Using pension to pay off mortgage

elizamalteser

Hi ... could do with a little advice, please (my 1st post!!) ... my partner has just been dismissed from his computer job (poor attendance) and at age 58 and having been dismissed I think he will struggle to find another job with similar pay ... he is appealing the decision but not hopeful of being reinstated. Obviously this leaves us in a bad situation financially. I work part time as we have a son with autism but even with my salary, carer's allowance & son's disability we will have a shortfall of approx. £1400 a month. My big fear is losing our house (would be really hard to move because of son ... we have good neighbours here) and I have been wondering about taking a lump sum from OH's pension fund to pay off mortgage (just less than 50k outstanding) so we would at least own the house and have less outgoings each month. I've downloaded Martin's brochure re pension choices but some impartial advice would be good.

Thanks in advance

Eliza

justme111

I think you are not giving eniugh details here - what his pension is , pensionable age , its amount , your budget, your projected budget when retired, your savings and so on. I do not think anybody on here will think it is a good move and you probably will lose like 20 k to tax if you take 50 k out now as gis taxable income in the year will be very high (salary plus those 50 k). Or is it tax free lump sum and he would take his pension early?
By the way £1400 is just about 20 000 salary so even if your husband does not get the same well paid job about any job will give him that so not sure why you do not plan to take any job. Or if he can not he could look after aon and you work. Plus never underestimate ability to spend less that suddenly appears when there are no money to spend - you may need less

Jamie20102

Hi Eliza

IMO if you have a shortfall of £1400 how much would you save a month if you paid off the mortgage? If it still leaves you with a shortfall what would you be struggling to pay then? If its other debts then could it put in trouble regarding your home? It would be a personal choice based on circumstances but would cashing the lump sum and living off that until OH finds a new job but that might be to big a risk. What may be an option is to see how much money he would get in unemployment and if that helped coupled with paying off house to cut the shortfall enough but im not to clued up on it. If you kept the lump sum and OH got a job which might not pay as well but would help reduce the shortfall so that the monthly wage and part of the lump sum helps cover it until you mortgage is paid again i dont know how long that is or if its practical for you

xylophone

Could you work full time while your partner cares for your son?

What kind of pension does your husband have?


Do you have a pension?

Have you both obtained new state pension statements?

https://www.gov.uk/check-state-pension

jamesd

elizamalteser wrote: »

I have been wondering about taking a lump sum from OH's pension fund to pay off mortgage (just less than 50k outstanding) so we would at least own the house and have less outgoings each month.

Unlikely to be a good idea to pay off the mortgage. That's normally a bad idea because investing the same amount of money can normally make more income than the saved mortgage interest.

What I do with a fair chunk of money is peer to peer lending via places like Ablrate, MoneyThing and Collateral. Those have typical raw interest rates of about 12% for secured lending, though you should allow for about 2% loss to bad debt after security is taken and sold if there is a default.

Ablrate has an innovative finance ISA and MoneyThing is working on one, so this interest can be tax free even for those who are tax payers with no personal allowance or personal savings allowance available.

Given those sorts of rates, about that £50k invested could be expected to produce between £5k and £6k a year of tax free interest after allowing a bit of time to get all of the money invested within ISA limits. That may not be enough to cover both mortgage interest and capital but should go quite a way towards it and you can draw on the capital invested if needed.

Please say more about the mortgage term remaining and the current split between interest and capital monthly payments. Also please say something about the total value of the house so we can consider options like further mortgage advances or equity release that may help you get to and beyond state pension age.

elizamalteser wrote: »

we will have a shortfall of approx. £1400 a month.

So a total shortfall of about £16,800 a year. At 10% net returns P2P could do that with £168,000 invested, though that's fairly pessimistic and the lower end at full 12% is around £140,000. Those are the sorts of amounts I have invested in P2P myself, normally between £100k and £200k.

I'll assume that your husband has a defined contribution pension, that is, one where there is a pot invested in his name. And not a defined benefit type, like final or average salary.

From a defined contribution pension a person can take 25% of the pot value as a tax free lump sum from age 55 onwards. There are no adverse consequences from taking just this part, aside from loss of investment growth if it isn't invested, or for those who might have pensions worth close to or more than a million Pounds total.

There is a major cap on future pension contributions if any taxable money is taken flexibly, which means either the normal flexible drawdown from the remaining 75% or a UFPLS lump sum that is 25% tax free and 75% taxable. The cap is to a maximum of £4,000 a year of pension contributions in the person's name from all sources, instead of the usual limit of the lower of £40k from all sources or pay from the individual. So a bad idea to take those sorts of taxable money unless the plan is full retirement.

However, there is a partial workaround. A person can use something called the "small pots rule" to take all of the money in a pension pot worth up to £10,000 as a lump sum that is 25% tax free and 75% taxable. This can be done up to three times per human lifetime and really must be the whole pot. To get a pot to a convenient size you can transfer money from another pot to the one you will take. This transfer must be money that you haven't taken the 25% tax free lump sum from because you can't transfer out part of a pot that you've taken the 25% from.

So a potential plan is:

1. Do three transfers of just under £10,000 and use the small pot rule for each of them.
2. Take a 25% tax free lump sum from the rest of the pot.
3. Leave the remaining 75% invested inside the pension until full retirement.
4. Invest the three small pots and the 25% tax free lump sum to generate ongoing income.

It's also worth saying more about your own age and pension situation as well as total household savings and investments of all types. Among other things this will let us consider whether full retirement is possible or just how much income you can potentially generate in total.

It will also be good to know whether you might ever possibly want to work more and your potential pension contribution level. This is because a person who won't care about the £4,000 cap can pay money into a pension, get basic rate tax relief added and then take the money out again a few months later. A person not working can do this with £3,600 gross into the pension and make £720 a year doing it if they have at least £2,700 of income tax personal allowance available. Or £180 if none is available. This continues until they reach age 75. Potentially a very useful £1,440 a year of gain if a couple is doing it, which might be the case if you don't plan to work to get highish incomes and full retirement looks doable for your husband.

Knowing your total annual spend and the breakdown of say the top ten spends of all sorts may also help to see potential opportunities.

elizamalteser wrote: »

I've downloaded Martin's brochure re pension choices but some impartial advice would be good.

That does a poor job of describing the potential of using income drawdown funded from pension pots. Like most guides from annuity vendors it tends to push people towards buying annuities as the only way to get income, when that's usually grossly inappropriate for the total income needs of those retiring early or in financial stress before retirement. An annuity provides consistent income spread throughout life and what's normally needed for most income is a high initial income until state pension age, then reduced income as the state pensions start. An annuity also usually provides something like half the income level that can be obtained from drawdown. It's premature for you at the moment but there's much more background reading about safe withdrawal rates in retirement at Drawdown: safe withdrawal rates. If full retirement looks viable that might become more interesting reading but we don't yet know enough to know whether that looks doable or not.

Your spending will also probably need to be reviewed since it's often easier to reduce spending than generate investment income. If full retirement on the desired income level doesn't look doable, cutting back with things like switches in what you buy can go a long way towards stretching out how long you can last.

A key consideration is also that you don't need to be able to sustain all spending forever. If you can last until your state pension ages the state pensions will start to carry about £16,000 a year of the burden, assuming you're both going to get £8,000 a year that way.

stephennt

jamesd makes a number of very good suggestions, however I personally wouldn't be entirely comfortable investing in the aforementioned P2P sites without also having some rainy day cash. As such more information on your financial situation would be useful.

(for full disclosure I do also have a lump of money invested in the same P2P sites as jamesd mentions)

jamesd

Keeping some cash in current and savings accounts is sensible, though all three of the places I mentioned do have active secondary markets for buying and selling, with Ablrate allowing discounts that can in general be relied upon to get loans sold within a few days even in generally poor selling environments. The interest is paid monthly, on anniversary day of the loan at Ablrate and MoneyThing or start of month at Collateral. In general I expect to be able to sell at least 50% of what I have invested in a month or less if I have the need to do that. Not guaranteed, but realistic.

At the moment I tend to keep about a month or two of spending in current account(s) and ample credit facilities available as well as the potential P2P selling. Once retired I'll probably bump that up a few months but not really more because there's no need for me to have more than that, given the ongoing income and ability to sell.

elizamalteser

Thanks everyone for the advice ...I have taken it all into account ... partner is appealing against his dismissal but if unsuccessful we will speak to a financial advisor ... as I said the most important thing to me is not losing the house as it would cause huge distress to my son