Redundancy cash - pension or debt repayment?

HappyNow

Hi, please could someone suggest our best option?

My husband is 59 and has three old pensions with a total value of £100K, which we aren't adding to us as we are busy paying off our unsecured debt of £37K. The debt is on permanent low interest (around £95 monthly) and we are repaying it at over £1K monthly. Our plan was to consider early retirement in late 2019 when the debts are cleared, and use his pensions in drawdown and my LGPS (paid early under Rule of 85) to fund the years until SP kicks in.

Then, two weeks ago my husband was made redundant. He will get around £13700 redundancy plus some bits. Due to his age and health he might struggle to find a decent job, but my job is secure and we can pay the debts albeit at a lower rate.

My first thought was to pay £10K off the debt, leaving the rest as a cash buffer. This would reduce the interest by maybe £45 per month. But would he be better opening a SIPP or similar and paying the £10K into there to benefit from tax relief? Then in 2019 going into drawdown and paying the debts from that? If that's a better option, does a HL SIPP invested in Portfolio+ 'conservative growth' plan look about right? Or is a combination of the two ideas best?

I would be very grateful for any input.

edinburgher

It strikes me that you might benefit from some paid financial advice, there are quite a few variables to consider and balance there.

HappyNow

Thank you for the reply

We did pay an IFA last autumn, who checked my husband's pensions and recommended leaving two of them alone until nearer 2019 as they are doing OK. He changed funds in one of them to a lower risk. He also reassured us that our retirement plans were feasible. It's just this pesky redundancy that's thrown a spanner in the works!

He will find work, but it will probably be lower paid, which hopefully will be at least partly offset by us putting the redundancy money to best use!

AnotherJoe

HappyNow wrote: »

My first thought was to pay £10K off the debt, leaving the rest as a cash buffer. This would reduce the interest by maybe £45 per month. But would he be better opening a SIPP or similar and paying the £10K into there to benefit from tax relief? Then in 2019 going into drawdown and paying the debts from that? If that's a better option, does a HL SIPP invested in Portfolio+ 'conservative growth' plan look about right? Or is a combination of the two ideas best?

I would be very grateful for any input.

Absolutely not. You should not be investing money that you have targeted to pay off debts. That money could lose value. You should either pay off the debts, or save it.

What is the interest rate on the loan? If its under 2 - 3%, put the money into high interest current and savings accounts,where you should be able to get around 4-5%. Otherwise, anything above 4% or so pay off a good whack of the loan as you'd planned, leaving the rest in high interest accounts. Under no circumstances invest that money unless you like to gamble.

p.s there is another twist on this.Take the full amount, lets say £14k and put it into SIPP. That will get bumped up to £17,500. Keep it as cash. Now, immediately start drawdown. If hubby isnt earning, you can get all that money without paying any tax by splitting it over two tax years. If not, at least 25% of it is tax free, so thats free money. You can then pay off part of the loan or put into high interest accounts,as above, depending on rates.

kidmugsy

AnotherJoe wrote: »

.Take the full amount, lets say £14k and put it into SIPP. That will get bumped up to £17,500.

The trouble with that is that her husband is unlikely to have had earnings in this tax year so far of £17,500. So it's likely (I guess) that his best bet is to contribute to a SIPP later in the tax year when he's got a clearer picture of his earnings for 2016-17. Meantime the couple can, as you suggest, either pay down debt or use high interest current accounts. The latter would appeal to me - it's always wise to have some cash to hand for emergencies.

Another thing worth considering is taking Tax-Free Lump Sums from the pensions and, along with the redundancy money, just clearing the debt. That would leave surplus income every month that could be used to fill high-interest regular savers and to contribute to a SIPP. This would have the advantage that one quarter of the pension money would no longer be exposed to market risk so late in their earning lives. On the other hand, taking a lump sum and also contributing to a SIPP would mean that they'd need to avoid falling foul of the laws governing the recycling of tax-free lump sums. This wouldn't be difficult, but it's just another pestilential complication of pensions that they'd need to be aware of.

If the couple are really hoping that the husband can retire in the next three years or so, maybe they should be aiming to cut out market risk on his pensions altogether - perhaps the IFA commented on that.

atush

What % interest is your debt?

Personally, i do not feel either of you should retire early, despite you wanting to, with debt of that level and no other savings investments outside of pension.

Will your LGPS pay out in full w/o reduction? Can you continue to work for them if you do?

I feel you need to build up ca cash buffer after paying off debt, and that he should as you say get whatever job he can find.

So paying off some of the debt could be a good idea- but maybe he shold find a new job first, keeping the cash in savings until he does?

HappyNow

AnotherJoe wrote: »

You should not be investing money that you have targeted to pay off debts. That money could lose value.
p.s there is another twist on this.Take the full amount, lets say £14k and put it into SIPP. That will get bumped up to £17,500. Keep it as cash.

Thank you for that take on things. The fear of it losing value was what made me think of 'conservative risk' funds, but yes, I see what you mean that keeping it as cash is more appropriate. It's that 'bumping up' that made me think the SIPP could be a good plan, but I had overlooked Kidmugsy's point below about hubby's earnings, which knocks that one out of the water for now.

kidmugsy wrote: »

The trouble with that is that her husband is unlikely to have had earnings in this tax year so far of £17,500. So it's likely (I guess) that his best bet is to contribute to a SIPP later in the tax year when he's got a clearer picture of his earnings for 2016-17. Meantime the couple can, as you suggest, either pay down debt or use high interest current accounts. The latter would appeal to me - it's always wise to have some cash to hand for emergencies.

Another thing worth considering is taking Tax-Free Lump Sums from the pensions and, along with the redundancy money, just clearing the debt. That would leave surplus income every month that could be used to fill high-interest regular savers and to contribute to a SIPP. This would have the advantage that one quarter of the pension money would no longer be exposed to market risk so late in your earning lives. On the other hand, taking a lump sum and also contributing to a SIPP would mean that they'd need to avoid falling foul of the laws governing the recycling of tax-free lump sums. This wouldn't be difficult, but it's just another pestilential complication of pensions that they'd need to be aware of.

If the couple are really hoping that the husband can retire in the next three years or so, maybe they should be aiming to cut out market risk on his pensions altogether - perhaps the IFA commented on that.

Thank you. I hadn't appreciated the impact that his lack of income this tax year would have.

I agree about keeping some cash in reserve, so I think £10K off the debts which will leave about £4K to put in high-interest current accounts is probably wise.

The point about using some of the Tax Free Lump Sum along with the redundancy to clear the debts is a good one, but I tend to wear a 'hair-shirt' about the debt and want to pay it off before accessing any pension funds! I know it's all our money, but still.....

The IFA did move funds in one of the pensions to low-risk investments and (as that was the largest pension) he was happy with where they now sit.

atush wrote: »

What % interest is your debt?

Personally, i do not feel either of you should retire early, despite you wanting to, with debt of that level and no other savings investments outside of pension.

Will your LGPS pay out in full w/o reduction? Can you continue to work for them if you do?

I feel you need to build up ca cash buffer after paying off debt, and that he should as you say get whatever job he can find.

So paying off some of the debt could be a good idea- but maybe he shold find a new job first, keeping the cash in savings until he does?

Thank you for the reply. The debt is all on either 0% or 4.9% life of balance interest and I monitor rates almost daily!

My LGPS will pay out unreduced in 2019 due to Rule of 85. But nevertheless, we won't retire until the debt is clear. Before the redundancy it was scheduled to be clear by Feb 2019 - hopefully it still will be - and we would then retire (or at least reduce our hours) late 2019 with a cash buffer built. The dates are all flexible though, they can extend as needed.

We do have other investments, namely a BTL property which we will sell when the current, problem-free, tenant moves out, and we also live in a very nice house which we may downsize from. I perhaps should have said that it's not all financial doom and gloom but I was trying to keep the first post short so as not to lose the point!

Many thanks to everyone who has taken the time to comment, it is much appreciated

kidmugsy

HappyNow wrote: »

we also live in a very nice house which we may downsize from.

I've never really been convinced that when two people stop spending much of the day at work, and start spending much more of it at home, that that is the natural time to downsize.

atush

In our case it is as we have 5 bedrooms 3.5 bathrooms and 3.5 reception rooms lol.

So downsizing to 3 bed 2 bath 2 reception should in theory work.

atush

Thank you for the reply. The debt is all on either 0% or 4.9% life of balance interest and I monitor rates almost daily!

My LGPS will pay out unreduced in 2019 due to Rule of 85. But nevertheless, we won't retire until the debt is clear. Before the redundancy it was scheduled to be clear by Feb 2019 - hopefully it still will be - and we would then retire (or at least reduce our hours) late 2019 with a cash buffer built. The dates are all flexible though, they can extend as needed.

We do have other investments, namely a BTL property which we will sell when the current, problem-free, tenant moves out, and we also live in a very nice house which we may downsize from. I perhaps should have said that it's not all financial doom and gloom but I was trying to keep the first post short so as not to lose the point!

Many thanks to everyone who has taken the time to comment, it is much appreciated

Ok sounds like a plan, and the sale of your BTL will give you cash so no need for LS from your LGPS pension. Consider S&S isas for some of this money.

Ok, so keep the redundancy as cash until he gets a new job (even part time or lower paid) then put some on the debt (the 4.9% not 0%), some on his pension. Join his new pension if there is one. Small cash buffer.

Keep your LGPS going until it is unreduced in 2019.

Good luck to your OH in his job search. Hasd he left yet? Help him spruce up his CV, and have him sign on at the JC so he can get his JSA while he looks.

AnotherJoe

The pension uplifting the money idea may still work can't you go back up to 4 years for unused allowance ?Experts ?