Which civil service pension for early retirement?

jamesd

Geepers1 wrote: »

If I needed a lump sum to clear my mortgage in my fifties, would taking it from a DC fund be a good option?

Yes, using the pension tax free lump sum is the most efficient way to pay off a mortgage with a lump sum because you've received the help of the pension tax relief.

It isn't the most efficient way to pay off a mortgage. That's to wait and do it out of income once you have all of your pensions in payment. The reasons for this are:

1. Investments in DC or outside a pension can be expected to grow at a higher rate than the mortgage interest cot, so any withdrawing to pay off the mortgage loses you that extra growth and makes you worse off.
2. 50s is before all pension income is in place so it increases the amount of money that you need to set aside to allow you to retire earlier. That's the worst possible timing for you.

I'm not 55 yet but have enough non-pension money to clear my own mortgage whenever I like. I won't because it doesn't make sense. At 55 I'll also have enough to do it from a pension tax free lump sum but the same reasoning applies then as well.

[Deleted User]

Thanks, James. I was surprised that it's better not to pay off a mortgage. I thought mortgages were expensive, and interest paid on savings/investments had been low due to low interest rates set by the BoE? (Not speaking from experience, though, because I haven't had significant long-term savings so far.)

The idea to clear my mortgage in my fifties was so that my housing costs would be cleared and I would use a low wages income and possibly other savings to live off. Maybe I'll think again

TheShape

Geepers1 wrote: »

Thanks, James. I was surprised that it's better not to pay off a mortgage. I thought mortgages were expensive, and interest paid on savings/investments had been low due to low interest rates set by the BoE? (Not speaking from experience, though, because I haven't had significant long-term savings so far.)

The idea to clear my mortgage in my fifties was so that my housing costs would be cleared and I would use a low wages income and possibly other savings to live off. Maybe I'll think again

The thing with mortgages is that their cost is dependent on many factors. The BoE rate affects them but so does the size of your loan relative to the value of your property or whether you have a fixed rate and how long that fix is for.

In general, if your money can earn you more doing something other than paying off your mortgage quicker then it's worth doing with the caveat that you should have a plan in place should your mortgage interest rate increase significantly.

jamesd

Geepers1 wrote: »

I was surprised that it's better not to pay off a mortgage. I thought mortgages were expensive, and interest paid on savings/investments had been low due to low interest rates set by the BoE?

Mortgages tend to be some of the cheapest borrowing around, not expensive. Savings rates are low but not investment returns, though it depends on where you're invested. At the moment much of my money is in P2P typically paying circa 12% interest before bad debt that I think is likely to be over 10% after. More traditionally, the long term average of the UK stock market has been something like 5% plus inflation, well above typical mortgage rates.

One of the advantages that not paying off the mortgage delivers is a higher safety margin, since you have that much more capital available to cover all bills until the later pensions arrive and let you take care of it out of income.