Paying into pension V's overpaying mortgage.

232607

Help please!
1st a bit of background:-
Our Company shut down the DB 12 months ago and replaced it with a DC where I have to pay 5% to get their max 15%.
I currently pay 7% to keep out of the 40% tax band. Payments are made via salary sacrifice.
Fortunately I've got enough years in the DB and a previous section 32 pension to be comfortable if I take them from 65.
For this reason my sole focus with the new DC is to use it to retire early.
Currently 48 Y/O & pretty confident I'll be going at 60 but looking to do everything to drop that further hence the title of the thread.

Currently owe approx £60K on mortgage which was originally 1/2 interest only & 1/2 repayment. About 5 years ago I started overpaying & have increased these overpayments by a £30 to coincide with annual pay awards. I currently overpay by £270 on the standard payment of £381. This pattern of annual increasing overpayments will pay off the mortgage in approx 7.5 years which is within when it needs to be paid.

Now the the important bit:-
I worked out figures in a mortgage calculator based on dropping the payments back to £381 for 7.5 years with an interest rate of 2.25% (1.75 + base) & it came out that I'd be owing £33.6K when it needs to be paid.
I then worked out what extra would be in my pension if I started by paying £270 net & uplifted by a factor of 1.47 to get it to gross, IE to take consideration of the tax & NI benefits. I then increased this by a further £30 (factored up) every year for the 7.5 years. I also assumed an investment return of 4%.
It came out that I would have an extra £56.0K gross in the DC or £47.6 net when using a 15% tax withdrawal rate to take account of the 25% TFLS.

Seems like a "no brainier" but one thing concers me.
It would mean using some of the TFLS in the pot to pay the remainder of the mortgage & I believe under current rules this wouldn't trigger the restricted annual payments down from £40K to £10K.

With all the changes taking place does anyone know if this is likely to be the case in 7.5 years or has this been mutted.
I appreciate no one has a crystal ball.

This is the only thing that could "hamstring" me!!!
When mortgage is fully paid I'd probably be putting in £30K + P/A & if this was restricted it could wipe out any gains made.

Sorry if this has been a bit long winded but wanted to be concise.
Appreciate any thoughts & thanks in advance.

atush

No one cxan tell you what a Labor govt or lib dem or Ukip govt would do. I'd bet that a Cons govt would not hamstring you in this way but no one knows.

Guessing is a mugs game, and pensions should be tought about on the current rules.

Apart from your overpayment, do you or your OH save elsewhere? Into cash? S&S isas? Other investments/pensions? Have you MSE'd your outgoings, and done a spending diary?


In your case, arranging to have your mtg paid off at the term end is a good one, by overpaying or perhaps switching to repayment. But although you have 20% going into a pension now, and a past DB one, if you want to retire early you will have to pay in more somehow?

redux

Simplify the dilemmas.

Do you take an opinion that your pension and other investments are likely to outperform the mortgage interest rate? It sounds like it.

Temper that with the risk that if the mortgage must be repaid on a specific date, and not potentially extended, this might happen at a time when the market is down and you'd prefer not to be forced to realise some investments just then.

Then design ways of being flexible.

From my admittedly inexperienced and probably naive viewpoint, it looks like continuing to have a modest mortgage into retirement and paying it from partly the lump sum then a potentially larger pension income might be an attractive way to go, but I don't know how lenders look at this.

On the other hand interest rates could go up and the market be flat for a few years ...

jamesd

232607 wrote: »

It would mean using some of the TFLS in the pot to pay the remainder of the mortgage & I believe under current rules this wouldn't trigger the restricted annual payments down from £40K to £10K.

With all the changes taking place does anyone know if this is likely to be the case in 7.5 years or has this been mutted.

Removing the tax free lump sum is always being rumoured. It's also likely that changing the rules so that taking it triggers the contribution drop will be rumoured at some point, though I haven't seen that yet.

There are three major catches to tampering with the lump sum rules:

1. People have pension mortgages long term and this could seriously hurt them.
2 The lump sum being tax free delivers a substantial part of the pension benefit for basic rate tax payers. remove it and ISAs become more attractive than pensions in many ways: most of the same investment choices with more flexibility.
3. A big change in pension rules, the sort of things that encourages mistrust in pensions.

232607

atush wrote: »

No one cxan tell you what a Labor govt or lib dem or Ukip govt would do. I'd bet that a Cons govt would not hamstring you in this way but no one knows.

Guessing is a mugs game, and pensions should be tought about on the current rules.

Apart from your overpayment, do you or your OH save elsewhere? Into cash? S&S isas? Other investments/pensions? Have you MSE'd your outgoings, and done a spending diary?


In your case, arranging to have your mtg paid off at the term end is a good one, by overpaying or perhaps switching to repayment. But although you have 20% going into a pension now, and a past DB one, if you want to retire early you will have to pay in more somehow?

I'm single and have 6 months energency funds but not S&S or isas. Putting money in to these doesn't seem appealing when you consider thhe benefits of putting it in to the pension. The salary sacrifice makes a big difference.
I definately want to pay it off at term time but the effect of paing it off via the TFLS at 55 has the effect of boosting the pension as opposed over paying the mortgage now.

Agreed that anything could happen with a labour goverment and god forbid we get labour/lib dem coalition...We may as well all "run for the hills" if that happens.

Thanks.

232607

redux wrote: »

Simplify the dilemmas.

Do you take an opinion that your pension and other investments are likely to outperform the mortgage interest rate? It sounds like it.
Yes.

Temper that with the risk that if the mortgage must be repaid on a specific date, and not potentially extended, this might happen at a time when the market is down and you'd prefer not to be forced to realise some investments just then.
Understand this but the 25% net boost on contribution going in will act a some kind of buffer if I need to seel in a down market.

Then design ways of being flexible.
I am giving thought to this but not sure at present.

From my admittedly inexperienced and probably naive viewpoint, it looks like continuing to have a modest mortgage into retirement and paying it from partly the lump sum then a potentially larger pension income might be an attractive way to go, but I don't know how lenders look at this.
I can't you see how the lender can object? My contract is to pay £381 per month and and balance at the term of the mortgage. Surely how I pay that balance is up to me.

On the other hand interest rates could go up and the market be flat for a few years ...

.
Possible but interest rates have been low for a long time & I don't see the micro ecconomics changing anytime soon.

atush

Could you change the mtg to repayment? And save more outside the pension as well?

232607

atush wrote: »

Could you change the mtg to repayment? And save more outside the pension as well?

I could change the mortgage to repayment but wouldn't that defeat the object of what I'm trying to achieve?
I'm trying to pay as little on the mortgage as possible to maximise what goes in the pension to get the uplift.
Likewise saving more outside the pension would have the effect of depriving the pension.

atush

Not if you haven't MSE'd, done a spending diary etc and found more income.

I guess I am saying a repayment mtg might not have to be paid off quite so soon?

In any case, with salary sacrifice you will be getting even higher TR so I probably would still go with pension as you are proposing. But when is your SPA? And would you miss the deadline for taking pension at 55, but have to delay until 56 or higher? This needs to be factored in as it is already in the pipeline of changes to be made by pesky governments lol.

232607

atush wrote: »

Not if you haven't MSE'd, done a spending diary etc and found more income.

I guess I am saying a repayment mtg might not have to be paid off quite so soon?

In any case, with salary sacrifice you will be getting even higher TR so I probably would still go with pension as you are proposing. But when is your SPA? And would you miss the deadline for taking pension at 55, but have to delay until 56 or higher? This needs to be factored in as it is already in the pipeline of changes to be made by pesky governments lol.

Currently the mortgage has to be paid off when I'm 55 but if the lender offers to extend this to say 60, that would be ideal as I could load into pension & still pay off at 55 if stock market is good/normal.
They have in the past been keen to move it to full repayment but I've resisted. Guess it could be a trade off, IE I agree to full repayment if they agree to extend to 60.
I'm 48 now so would be 55 in 2022. The change from being able to take pension at 55 doesn't kick in til 2028 (I believe) so I'd be OK for taking it at 55.

atush

Good so you meet that deadline.

Your biggest problem will be should they call for the money at 55 and not allow you to go repayment- ie refuse to extend at all. They can do this. which is why I dont like int only mtgs on a main home (as opposed to BTL where they make more sense).