Pension Early Release, Loan Alternative?

Bikerdave

Hi

I need to find £18,000 which the Banks Building Societies will not lend me due to my age, income level and the current FCA rules, even though I can repay and have sufficient equity in my house.

I am considering taking Early Release from my pension and then 'repaying' the amount monthly as if it were a loan.

I found out about this idea from a mail shot from a financial company. Not that I intend to use them but would deal direct with my pension provider.

It seems to be a workable solution given my difficult circumstances but I am concerned that I might be missing something important and wondered if anyone has experience or any comments?

Thank you

Dave

xylophone

I am considering taking Early Release from my pension and then 'repaying' the amount monthly as if it were a loan.

I don't quite follow. What kind of pension is this?

Whatever kind of pension it is, how would you repay it?

When you say early, what exactly do you mean? With Trustee permission and actuarial reduction? At 55 because you can't leave it until later?

kidmugsy

Bikerdave wrote: »

I need to find £18,000 which the Banks Building Societies will not lend me due to my age, income level and the current FCA rules, even though I can repay and have sufficient equity in my house.

I am considering taking Early Release from my pension

How old are you?

jamesd

The proposal is usually daft and you have probably been misled by the mail shot into believing that it is a good idea and that it is credible to put yourself into the same position by repaying the amount monthly. It is not usually credible in situations where "early release" terminology is likely to be used: pension scams designed to exploit the inexperienced and unwary.

However, usually daft does not mean always daft. It does depend to some extent on your specific situation:

1. What is the money to be used for?
2. What type of pension is it, workplace defined benefit like final salary, defined contribution? Personal pension?
3. Are you 55 years old or older? If not 55 is the pension scheme one with a protected early retirement age?
4. Are you 60 years old or older and do you have any pension pots with a value of no more than £10,000 or pension pots of any size with a value no higher for all combined of no more than £30,000?
5. Do you have credit cards that have available balance transfer or money transfer offers of sufficient value to achieve your objectives?
6. Do you own of have significant equity in your own home?
7. Roughly what is your current income level, say to a round £5,000 a year or so, or if over £50,000 just say that.
8. Are you employed? If yes, full time, part time? Retired? receiving the state pensions or eligible to receive them?

Bikerdave

Thank you for the replies. My situation is a little complex.

I built up credit card debt and a business loan through a bad business venture and I don't have the income to service the repayments as well as my mortgage. I want to consolidate the debt into additional mortgage (lower interest rates and slightly longer term) but due to my age 59, my income (full time employment) £18.75k and the current FCA rules no one will lend me the £36k (on top of my mortgage) I need, even though I can afford the repayments. (No holidays fast bikes boozy nights etc)

I can get £18k which means I need to find £18k. Family and friends cannot help so I am left with the idea of using some of my pension pot.

I have a personal pension with a pot just large enough to allow £18k (25%) Home equity with current mortgage is 23% easily enough to add £36k. My house has been on the market for six months but has had no offers but I dont really want to move as I have an elderly parent that lives close by.

I assume that if this works, there will be at a cost, but I don't think I have much choice given the circumstances.

Thank You

Dave

xylophone

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/301563/Pensions_fact_sheet_v8.pdf

http://www.hmrc.gov.uk/pensionschemes/pensionflexibility.htm

Have you enquired of the pension provider as to what you might be able to do?

Is there any possibility that you could take a lodger under the rent a room scheme?

Is there any possibility that you could live with your elderly parent and rent out your property?

http://www.thisismoney.co.uk/money/experts/article-2340892/Will-local-council-mothers-care-home-fees-I-sell-house-dies.html might be of interest.

xylophone

And regarding the new state pension https://www.gov.uk/new-state-pension

It would seem that state pension statements calculated under the new rules will be available before the end of the year - you could apply when you are 60 to help you plan for the future?

jamesd

Thanks. Since you are 59 years old there is no need to use early release of the pension types that have pots, defined contribution or personal pensions. This is because age 55 is the normal minimum age so you can simply do a normal withdrawing of money to achieve your objective.

To do so you would ask the provider of the pension whether they offer "capped income drawdown". If they do, you would tell them that you want to take the maximum 25% tax free lump sum and put the rest into capped income drawdown without taking any income from it.

If you need more than the 25% lump sum can provide you can also at the same time take out the GAD limit amount of taxable income from the 75%. That varies a bit but is likely to be around 7% of the 75%, before tax.

If the pension provider says that they do not offer capped income drawdown you can transfer to one that does. Do not be misled if they say you have to buy an annuity. That typically really means "the only pension income product we can sell you is an annuity", not that you can't transfer to do what you want. Regulations mean that employees are normally not permitted to offer comments about things that their own firm does not sell.

Your situation is one where doing this is not fundamentally bad and it can be a useful and appropriate solution, so I suggest that you proceed.

If your pension is not a personal pension or defined contribution workplace pension but is instead a defined benefit pension, like final salary, it is quite likely that it would be possible to take it early or even that it also has a normal age of 55. 60 is another common age and it is quite likely that the cost of taking it at 59 instead of 60 is not going to be huge. However given the choice, use one of these only after using one of the other types.

Now I'll explain why it's usually not credible just to pay enough to compensate yourself for taking the pension money sooner than you could. The problem is that by taking £18,000 you lose both the £18,000 in the pension pot and the typical investment growth on that. For the UK stock market the long term average is about 5% plus inflation, call it 8% total at the moment. So to catch up you have to pay in enough of a monthly payment to pay that 8% plus also accumulate the £18,000 before retiring. You can us a loan calculator to estimate this. Put in £18,000 as the amount borrowed, 8% as the interest rate and say 9 years as the loan term, to an age 68 retirement age. Now the monthly payment on the loan will be what you need to pay to catch up.

Since the money in this case will let you recover an unstable financial situation and that may let you increase your income anyway it is entirely possible that you will end up able to pay in more than it takes. Just bear in mind what that loan calculator says.

Of course, you shouldn't really just use a loan calculator like that. Instead you should start retirement planning and work out your target income then come up with a plan to get to that level of income. That'll wait until things are a bit more stable.

Bikerdave

Thank you xylophone and Jamesd. I have looked at all of the links and your suggestions.

I cannot live with my parent as the house is a retirement one bed. I have considered letting a room, I have a spare. My reluctance is due to the need of more per month than I think would be likely to obtain but also there is the uncertainty of periods when not let.

In looking for my pension providers contact details I have found that I have four pensions. All personal pensions as far as I can tell. Two have transfer values of just over £10k while the others have £59k and £51k.

From what I know now (with your help thanks) I think my plan is to consolidate from four to two, or maybe one, pension, transferring the funds to the best performing pension(s). Then take the £18k and 'repay' at as high as I can to compensate for the investment growth.

I will be contacting each provider now to check the possibilities, conditions and charges (if any). I realise they will not give independent advice.

Thank you

Dave

kidmugsy

Bikerdave wrote: »

All personal pensions as far as I can tell. Two have transfer values of just over £10k while the others have £59k and £51k.

If you are in a hurry you could make sure that the two smaller ones are with separate providers which offer drawdown, then take the tax free lump sums, then get the remainder under the "small pots" provision (since each will be less than £10k). Mind you, you need to be 60 to do this.

atush

Have you thought of selling your home and downsizing? Or renting and buying new when your pensions are payable?