Should I use pension to pay off mortgage?

jamesd

geoff2 wrote: »

I want to draw my tax-free lump sum but I don't want to draw an income from the remainder because I'm still working. However, upon taking the TFLS, I am then obliged to put the rest into a "flexi-access drawdown" account - I can't just leave it where it is. So - is this "Drawdown" a specific type of product or just a particular option within some other product?

It's just another pot of money within the same pension scheme. Say you had £100,000 to start with. You'd say decide that you want to take 25% of £50,000 of that so you would put 50,000 in to flexi-access drawdown, take the £12,500 tax free lump sum and end up with two pots inside the pension scheme:

1. the £50,000 still in the original pot.
2. the £37,500 in a new flexi-access drawdown pot.

At any time you could put more of the £50,000 into flexi-access drawdown, take a 25% tax free lump sum and have the remaining 75% added to the existing flexi-access drawdown pot. Or you could just do it all at the beginning, I'm just illustrating that it's not an all or nothing choice.

geoff2 wrote: »

Surely if I've had the TFLS I can't then put the 75% remaining into another pension because isn't that "recycling"?

No recycling, it's still staying within the pension tax wrapper system. Think of it as like an ISA transfer, it just moves from one ISA to another and never leaves ISAs.

jamesd

unphased wrote: »

taking large lump sums and paying heavily on income tax.

I see some not quite perfect answers on the income tax side so I'll try to clarify.

First, there's your final income tax situation. That is arrived at by just adding the taxable part of the pension to your normal income for the year. Then your tax obligation is the usual nil on personal allowance, 20% on the basic rate band, 40% on up to £150,000, losing your personal allowance starting at £100,000, then £45% above £150,000.

But that isn't how you will initially be taxed on the money. The pension provide will tax you on the emergency tax code and give you 1/12th of your personal allowance and 1/12th of your basic rate band and 1/12th of the £150,000 and £100,000 and so on. This isn't a big deal because you can reclaim the extra tax from HMRC using one of three different forms. But you will initially pay much more income tax than your actual due amount of tax. You'd be taxed as if you were going to receive £75,000 a month for the whole year until you make the reclaim from HMRC. Taking the money as regular payments avoids this because that gives HMRC time to send a proper tax code after the first payment, then the PAYE rules will automatically return the overpayment to you over the rest of the year.

geoff2

dunstonh wrote: »

What you want to do is drawdown. This is a specific transaction that is only available on more modern personal pensions, SIPPs and drawdown plans. It is not typically available on older legacy plans.

Thanks dunstonh and jamesd for your responses. You're certainly right about "legacy" plans. Mine's with the Prudential (but originally Scottish Amicable). I researched a bit more yesterday, finally getting through on the phone and the options are limited to three choices:

(1) Take the whole lot (£40k) and pay emergency tax on 75% of it. Plus I'd then be pushed into the upper tax band for most of my 2015 earnings (which is only minimum wage!)

(2) Convert it to "drawdown" but with the Pru you have to apply via an IFA!

(3) Transfer the whole pot to another (more flexible) provider.

So it'll have to be option 3. Question is, to whom? I'm quite interested in a SIPP but it's got to offer "high level" investment categories, not nitty-gritty share dealing, which is a mug's game.

unphased

Having explored some options it is clear that my pension pot needs to be much bigger before I start raiding it. I am only 56 so I have a few more years left before I need to retire and want to increase the pot substantially. I have decided to let things stand as they are with the mortgage and increase my pension contributions now.


Thank you for your contributions.

redux

I'd still say experiment with some loan repayment calculations, with a higher proportion of the mortgage as interest only, and add a few years to the term. Also perhaps increase it by a few thousand to help clear the other debts that are at a higher rate. You should still have some left over per month to help with the extra pension contributions.

unphased

Hello redux
I don't have any high interest loans. I have 0% credit card balance transfers that are costing me nothing. The overdraft has been left far too long and I have dealt with that by paying it off with a 0% money transfer deal. The Nationwide mortgage is a standard rate with no penalties for overpayment. The overpayment is generating an overpayment pot that has accrued £1400 and can be borrowed back at any time. All things considered I now have a stable financial situation at this time and cannot see any benefit of taking money from my pension pot without compromising my future ability to finance my life. It is frustrating because we don't know how long we are going to live, how much we will need in the future when our ability to earn is reduced and all that but gut feeling tells me to keep the pot untouched. Being self-employed I don't have the benefit of company pensions. The pension is a tax efficient vehicle to save.

geoff2

Hello
This thread has been quiet for a while but it seems an appropriate place for me to post an update of my circumstances, with a question for anybody kind enough to spare a moment. I've now got £127k in a Fidelity SIPP, currently just in a cash pot. My mortgage with Leeds BS is interest-only (which I regret but we are where we are), with a balance of £238k and I'm stuck on the SVR of 5.45%. I'm just over 65 but still working (now only earning £18k pa) and I've deferred my state pension (currently forecast at £181 pw). I also have another £40k pension fund with the Pru, which has a GAR of 10%, which I have not yet taken. Due to the GAR, I plan to buy an annuity with the whole pot. My house is worth about £430k according to the Nationwide calculator. My wife's on £48k pa and has a good civil service pension for when she retires early next year. I really want to start reducing the mortgage balance as the term expires in a year and we are likely to have to downsize. Since, in my opinion, it's very unlikely that I'll achieve anything like a consistent 5.45% growth in my SIPP (assuming I invest in some of Fidelity's medium/low risk funds), I'm inclined to take out my 25% tax-free lump sum of £32k and pay this off the mortgage, effectively making a 5.45% saving, and perhaps draw around £10k more so that I stay inside the 20% tax band. In the team's opinion, am I doing the right thing? Thanks in anticipation.

jamesd

Do you want to downsize?

Whether you want to downsize or not, there are lenders who will do a repayment mortgage to age 85 if you have the income to support it.

238k balance on a 430k property is pretty good if you are happy to downsize.

5.45% doesn't seem great but you might be able to get a better deal on say a ten year fix when downsizing or on the current place if you don't really want to do that.

Besides the interest rate you're on a broadly winning track with your income plans, since state pension deferral is delivering an increase of more than the raw mortgage interest rate and the inflation-linked increases just mean that the mortgage capital cost as a percentage of income is just going to continue to drop over time. Well, aside from the stopping work aspects.

So far as Leeds BS goes, their normal maximum mortgage term is age 80 but they don't go into retirement for normal interest only mortgages. However, for existing customers with an interest only term that is ending they will look at the specifics of the situation and may be willing to offer a solution of some sort. That might be repayment until age 80 or some combination of interest only and repayment. Downsizing would help if you want to do that, of course, and they can do a porting with term extension and all or partial repayment when that's warranted. This is something that their underwriters have to consider on a case by case basis since it's not standard terms unless it's pure repayment.

At the moment it doesn't seem best to pay money off the mortgage capital. That's because if you do want to stay or move and keep a mortgage with the Leeds BS you can offer that as part of discussions about how to sort things out.

It's also a good time to be maximising pension contributions using savings if you have those, since you can already get at pension money and have the income to allow you to make large pension contributions. Same for your wife.

Your wife may have a particularly valuable option. Some of the public sector schemes let AVCs be used to take the tax free lump sum from the combined value of AVCs and defined benefit pensions. This can mean 100% tax free AVC money. so tax relief on the way in, no tax on the way out at all for the AVC up to the 25% of combined value. This is so valuable that it's important to find out whether she has this. If she does one option would be for you to take the tax free lump sum paid into a bank account in your name, you to give it to her to one in her name and her to use that for AVCs. Then she'd get tax relief on the 32k on the way in to increase it by 25% but no tax on the way out, a nice 25% addition to the money available.

So far as the 75% of your pension pot goes, it's very unwise to take such a large amount in one tax year because all 75% would be taxable income and you'd pat a lot of income tax. But one option you could consider is drawing enough to take you to the edge of the higher rate band and perhaps discussing with Leeds BS the option of doing this to draw the money over say 5 years at 19.05k per year to fund a partial repayment mortgage over that term, with the rest on a longer term up to 80 years. They will undoubtedly understand that paying 40% tax instead of 20% just means less money for them overall. With potentially 76k after tax plus the 32k tax free this could get them 108k off the 238k balance and given what I see about income levels that should make repayment on the rest until age 80 considerably more affordable.

geoff2

jamesd, thank you very much for your comprehensive reply, which is enormously helpful. As you suspected, we would prefer not to downsize but we wouldn't rule it out if we can buy a reasonable place and have no mortgage, as this would make it easier for us to to afford holidays etc. and visit our daughter in Ireland. The AVC idea is interesting! I will look into it. Thanks again!

jamesd

It's pretty common for people not to want to downsize so I thought you might not.

But I do suggest that you do some online window shopping because your current place is probably not really ideal for later life when you might have mobility difficulties, say. You might end up finding an interesting place that's a few tens of thousands cheaper and also better long term. Then maybe you could also afford things like say improved insulation, maybe solar power and such to cut your long term expenses. May not be too hard to end up after costs with a place that's £50k cheaper which might not sound a lot but after the pension money it'd cut more than a third from the remaining mortgage balance and do great things for affordability. It's pretty clear that you don't need to plan to completely get rid of the mortgage when moving, so that should greatly increase the attractiveness of the options available to you compared to having to get rid of it all.

Leeds will let people port a mortgage to a new property in this sort of situation, subject to affordability, because it both cuts their risk and helps the affordability long term. Also shows them that you're doing something to try to get rid of the mortgage which is a nice gesture that can help to improve the attitude to what you're asking.

Depending on the balance you'd also have equity release as an option. With no repayment required, but payment of interest or capital optional if desired, that can be interesting sometimes. Probably too young to switch the whole mortgage to this yet but a reduced one might well be doable. It's also an option you could offer to Leeds, the pension based early repayment then switch to equity release once that scheduled set of payments has finished. That way they get out of the mortgage sooner if they want that.