Using lump sum to pay off mortgage?

DT1989

mania112 wrote: »

Qualified as of November 2013 -
I also believe the client needs to understand their options - this IS a job of the IFA.

You're right. There are no guarantees.

This is the pensions and retirement forum, not the investment section. I believe it's better to have paid off the mortgage in your 60's than to still be running the investment tightrope just to make a few extra quid.

And savings are made from no longer repaying the mortgage - this can then be invested (win win?).

I hope, whether you agree or not (and i'd like to hear from the OP on this one too), that you don't think all IFA's want to rip people off. If this advice was in the real world I would be losing out on a fee on the £50k not invested (and the ongoing fee of it thereafter).

Hi All,

Many thanks for all your responses and advice. The thread seems to have drifted off-piste in places but there is much here that has been helpful. There will never be a clear consensus but we are in a better position to consolidate our strategy.

Why our response at this stage? mania112 hit the nail on the head in the quote above.

We are coming out of the "stressful, focused, driven" years and entering the "cautious, contented, wise" years. Being debt-free and carefully investing remaining capital seems to fall into the second category.

In our view the acronym IFA should mean what it implies and most IFAs we have dealt with in the past have been genuinely impartial and not "commission-seeking". We've done well over the years by understanding all the financial advice we've been given or researched ourselves and taking appropriate action on it.

Again many thanks to you all. DT1989

bigadaj

mania112 wrote: »

I didn't understand if you were quoting me because you disagree with this statement, or because you just wanted to ensure you were talking to me.

I can confirm this statement I made is true. Again, this is a pension forum, if you wanted to transfer your pension an adviser could not do so on the justification that there is a fund which will perform better than their existing holding. (for example)

Probably my interpretation but it seemed as though you preferred a lower risk solution rather than one which may well be financially better off in the longer term, without really explaining this to the OP.

I've got a reasonably high risk profile but have paid off a mortgage, though this is partially to do with a lack of understanding of the relative benefits at that time.

I'm currently moving jobs and relocating, and will no doubt be taking on a mortgage in the short term, and will make an assessment on whether I pay this off early or not, but it certainly needs some thought.

mania112

DT1989 wrote: »

Hi All,

Many thanks for all your responses and advice. The thread seems to have drifted off-piste in places but there is much here that has been helpful. There will never be a clear consensus but we are in a better position to consolidate our strategy.

Why our response at this stage? mania112 hit the nail on the head in the quote above.

We are coming out of the "stressful, focused, driven" years and entering the "cautious, contented, wise" years. Being debt-free and carefully investing remaining capital seems to fall into the second category.

In our view the acronym IFA should mean what it implies and most IFAs we have dealt with in the past have been genuinely impartial and not "commission-seeking". We've done well over the years by understanding all the financial advice we've been given or researched ourselves and taking appropriate action on it.

Again many thanks to you all. DT1989

Thank you.

As the years roll on, it should be natural to become more cautious and to button-down the assets you've accumulated over the years.

For me, that would include owning your bricks and mortar and removing myself from any ongoing liabilities.

For you, it would require confirmation of your situation and objectives.

atush

I guessmy reservations for the OP is that they would be left with no opportunities for growth or to beat inflation.

They have access to only 80K in capital, and to put 50K in the mtg, and the other 30 would remain in cash as an emergency fund leaves them not invested at all. So their remaining 30K would with slowly away.

I suppose if the invested in a S&S isa with their mtg repayment money over the next ten years that could help.

jamesd

mania112 wrote: »

Agreed. A factfind needs to be completed. We are all speculating without knowing the client. However, this is surely more reason to err on the side of caution (as I think I have)?

Hmm, I'd say more of a reason to present both potential and risk as I did, around 50-50 split in my first post.

Even if we didn't now have feedback from the person asking the question I wouldn't call what you wrote "err", though. It's a completely valid opinion and you're free to give opinions here just as others are.

mania112 wrote: »

I was flippant with 'pay off the mortgage' and I think I may have been influenced by my personal preference.

Still, I can't see how it is preferable to continue investing when cash is available to clear debt.

I don't know your age but I do think that you're right with the personal preference observation there. Assuming that you're relatively young, two things to watch out for are age-related tendency to have lower risk tolerance than is really ideal for the time available to invest and framing error based on the objectives of a younger person, which tend to have a high focus on mortgage cost.

Consider Martin's mortgage overpaying and debt reducing guides. He's pretty keen on people getting rid of debt in all cases but he qualifies that with the word "expensive" and he also mentions alternative returns from savings or investments in his guides. Then he goes on to suggest that if the gain from saving or investing exceeds the saving then the saving or investing approach may be better.

But it's not that simple because some people just want debt gone, however cheap it is. That seems to include you and there's nothing at all wrong with that preference, it's just one of the differences between people.

As people get to retiring there seems to be some general split that happens. Some - the majority - just want an easy life. For that group the choice between paying off and investing is easy, pay it off and forget about investing and the uncertainty that goes with it. Others find that they have ample resources for meeting their own needs - say lots of final salary pension income as in this case - and focus instead on trying to maximise inheritance or cover contingencies like care needs through investing, knowing that it's long term and they just don't need the money if the lower probability events happen rather than the typical results.

So I don't think there was any problem with your posts. Just wonder if you might find it useful to cover the potential gains as well as the risk and then if you wish to move on to your own personal preference. I think that approach is more likely to focus the questioner's mind on the fundamental questions of reward and volatility or risk and where they want to be on that spectrum.

mania112 wrote: »

Still, I can't see how it is preferable to continue investing when cash is available to clear debt. ... This is the pensions and retirement forum, not the investment section. I believe it's better to have paid off the mortgage in your 60's than to still be running the investment tightrope just to make a few extra quid.

There's another young person's potential bias to watch out for there. For a younger person the gains from removing debt are very long term reduction in interest cost due to the high number of remaining years of life. For a person retiring there are fewer years of life to pay that cost and the old mantra of "you can't take it with you" to consider. Any money tied up in a property is money that isn't being used to improve lifestyle while alive. Some will want to get rid of debt, some to maximise spending power and ability to retire earlier. Others will want to maximise inheritance. Have a look in the over 60's section for the SKI thread - Spending the Kids Inheritance as a deliberate planning choice.

mania112 wrote: »

One would have to be a speculative investor with other resources if it all went pear shaped, in my opinion.

This is another area where age can matter because a younger person may have low money assets but high potential earnings. So they can be very speculative, knowing that all they do is work to replenish the money. While a person who's retiring is less likely to want to choose to work - even though it's quite popular - and may be unable to. Things like guaranteed incomes can make the higher risk approaches good and do seem to apply here, but that can't override the personal preference which may be for an easy life.

mania112 wrote: »

And savings are made from no longer repaying the mortgage - this can then be invested (win win?).

Well,a compromise, though it's necessary to watch out for the "exponential growth bias" - the failure to correctly value the power of compounding over time. investing over time isn't likely to match lump sum investing at the start of the period due to lost higher compounded growth. But the peace of mind benefit can make it preferable anyway for many.

Ultimately there's no one right answer because so much comes down to the personal preferences and circumstances of the person asking the question. That's part of what makes things interesting.

jamesd

DT1989 wrote: »

Being debt-free and carefully investing remaining capital seems to fall into the second category.

That's a fine preference, next is the question of how to do it.

There's one option that might apply and be more efficient than paying off directly but I'm not sure if it'll fit your circumstances. Initially it looks as though it won't but I'll describe it anyway in case your future plans would cause it to fit.

There's something called Flexible Income Drawdown from a personal pension. This allows taking out the whole pension pot at any time, not just the usual 25% tax free lump sum. The remaining 75% is added to taxable income in the tax years in which it is taken. This means there's the potential to pay money into a pension, get the tax relief, then take out the money again, gaining on the tax that would have been paid on the lump sum and maybe due to a change in income tax rates (which doesn't seem to apply to you).

The requirement to be able to use flexible drawdown is having at least £20,000 in guaranteed retirement income from work defined benefit pensions, annuities and the state pensions in payment at the time you first opt to use it. I see that so far you have £17k of this so I wonder whether you anticipate going to £20k in a time that would be relevant to your mortgage or other plans?

A catch to watch out for is that once you enter flexible drawdown it is not permitted to have any pension contributions made in your name, including buy an employer. Since you're still working and presumably still getting increased work pension benefits that means it is very unlikely to be appropriate at the moment. However, this may change depending on how long you plan to continue working.

From what I know so far this probably wont' fit your needs but since I don't know when you plan to stop working or what your work pension situation will be then, it's worth mentioning this since it's a risk free way to pay off the mortgage at lower cost, helped buy the tax relief. Risk free assuming you use cash-type savings or investments within the pension between paying the money in and taking it out again, and that's normally easy to do.

atush

But surely you NEED a 30K safety cushion? for any and all eventualities?

It was this fact alone that made me say to not pay 100% of the mtg off.

I guess we need more assurance of how, exactly you were planning on repaying the loan over the next 11 years. If you intended to still be working for all of it, you have some wiggle room. Part of it? Some.

If you had no plan then, I say why not?

jamesd

atush, there's £50k lump sum and £30k of other savings with a 50k mortgage, so the £30k will remain after clearing the mortgage.

atush

Yes, I realize that, but that is their emergency fund I assume (which would largely or completely remain in cash or the equiv). Everyone needs one. but the buying power of this pot could slowly wither on the vine of inflation.

I asked how they planned to pay off the mtg originally, and if they intended to keep working for another 10-11 years (the term of the mtg) as that period of saving/investing what used to be the mtg payments would help them diversify.

Daniel54

jamesd wrote: »

Ultimately there's no one right answer because so much comes down to the personal preferences and circumstances of the person asking the question. That's part of what makes things interesting.

That is true,but your excellent post was well expressed and thought through,so this in in lieu of pressing the thanks button.