Should I use my Mortgage Pension Pot to pay off my mortgage now or later

wroughtironron

[That is sad. 30 years ago, £70pm gross would have been a good contribution. Today, its a pittance. If that had been increased in real terms every few years, that could have been a very good pension pot. A good start thrown away. Too many people do that.[/QUOTE]

Over those years I paid AVCs in addition to my own contribution,s into my occupational pensions which were benefitted from when I first retired two years ago, and took my pensions.

xylophone

You might consider transferring the OM pension into a SIPP with HL and taking the 25% PCLS.

You might use the PCLS to open a sole Nationwide Flexdirect each and a joint Flexdirect and a Flexclusive regular saver each.

You would need to remember to cycle in/out £1000 a month from an outside source into the current accounts.

At the end of a year you could each have £6000+ in the savers - make a lump sum payment off the mortgage?

The assuming Nationwide offerings remain the same

in year 2, you'd be getting only 1% on the Flexdirect current accounts but could continue with the Flexclusive RS - another lump sum payment at the end of that year?

and in year 3, re-establish the 5% on the current accounts if possible, continue with RS and make final payment off the mortgage?

Had your wife considered opening a SIPP with HL? See


https://forums.moneysavingexpert.com/discussion/5580163

With relevant earnings of £4000 per annum she could contribute £3200 per annum ( rather than the £2880) and receive tax relief of £800.

She might choose to access the SIPP once she stops earning if not before.

You might choose to access the balance of your pension as an earnings replacement once you stop earning?

jamesd

When is the mortgage due to end?

You have earnings of around £15k so you're allowed to make gross pension contributions of up to that amount each tax year. You should if there's time to get it out again before you need it. You get basic rate relief of 25% added to the amount you pay in even on income within your personal allowance. Then you get 25% out tax free and the rest taxed at 20%. In effect saving you the income tax on 25% of your pay.

Since you have savings of about £6,000 and can take a tax free lump sum of up to £7,500 each rolling twelve month period without tax free lump sum recycling issues I suggest you do that. £13,500 net is £16,875 gross so a bit more than the £15k you're allowed, net equivalent of that is £12k paid in.

Your wife can do something similar and probably should.

No reason for the two of you to turn down the easy and risk free tax saving that is available to you, unless forced by the mortgage timetable.

But see my next post instead of doing what I suggest in this one.

jamesd

Something important has been skipped by those describing taking out the taxable pension money during: the Money Purchase Annual Allowance. This currently restricts the amount of pension contributions you're allowed to make to £10,000 a year, soon to be £4,000 a year. It applies if you flexibly withdraw taxable money from a pension. Flexibly withdraw means the taxable money in UFPLS or the after tax free lump sum 75% of a drawdown pot. Very bad news to someone like you who can pay in up to earnings of £15k a year if only restricted by the usual £40k annual allowance. You must avoid triggering the MPAA. Fortunately, you can.

There's something called the small pot rule. Up to three times in your life you can take out all of the money up to a maximum of £10k from a pension pot like these. Must be the whole pot and must be no more than £10k. It can be a pot after taking the 25% tax free lump sum, so you can start with £13,330, take 25% tax free lump sum of £3332.50 then take the remaining £9997.50 as a small pot. HL charge £25 for taking a small pot, not the close account within one year charge which is much higher. The tax free part of a small pot isn't covered by the recycling restrictions, nor is the taxable 75%.

With £14k of pensions and £15k from work and basic rate tax up to £45k you have £16k of basic rate taxable income to use this year. Two of the three per lifetime small pots will use £20k if you fully use the limits so you can't quite get to the maximum if you do it twice in one year. You can either do it over three years or over two and not using the maximum small pot rule amount or pay a bit of higher rate tax. I'll describe the bit of higher rate tax two times in one year way first.

So what I suggest you do is in year one, this year, transfer £13,300 from Old Mutual to HL then take 25% tax free lump sum and use small pot rule to take out the rest £9,975 taxable. Then use that money to pay in to HL new contributions of £10,640. Wait a month the or so for the tax relief to arrive and increase the amount to £13,300 then repeat the taking of tax free lump sum and small pot rule taking.

To avoid the higher rate income tax, just pay in £4,000 less. That will cut the taxable small pot to £6,225 and the total taxable for both to £16,200. Still a couple of hundred into higher rate so tweak a little more based on your exact pay and pension amounts.

That won't quite use all of your pay contribution allowance, which is about £12k minus any work contributions. Close to the end of this year pay in the about 12,000 - 10,640 that you're allowed in this tax year. At the start of next to tax year pay in the difference between that roughly 1,360 and the £10,640. Then wait for the tax relief to arrive and do the tax free lump sum and small pot rule thing again. That's all of your three per lifetime small pot rules used.

Now transfer the rest of the money eyes from OM and take a tax free lump sum from it, leaving the rest in drawdown but taking no income while working. Make more pension contributions as you can, taking just the tax free lump sum.

If you want to more fully use the small pot limit do one transfer from OM a year and use the tax free lump sum and small pot rule with that. Make your new pension contributions to somewhere other than HL, they have told me that they won't let you use the small pot rule on a crystallized (25% tax free taken) pot if you have money in the other pot. Or do the small pot transfers to somewhere other than HL.

Do something similar with your wife.

I can't plan around mortgage repayment because I don't know when that is but you would need to plan to take out enough taxable money by end of mortgage or remortgage. Mortgages to 85 and beyond are available so that might best best, letting you take out taxable money within the basic rate band on an easy schedule.

Suffolk_lass

One other thing that might affect the timing of what you choose to do - If your wide's total income (both her state and occupational pensions, and her part-time work) are below the standard tax threshold (£11,500 in 2017-18), in any of the tax years before you draw down cash, (assuming you look at xylophone's advice you could consider transferring some of your taxable income to your wife to take up all of your (joint) tax free allowance. You must be a standard (i.e. not higher) rate tax payer to do this, and she must be beneath the tax threshold. So if you were to draw down your pension pot in cash and breached the higher rate threshold you would lose this married persons tax allowance.

ffacoffipawb

jamesd wrote: »

There's something called the small pot rule. Up to three times in your life you can take out all of the money up to a maximum of £10k from a pension pot like these. Must be the whole pot and must be no more than £10k. It can be a pot after taking the 25% tax free lump sum, so you can start with £13,330, take 25% tax free lump sum of £3332.50 then take the remaining £9997.50 as a small pot.

I think the pot before PCLS has to be under £10k to use small pots, it isnt the pot post any PCLS.

If your fund is £12k it is too big for small pots even after taking a £3k PCLS leaving a residual fund of £9k.

The good thing about small pots is that it doesnt use up any of your lifetime allowance.

Dazed_and_confused

Suffolk lass

you could consider transferring some of your taxable income to your wife to take up all of your (joint) tax free allowance. You must be a standard (i.e. not higher) rate tax payer to do this, and she must be beneath the tax threshold. So if you were to draw down your pension pot in cash and breached the higher rate threshold you would lose this married persons tax allowance.

Bit confused by this, you start off talking about transferring income to the wife and end by referring to married persons tax allowance

If you really mean the Marriage Allowance then she doesn't need to be under the tax threshold to apply for this. A lot of people do need to be under the personal allowance before a couple can benefit from this but if your income includes savings interest or dividends (not uncommon for posters on this board!) you can have a much bigger income, apply for marriage allowance and still not have to pay tax, all courtesy of the myriad of 0% tax rates we now have to contend with.

jamesd

ffacoffipawb wrote: »

I think the pot before PCLS has to be under £10k to use small pots, it isnt the pot post any PCLS.

If your fund is £12k it is too big for small pots even after taking a £3k PCLS leaving a residual fund of £9k.

Then you need to rethink your thinking per HMRCs PTM063700:

"If a member has a small amount of benefit rights (whether the rights are uncrystallised or comprise a pension in payment)"

And as Royal London also explains:

"This means that if the payment is made from uncrystallised money, 25% will be tax-free and the rest chargeable to income tax as pension income."

"If" being they key word.