Phased Retiremen

Historybuff

I'm two years away from NPA of my final salary pension. I still enjoy my job, but want to reduce from full time to give me more time with my husband who has retired already. I'm thinking of taking 75% of my pension benefits when I do this to supplement the loss of income. I am still paying a mortgage on a fixed rate until September 2016. Overpayments are limited to £500 per month until then, but I'm thinking of paying the rest of it off when the fixed term ends with the lump sum. My quandary is...shall I take the highest possible lump sum, pay all the mortgage off, then save up the lump sum again whilst I'm still working, or take a lower lump sum, pay that off and continue with the payments until I retire properly, saving up as much as I can afterwards. My remaining pension stays in the scheme and I can continue to build up further pension benefits until I retire properly. I've done endless permutations on the calculators. I know no one has a crystal ball, so what to do for the best?

jamesd

Usually final salary pensions cost you too much in lost income to make taking a lump sum a good deal but that is not always the case. To give any guidance we need to know how much income is given up to get the various possible levels of lump sum.

For the mortgage your best route is probably to immediately stop overpaying and switch to making contributions to a personal pension instead. This is because you get pension tax relief that increases the amount you end up paying off. the new rules from 6 April 2015 let you take out any amount from a personal pension pot so you can get both the 25% tax free lump sum and the 75% that is added to your taxable income. Because it's taxed you'd normally take out the 75% at a rate that keeps it all subject to only basic rate income tax.

But ahead of that in priority is delaying taking any of the work pension until normal retirement age, because the reductions are often too big for taking any early to be a good idea. But this isn't always true, to be sure we'd need to know the differences in income paid at the various times you're considering, soon and normal retirement age.

The best time for you to do any mortgage overpaying is probably after you finally claim your state pension. That's when you'll have the highest income so it'll be most affordable. No big harm in waiting, after all. Indeed, one useful trick to boost available income is to extend the term of a mortgage for a while to reduce monthly payments until income is higher.

Historybuff

Thanks jamesd.
It's all really complicated. I'll go back and look at the numbers again and post them on here to see what people think. Maybe I will be better carrying on as I am until NPA. But two years seems a long time...

Historybuff

Pension at NRA would be £22000 and £66000 lump sum or give up £4341 pension to get £18000 and £118000 lump sum. At 58 it is £19000 and £56500 lump sum or give up £4000 pension to get £15000 pension and £101000 lump sum.
If I took 75% of pension benefits at 58 it would be £14000 and £42500 lump sum or give up £3000 for £11000 pension and £76000 lump sum. With this option 7 years remain in the pension scheme and further benefits are built up whilst I'm still working. I suppose it all boils down to how much my time is worth to me to find the best option.

kidmugsy

Historybuff wrote: »

Pension at NRA would be £22000 and £66000 lump sum or give up £4341 pension to get £18000 and £118000 lump sum.

That's a commutation ratio of about 12 - most people would think that pretty miserable i.e. that it would be better to take the bigger pension than the larger lump sum. (Unless, for instance, you expect to be short-lived.)

Historybuff wrote: »

At 58 it is £19000 and £56500 lump sum or give up £4000 pension to get £15000 pension and £101000 lump sum.

Again, prefer the bigger pension.

Historybuff wrote: »

If I took 75% of pension benefits at 58 it would be £14000 and £42500 lump sum or give up £3000 for £11000 pension and £76000 lump sum.

Same again.

Historybuff wrote: »

With this option 7 years remain in the pension scheme and further benefits are built up whilst I'm still working. I suppose it all boils down to how much my time is worth to me to find the best option.

If you very much want to release time from the job, then it's up to you to grasp the nettle. I don't see how anyone but you and your worse half can contribute much to the decision. After that decision is made, jamesd's wheezes for making best use of your income are well worth considering.

jamesd

That commutation ratio is equivalent to around 8.33% increase in our income, for life, by not taking lump sum money. Your mortgage isn't going to cost anywhere near to that much in interest and it will end well before you die. So bad move to take the lump sum to clear more of the mortgage. Similar for taking it early, not a good deal.

But you do have options, including:

1. Trying to increase mortgage term to reduce outgoings. You can probably prove to a mortgage lender that you'll have plenty of income in retirement to clear it.

2. Credit cards. 0% for spending deals are very common and so are 0% balance transfers with fees of perhaps 3%.

3. Personal loans with 5 year term. The interest cost is short term, five years is to keep the repayments down, you can clear faster once you have the higher income at NRA.

4. You probably have other savings or investments available?

5. You could also consider an equity release mortgage that allows drawing money as needed and repaying as desired. With this you'd deliberately not pay for a while and maybe even draw on it to allow complete retirement sooner, then repay once you have all of your income including possibly deferred state pension.

In general the idea is just to defer some of your outgoings until you have the higher income available at NRA. With only two years needed you're will into credit card deal territory.

Essentially this is observing that the cost of borrowing is lower than the cost of taking the lump sum or taking the pension early, so borrowing beats either of those two options. This is pretty much the opposite of the way people tend to be thinking just before retiring but it's a really useful tool because your future income is guaranteed, unlike the working years when you could lose your job.

My guess is that you could probably retire tomorrow using these tools until your income has gone up.

Historybuff

Thanks kidsmugsy and Jamesd. There's lots to think about. As you say borrowing is actually costing less than what I would lose taking the pension early. I guess my mindset needs changing in relation to this. I was thinking that all debt needed to be paid off by retirement, but I might actually be better off in the long run not paying it all off early.
So much to think about...

kidmugsy

Historybuff wrote: »

As you say borrowing is actually costing less than what I would lose taking the pension early. I guess my mindset needs changing in relation to this. I was thinking that all debt needed to be paid off by retirement, but I might actually be better off in the long run not paying it all off early.

Hold on; do I see that you have a mountain of unsecured debt? If so, is it costly? Clearing costly debt is one reason that taking a big lump sum might make sense.

Historybuff

Yes, kidmugsy, there is a debt mountain. After a massive wake up call I cut up the credit cards and negotiated zero interest payment plans, so it is now reducing, but will take a long time to pay off. The only debt charging interest now is the mortgage.
I think I need to get some professional advice to sort out what is the best thing to do.

kidmugsy

Historybuff wrote: »

egotiated zero interest payment plans ... The only debt charging interest now is the mortgage.
I think I need to get some professional advice to sort out what is the best thing to do.

As you were, then; if you can cope with the repayment schedule, and the debt is interest-free, it would be a pity to give up part of a good pension when there is no need. Seeking professional advice might be wise. I might even do it myself one of these days.:)

Historybuff

Right. I'm staying as I am. Not touching the pension. I think it's too late for me to even think about paying more in with two years to go, so I have to maximise what I have already paid in. I do also have a small FAVC that I was persuaded to take out years ago. I soon stopped paying it as it became clear it was a duffer. I need to find out whether I can move what is in there over to the main pension or take a lump sum, otherwise it will be something like £200 a year!
Anyway, I have decided to carry on full time for the next two years and have a pension rethink after that.
Thank you all who have taken an interest and helped me clarify things. This website is amazing!