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IFA pension advice, what do you think.

I have posted a few times in the past few months discussing my pension options with respect to paying off my mortgage early and optimising my retirement income at 55 (I am 42 now). I decided on taking professional IFA advice (for the first time) due to the enormity of the financial commitment I have made and the implications if it all goes wrong. My attitude to risk is 'medium'.

Brief summary of my situation; solid occupational pension scheme, will recieve £31.5K pa and £97K tax free lump sum (todays rates) @ 53. have small (PR funded) PPP with Scot Eq, current value £18K (fund spread on the risky side - 8 funds). I have a £259K mortgage - currently repayment with 16.5 years to run (costs £1900 pm - £1067 interest/c£840 repayment). My 'aim' was to pay mortgage off in an efficient manner whilst maximising/optimising pension options at 53/55 with a view to semi retirement at 55 (13 years). I am married 3 children, wife work p/t (NHS nurse) with small pension pot circa £3.7K pension and £10K lump sum @ 60 (she is 45 now).

I gave my IFA some guidelines (including my desire to change to IO mortgage) and this is what she is suggesting:

- Transfer mortgage to interest only -£1067 month.
- Tx PR Scot Eq PPP to new Norwich Union PPP
- Invest £840 (net) into new NU pension - £1077/month(with basic rate tax relief)
- invest £3800 (remining 40% tax relief rebate) into equity ISA each year.

This could result in the following at 55 (assuming 6-8% returns). c£70K tax free from new PPP, £12K from PR funded PPP, £55K from equity ISAs. That combined with a large portion of my occupational pension lump sum would pay off majority of mortgage. The result pension pot would be transfered to a USP, maybe giving £16K pa (combined with £31.5K from occ pension). The remaining mortgage would be around £70K and I would also have a £70K lump sum left over. I would pay the remaining mortgage off over the following 10 years.

The suggested fund spread for the NU PPP is:

NU Corporate Bond 25%
NU European Equity 10%
NU Property 25%
NU UK equity 10%
NU Investec American 15%
NU SHroeder UK Mid 250 15%

The NU funds all have a 1% AMC, and v low fund expense charge.

The Equity ISA funds are yet to be decided but will be higher risk. I am also making some changes to Life assurance/Critical illness cover.

I am relatively comfortable with what has been suggested, but would be grateful for any comments!
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Comments

  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    peterg1965 wrote: »
    The result pension pot would be transfered to a USP, maybe giving £16K pa (combined with £31.5K from occ pension).

    Thus you will be a higher rate taxpayer in retirement, you have to add state pension on top as well.This is not the way it's supposed to work.

    But perhaps we have been here before. :confused: :rolleyes:
    Trying to keep it simple...;)
  • Andy_L
    Andy_L Posts: 12,958 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    You wife is under pensioned by comparison- ideally you want to make use of her basic rate allowance (in retirement) instead of your higher rate
  • Judwin
    Judwin Posts: 207 Forumite
    It seems to me that you're already very close to (if not into) paying 40% tax on your retirement income. £31k from your occ pension, somewhere between £5k and £8k from state pension (depoends on your SERPS/S2P entitlement), and perhaps another £1k from your protected rights.

    Your wife however might not be paying any tax in retirement.

    I wouldn't be paying any more money into my PPP pot as things stand. I'd..

    1) Transfer Mortgage to Interest only
    2) Max out my Maxi SS ISA - £7K per year.
    3a) Pay into Wife's PPP to get her up to £20K p/a pension income
    3b) Max out my Wifes Maxi SS ISA - 7K per year.

    Only after all that would I put more money into my own PPP if I were going to end up paying 40% tax on it when receiving the pension.

    1) - assumes your investment returns will exceed your mortgage interest rate.
    3a&b) - people will argue about whether ISA/PPP is better.
  • peterg1965
    peterg1965 Posts: 2,164 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    EdInvestor wrote: »
    Thus you will be a higher rate taxpayer in retirement, you have to add state pension on top as well.This is not the way it's supposed to work.

    But perhaps we have been here before. :confused: :rolleyes:

    I know we have been here before Ed :D but this time I have some professional advice! I realise that I will be a higher rate taxpayer in retirement (unless the bands change significantly) but the new NU pension in my name attracts higher rate tax relief. This extra relief (actually £2300 not £3800) invested in the equity ISA will go a significant way to offset the extra tax I will pay in retirement. This has to be an advantage.

    what about the fund spread for the pension does that look about right?
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    peterg1965 wrote: »
    This extra relief (actually £2300 not £3800) invested in the equity ISA will go a significant way to offset the extra tax I will pay in retirement. This has to be an advantage.

    Even more of an advantage to save the money outside the pension so you don't incur the tax liability in the first place - that is a waste of resources.
    If I understand you correctly you plan to maximise pension contributions and use the 25% tax free cash at 55 to pay off your giant mortgage.

    This means that all your capital will be locked up in property (difficult to get out without selling or doing economically non-optimal equity release) and pensions (impossible to get out).

    Is that the plan?If it is, frankly it's very risky, as anyone who was mad enough to take out a pension mortgage in the 80s will attest.Not only do you risk the pension underperforming so you can't extract enough TFC to pay off the mortgage, but you also have only a small capital pot to meet emergency spending needs which do not disappear once you have retired.

    Ideally an individual should have three pots IMHO: one in a pensions (incl state pensions) generating a tax efficient income up to one of the three band levels (10k,20k and HR), one in property (tax free), and one in cash/invested assets (preferably built up in an ISA and thus also tax free).

    It's not a bad idea to aim for these to be roughly equal in size.

    How would your plan look if you used that as a basis? I'd suggest it would indicate that you use your spare money to max out your investment ISA @7k a year and overpay your mortgage, not pour more money into inflexible risky pensions.
    Trying to keep it simple...;)
  • Judwin
    Judwin Posts: 207 Forumite
    Dunno about the fund spread.

    But did you ask the IFA to include your wife in the calculations? I'd say it was absolutely vital that you ensure she gets a pension of at least the maximum age allowance. She will be entitled to get around £10K tax free. If her current pension arrangments won't provide that amount of income, then that would be my first priority as ultimately it'll be the most tax efficient.

    If you pay into Your PPP, yes you'll get 40% tax back now, but you'll also be paying 40% tax when you draw the pension, so the nett effect is no gain. The Taxman gets 40% eventually.

    If you pay into your PPP, and you take the maximum 25% tax free lumpsum on commencement, then you get 40% tax back now, and effectively end up paying 30% tax when you draw the pension - a nett gain of +10%, but the tax man still gets 30% eventually.

    If you pay into your wifes PPP, then you pay 40% now, and she can claim back 22% now, so the Tax man gets 18% now. However, when she draws her pension, if she's below the age allowance (£10K ish ), she'll pay no tax, and she also gets to take 25% tax free too. So the tax man only ever got 18%.

    If gets more complicated if she does end up paying tax in retiremnt, and there will come a point where it would have been better for you to pay into your PPP pot, but, I don't think that point would occur much before her income reaches £15K or so (including any state, S2P and PPP entitlement she already has).

    The arguments for ISA are slightly different in that you pay 40% tax now, and nothing later. So the tax man gets 40% now. However, you do retain control of your own capital.

    IMHO
  • peterg1965
    peterg1965 Posts: 2,164 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Thanks for the comments. My wife's pension is an NHS one, she doesnt yet have a PPP. I am in the Armed Forces and fortunate enough to have a gold plated pension, which also provides a substantial Death In Service benefit for my wife and ongoing pension in the event of me pre deceasing her in retirement. she is well covered.

    Mortgage: the aim of this plan is to pay the vast majority of the mortgage off at 55 by the following means:
    c£75,000 from the tax free lump sump from the NU PPP (assumes 8% growth over 13 years with £1077 (gross) /month - £300000 pot). I intend to increase contributions by 4% a year to increase this amount further.
    c£12,000 from Protected Rights part of NU PPP
    £50,000 from Armed Forces pension lump sum (leaves me with cash pot of £75,000)
    £60,000 from Equity ISA (funded by higher rate tax rebate)(assumes average £2600 per year contribution over 13 years 8% growth)

    Total £197,000

    This leaves me with a mortgage of £62,000 (further reduced by increasing pension and ISA contributions by an annual %) at 55. This will be paid off over the following 10 years using the Unsecured pension drawdown from the remaining pension pot (c£250,000). Cleared quicker if I decide to continue working in semi retirement from age 55.

    Once the mortgage is cleared that means I have my occ pension (£31.5K @ today rates) Unsecured pension and state pension from 66/68 and my wifes NHS pension + the cash pot of £70,000.

    Is this overly risky?
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    It's a lot more risky than using the money you are going to lock in pensions to pay off the mortgage, which is a guaranteed return of whatever interest rate you are paying.Surely it is obvious from the endowment crisis that relying on the stockmarket to pay off your mortgage is very risky?

    And I can't believe you are going to waste your ISA by using the money to pay off the mortgage.What is your IFA thinking of? Just appalling advice.
    Trying to keep it simple...;)
  • peterg1965
    peterg1965 Posts: 2,164 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    EdInvestor wrote: »
    It's a lot more risky than using the money you are going to lock in pensions to pay off the mortgage, which is a guaranteed return of whatever interest rate you are paying.Surely it is obvious from the endowment crisis that relying on the stockmarket to pay off your mortgage is very risky?

    And I can't believe you are going to waste your ISA by using the money to pay off the mortgage.What is your IFA thinking of? Just appalling advice.

    I am now confused, I agree that paying the mortgage off by this means has an element of risk. Surely you cannot be suggesting that investing in a reasonably balanced pension fund and anticpating a reasonable rate of return carries the same risk as the LOW COST endowment scandal of the 80's and early 90's. If that was the general concensus of risk than why on earth would anyone invest in pensions or any form of stockmarket investment?

    Of course I have a 'do nothing' option of sticking with my current repayment mortgage, having an outstanding balance of £70,000 when I am 55 and paying it off using my occupational pension scheme lump sum, leaving me about £50,000 cash and my armed forces pension only.
  • EdInvestor wrote: »
    Surely it is obvious from the endowment crisis that relying on the stockmarket to pay off your mortgage is very risky?

    And I can't believe you are going to waste your ISA by using the money to pay off the mortgage.What is your IFA thinking of? Just appalling advice.

    Forgive me if I'm wrong but aren't contradicting yourself there?
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