Dithering

olympictorch

Hello.
Bit of background.
I will be 58 shortly.
I am in a final salary pension scheme.
I am thinking of taking my accumulation account, (avc's) and using it to pay a lump sum off my mortgage, which is not due to finish until I am 65.
Having put my figures into the overpayment calculator on this site it tells me I could save £5500 in interest and knock 3 years off my time. I would have to pay approx £3000 tax on the 75% balance of my avc's.
Can't make my mind up, I know it's a net gain but still not sure.

PensionTech

I know it's a net gain

Quite possibly it isn't. You aren't taking into account the return you might get on your AVCs if you leave them invested - that's what you should be comparing against the interest on your mortgage (and the tax element just knocks it down further). I don't know what your mortgage rate is but they tend to be pretty low at the moment, particularly if you've paid off most of it already, which can make investing a better deal than paying down debt.

You also might (depending on your scheme rules) be able to use your AVCs to fund your 25% tax-free lump sum from the main final salary pension when you retire at 65 - which usually works out much better than commuting your final salary pension to get it.

Another thing to consider: if you were to withdraw your AVCs, would you pay less tax by splitting the withdrawal across a couple of tax years?

Linton

What is your mortgage interest rate? If your investment gain on your AVCs is higher then it is probably financially a bad idea. Otherwise it needs looking at further.

Do you have the option of using the AVC to pay out the tax free lump sum from your DB pension? If you do, that could be a better use of your money.

olympictorch

Thank you for your well informed posts both.
I obviously need to do some more research.
One thing I have been told by our HR people is that I cannot "drawdown" my avc's, I have to take it all according to them?

PensionTech

Not true, you can transfer it to another scheme (like a personal pension) that does allow drawdown. You have a statutory right to do that while leaving your final salary benefits where they are - although this is something that a lot of people still don't seem to know so don't be surprised if you have to argue the point.

olympictorch

Indeed so pensiontech.
Just checked with HR.
I can transfer it to someone that does offer drawdown, they recommend I take independent advice etc.
This could be more hassle than I thought 😀

PensionTech

Well, they would say that - it's the usual thing to say when you don't want to get too involved in someone else's decisions. In admin I used to hear it (and say it) all the time when members started talking about weighing up their options. The independent advice isn't a requirement for this kind of transfer (which really should be quite straightforward) and to be honest, if you're reasonably financially literate (which it sounds like you are), you should be able to understand the different management charges etc. between your current AVC scheme and a personal pension, if all you'll be doing in either case is a fairly quick withdrawal. I don't think an IFA is really worth it for the transfer.

The more complicated decision is whether it's a good idea to withdraw the AVCs at all. You can see my and Linton's questions for reasons why it might not be - but again it seems like you're probably capable of understanding these nuances and getting the information yourself, so I still think an IFA is probably overkill. But of course, it's your decision - and this forum will be on hand if you want to ask more specific questions once you have an idea of a) how your AVC investment return might compare to your mortgage interest rate, and b) whether you can use your AVCs to fund your lump sum from the main scheme.

atush

Personally I agree with pension tech. I would nto pay 3K in tax to save 5500 in interest.

You could move your AVC somewhere and take the 25%, or better yet leave your AVC so you can retire early. In the meantime OVERPAY your mtg instead?

Having said that, it could also be a case to put that money into your pension too if your interest rate is low. All depends on t he rate.

olympictorch

Just for info I'm paying 2.5% on my mortgage at the moment.
Unfortunately, it seems it is easy to get blinded by the relatively easy access to a large sum of money without thinking too deeply about it as it seems I have.
Like most others, the mortgage is a monkey on my back I could do without, I just wanted to get rid of it in as short a time possible.

kidmugsy

olympictorch wrote: »

the mortgage is a monkey on my back I could do without, I just wanted to get rid of it in as short a time possible.

For us the liberating moment wasn't when we paid off the mortgage, but when we realised that we could afford to pay it off. And we promptly didn't: it proved far more convenient to keep it running to the end.

olympictorch

I can see the attraction kidmugsy.
Trouble is, as my dear old mum used to say, I want the penny and the bun.
I would like to take early retirement as soon as I am able, but there seems little point as my mortgage runs till I am 65, I would have to look for a full time job to pay my mortgage, so, I may as well stay as I am, unless I can knock it down below the national debt of Brazil.