in the pension pot and you take out £10,000 of this a year, taxed at basic rate, so in a bit under five years there's nothing left in the pension pot. That £8,000 after basic rate tax can be used to pay and pay off the mortgage.

By the time you've done all that you'll have paid in that net £37,500 and taken out an after tax total of £53,125. With no investment risk at all you've just made a 41.7% gain on your money.

This flexible drawdown money can be used to help you to get a level income until the state pensions start, if you prefer. It can enable you to retire earlier than you might otherwise be able to.

And that probably illustrates why you get so many answers saying you should really be thinking of using a pension, even if you want to do it with no investment risk at all.

kidmugsy

bournefree wrote: »

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?
VERY LITTLE. Except in Greece, obviously.


At work there is a voluntary severance scheme at the moment, which I could take from 55 (not that I'm planning on it); IN YOUR SHOES I'd study that in depth.

Is it possible for you to stretch to a large contribution to buy Additional Pension, and still take Voluntary Severance? You could borrow, if needs be, and repay from your lump sums.

A friend of mine who retired and then did supply teaching was much happier with life.

bournefree

Thanks guys for your input here - really appreciate it! Started thinking that paying off the mortgage was the best thing to do, then save, but in my circumstances it looks as though I need to think more about factoring in how to maximise the pension. Lots to think through!

bournefree

atush wrote: »

At what age do you actually plan to retire? Will you volunteer to go, then continue to work as a contract or supply teacher? Would you still be in the HRTax band?

Can you get higher than 17...K in your pension if you take less than the full lump sum? Do you need all of that 82K LS? Can you still buy 1K extra pension with 10K as described?

It sounds to me like you should investigate the voluntary scheme. Esp if you can get your pension up to 20K.

With 20K income from a secure FS pension, anything you put in your PP now (or later if you continue to work) would be available for Flexible DD- where you could take any amount from the pension you like. It would be subject to income tax at your highest rate, so it is best not to draw any that puts you in the HRtax band.

PP can carry some risk, but with each 100 in the pension only costing you 60, it is a no brainer.

I wouldn't want to work in education, and would no longer be HRtax.
Should be possible to pay for additional benefits as employer doesn't contribute.

bournefree

jem16 wrote: »

However perhaps it's possible to use some of the severance payment to purchase some Additional Pension although you will probably be limited to £1k.

With some redundancies, they enhance your pension with a number of years. I take it you're not being offered that?

Whether it's correct for you or not depends on how much you need to live on and whether or not you wish to continue in teaching. My friend took early retirement 4 years ago and says it's the best thing she ever did!

I think I'll see what's on offer, including purchasing additional benefits, either as part of voluntary redundancy or just as an extra whilst staying in work. I think that enhancing by a number of years has fallen by the wayside in these straightened times (but will check!).

It may just be that I have to hang in there for up to another 5 years.:(

bournefree

kidmugsy wrote: »

Is it possible for you to stretch to a large contribution to buy Additional Pension, and still take Voluntary Severance? You could borrow, if needs be, and repay from your lump sums.

A friend of mine who retired and then did supply teaching was much happier with life.

I think I'm past wanting to do supply teaching - have been spoilt by working in a university!