New pension rules force me to seek IFA advice

jamesd

Paying off a mortgage is one of the more common mistakes that people make. The lost income is more than the interest rate cost of a mortgage, normally. What could you get as income now with no lump sum? It's also normally possible to take a lower lump sum and that can sometimes be useful.

For the mortgage it might be better instead to lengthen the term, perhaps to age 85. Then you'll have about 18 years of both this pension and state pension combined to pay it off, instead of doing it now when you aren't yet getting your state pension, so your financial stress is higher.

Other creditors might well be willing to agree to a payment plan over a longer term or with reduced interest when you explain your circumstances to them.

Do you have any savings or investments that you might be able to use to delay taking the pension? I'm asking this because the reduction for taking it early can make doing that an excellent deal, perhaps letting you get higher income and replace the savings with some lump sum money.

If you have savings, did you have any earned income this tax year? If you did than can increase the amount you can pay into a personal pension, letting you boost it with some free tax relief.

Is there any prospect of you getting means tested benefits? That can change the choice which is best very greatly.

dunstonh

I am however cautious and can't take on too much risk and certainly couldn't think about managing my own pension.

Drawdown is generally regarded as a high risk transaction. So, by default, even if you select lower risk investments, you are entering into a higher risk area compared to a defined benefit scheme.

Anunities are an option but the rates have never been lower. Generically, you would expect most cases to provide a lower income with annuities than the scheme pension. Although with higher transfer values at the moment and improved death benefits now available on annuities, it may be possible.

Sioux18

dunstonh wrote: »

Drawdown is generally regarded as a high risk transaction. So, by default, even if you select lower risk investments, you are entering into a higher risk area compared to a defined benefit scheme.

Anunities are an option but the rates have never been lower. Generically, you would expect most cases to provide a lower income with annuities than the scheme pension. Although with higher transfer values at the moment and improved death benefits now available on annuities, it may be possible.

Thankyou. One thing I am finding from my discussions is my risk profile is very cautious. IFA suggested Annuity may be better than DB pension hence reason for considering but I take on board what you are saying and will have to see what figures he comes up with I guess.

Sioux18

jamesd wrote: »

Paying off a mortgage is one of the more common mistakes that people make. The lost income is more than the interest rate cost of a mortgage, normally. What could you get as income now with no lump sum? It's also normally possible to take a lower lump sum and that can sometimes be useful.

For the mortgage it might be better instead to lengthen the term, perhaps to age 85. Then you'll have about 18 years of both this pension and state pension combined to pay it off, instead of doing it now when you aren't yet getting your state pension, so your financial stress is higher.

Other creditors might well be willing to agree to a payment plan over a longer term or with reduced interest when you explain your circumstances to them.

Do you have any savings or investments that you might be able to use to delay taking the pension? I'm asking this because the reduction for taking it early can make doing that an excellent deal, perhaps letting you get higher income and replace the savings with some lump sum money.

If you have savings, did you have any earned income this tax year? If you did than can increase the amount you can pay into a personal pension, letting you boost it with some free tax relief.

Is there any prospect of you getting means tested benefits? That can change the choice which is best very greatly.

Thankyou. My first step on this journey was to explore restructure of my mortgage which is interest only & £78k at a low SVR. I have no earned income only carers allowance and was flatly refused. With 9 years left to repay and limited options, the prospect of rising interest rates is a concern for me, hence, peace of mind in repaying the mortgage. Other lenders have suggested they may be able to help with DB income and a 15 year term, but, with a borrowing capacity of circa £40000.

I don't have any savings so this really is it in terms of doing the best I can with this pot.

Ordinarily I wouldn't ever think about repaying a mortgage and was surprised my lender wouldn't even entertain a term extension but apparently it's down to affordability and the 'need' to enter into a repayment loan, which of course I'm never going to be able to achieve.

xylophone

Is there any prospect of you getting means tested benefits?

The OP mentions "no earned income/no savings" but has

a modest annual income of say £9k pa.

He/she is in receipt of Carer's Allowance, but this would amount to less than £4000 a year - perhaps there is another pension in payment? Or other means tested benefits? Would he/she be in receipt of any support for mortgage interest payments?

One would imagine that with a disabled son and this low income, the household is in receipt of some council tax reduction?

The OP mentions being very risk averse but at the same time transferring out of a DB pension in favour of an annuity - although it may be the case that as a lifetime smoker such an annuity would be higher than average, would it really be a better option than an index linked DB pension?

The OP might be better off leaving the pension in deferment until either the mortgage comes to the end of its term or until the interest rate rises to what he/she considers an unsustainable level and taking the DB pension then - at least the actuarial reduction would be lower.

jamesd

The "say 9k" is the potential pension income.

Yes, benefits are a really big deal. He can't be compelled to take the pension since he hasn't yet reached normal retirement age for that pension. Which means that those he has unsecured debts with could in effect be forced to write off the debts if he doesn't take the pension, or at least accept only token payments until its normal retirement age. Help with mortgage interest can also be available via the support for mortgage interest scheme.

A benefits check with CAB seems to be a very high priority need in this situation, so they can compare now with benefits and no pension with taking the pension early.

It's looking very much as though taking the pension would be a bad mistake that achieves little beyond reducing benefit entitlement now and making you poorer longer term. Particularly if an annuity is purchased. Using drawdown offers better prospects, given the far higher potential income.

jamesd

Refusing is apparently often the first thing that some mortgage lenders will do. Yet at 65 you could have £66k lump sum and an extra income of £10500 then another £8k from age 67 that would let you clear the rest on repayment terms or using equity release. For them it's in effect just a matter of being patient, then they get repaid only a little later than the original end date.

Is your home bigger than it needs to be, or in a more expensive area? One way to reduce the mortgage might be to move, with any reduction in property value being used to cut the mortgage size.

You're a bit young for equity release but that might be worth investigating. Depending on LTV there might be enough equity to do it.

jamesd

I took a look with cfiresim using these changes to their values:

End year 2056.
Investigate max initial spending with success rate of 75%. Only 75% because means tested benefits are already a factor so falling back on them is not a dramatically worse outcome.
Portfolio value 280k (360k CETV minus 78k mortgage and a couple of k for other.
Fees 0.68 to compensate for being in UK.
Spending plan Guyton-Klinger, initial yearly spending 15000, floor pensions/SS.
Pension 1, 8000 starting in 2029, the state pension.

Run simulation and the max initial spending given is 26,400. Very encouraging.

Now to be more cautious I changed fees to 1.0%, initial spending to 20k, floor to 12k, minimum success rate 95%. Result £18,374. Dropped the success rate to 85%. Result £22,728. 90%, £19,900.

With fees 1.5%, floor 15000 the 95% level is £225 income, failure. 90%, £5841. 85% £8400. Not good enough.

Kept fees at 1.5% with floor at 13k. 95% £14,836, 85% £18,920.

jamesd

What those results suggest is that you could reasonably take an income of about £19,000 a year provided you use the Guyton-Klinger drawdown method after having spent £80,000 to pay off the mortgage and fees. This would start now and not increase when your state pension starts. Depending on investment performance you would normally get increases with inflation. If investments do as well as average the increase would be larger. If investments do badly you'd still not expect to go below the £12,000 floor.

mark55man

Could OP ask the Scheme's trustees to give a larger lump sum at the cost of some final salary.

Therefore OP would avoid giving up a DB to buy a strongly non recommended annuity just to get a larger slice of CETV.

OP, you should take the advice around OP - it sounds like you are trying to do the right thing and meet your existing repayments, but in the circumstances CAB should be able to advise on how you can best structure short term obligations without selling yourself short for later