Does my plan make sense?

DBdoobydoo

I have a DB pension of £10K that I started drawing in 2012 when I thought that I was retiring. A lot has happened in the last seven years. A new relationship, a new house & a return to the workforce in a well paid job (£60K). I am over state pension age & drawing my state pension of £7245. I have another DB pension of £18K. I am accumulating a new DB pension from my current job at the rate of about £1100 per year & have already earned £4K of pension.

As will be apparent from the above figures I am paying higher rate tax on quite a chunk of my income. I also have very high mortgage repayments of £2500/month as due to my age when I took out the mortgage I could not opt for 25 years. My mortgage has nine years to run before it is paid off.

My dilemma is that I would like to retire or semi-retire long before my mortgage is paid off but currently cannot afford to. I already have a large equity in the house & realise that I could downsize but I am reluctant to do this as we love the house & have invested a lot of time & energy in getting it just right for us & will suit us for the rest of our days.

It occurred to me that I could transfer out from my £10K DB pension into a SIPP & then draw down from that to pay off the mortgage. I have already taken the tax fee lump sum so paying off at £30K/year rather than in a lump sum would be more tax efficient. One thing that makes this more appealing to me is that unlike my £18K DB pension which is fully index linked only a very small portion of my £10K DB pension is index linked so in the seven years since I started drawing it there has only been a total increase of about £200/year so it's already worth a lot less in real terms than it was seven years ago. Assuming that the CETV is reasonable surely it has got to make sense to pay off my mortgage before I lose even more value in my pension due to inflation?

Does my plan make sense?

Albermarle

It occurred to me that I could transfer out from my £10K DB pension into a SIPP

As far as I know you can not normally transfer out of a DB pension already in payment , only ones that are not yet in payment,

DBdoobydoo

Albermarle wrote: »

As far as I know you can not normally transfer out of a DB pension already in payment , only ones that are not yet in payment,

I wondered if there was a fatal flaw in my reasoning:(

I hadn't twigged until recently that I am locked into a pension that is forever decreasing in real terms. Thus far I had assumed that CPI/RPI increases didn't occur because I was under State Pension Age but now some research has revealed that I am stuck with only a tiny portion being index-linked. It seems very unfair that I cannot do anything to improve my lot. So much for pension freedoms.

DBdoobydoo

According to the Pensions Advisory Service website "In some circumstances, you can also transfer after you have started to receive retirement benefits but this is not common."

I have contacted my pension scheme administrators so fingers crossed that a transfer is possible. Assuming that a transfer is possible does anyone see any other flaws in my plan?

Triumph13

Assuming a transfer is impossible, the first obvious thing to do is to put all your earnings above the HRT threshold into a SIPP to avoid paying any HRT. You can then use it to pay your mortgage when you retire.

Thrugelmir

DBdoobydoo wrote: »

It seems very unfair that I cannot do anything to improve my lot. So much for pension freedoms.

Many people would happily accept a core DB pension scheme as part of their planning for retirement. Drawdown is far from guaranteed as being the way to go. As with any fad there'll be losers as well as winners in the longer term.

DBdoobydoo

Thrugelmir wrote: »

Many people would happily accept a core DB pension scheme as part of their planning for retirement. Drawdown is far from guaranteed as being the way to go. As with any fad there'll be losers as well as winners in the longer term.

My £10K DB pension will become near worthless over time with no RPI increases. The scheme was closed years ago & any increase is at the discretion of the Company & this has never happened. The pension is already worth 16% less than when I started drawing it seven years ago.

Malthusian

DBdoobydoo wrote: »

So much for pension freedoms.

Pension freedoms were about releasing defined contribution members from the compulsion to buy an annuity, which was a crap deal. Defined benefit members didn't come into it as they already had an excellent deal.

It is unlikely that the DB scheme will offer you a transfer value - the most common scenario for this is to get rid of tiny pensions that aren't worth the admin. If they do it will probably be a risible offer. Most people with decently-sized DB pensions in payment would only ask to cash theirs in if they were about to die.

My £10K DB pension will become near worthless over time with no RPI increases.

If inflation is on target it will take 30 years to lose half its value and you will be dead long before it becomes worthless.

I was going to suggest selling the house, paying off the mortgage and paying extra pension contributions. You get 40% tax relief and you get a pension fund which can be invested to benefit from real above-inflation long-term capital growth. Then I re-read your third paragraph.

It must be a lovely house to be worth being forced into the 40% tax bracket to maintain the mortgage. Unfortunately I can't think of a solution. Not many people would unretire after seven years and commit to a big mortgage that requires them to keep pulling in £60,000 a year to pay it.

DBdoobydoo

Ah well. It is what it is. We do have a lovely house & I love my job but I am not getting any younger so would like to spend more time with my new wife who is ten years younger than me. I can reduce my hours some & still afford the mortgage but cashing in the DB pension that is not index linked seemed like an excellent wheeze to allow me to work just a couple of days a week while still being able to pay off the mortgage.


It seems I am exceptionally unlucky that my DB pension is not index linked. Since 1997 it has been a legal requirement for all DB pension schemes to be index linked but my service with the company ended in 1997. It was OK back in the day when the company was flush with money & was able to take contribution holidays for years but still offer index linking on a discretionary basis. However times got tough & the company was taken over then that company was taken over in turn & the DB scheme was closed. The current company refuses to make any discretionary increase despite it having been the practice of the previous incarnations of the company.

DBdoobydoo

Just as an update the pension scheme administrators & Pensions Advisory Service has confirmed that once DB pension is in payment that yo cannot transfer out. I presume that this is a legal requirement although I am at a loss to understand the justification.

jamesd

There are a few things you can do:

1. look into mortgage providers that offer longer terms on standard mortgages, 85 and now maybe older is available
2. look at equity release since this can be very flexible. Not just pay nothing, there are also products that are interest only and accept repayments. If you even want to repay anything
3. you're allowed to defer your state pension once after claiming it. It's increased by 5.8% inflation linked for life per year of deferral. Maybe resume when no longer subject to higher rate tax
4. use pension contributions

Pension contributions are very interesting because you can pay in then rapidly take a tax free lump sum. Say you pay in net 24k at higher rate tax. 25% is added inside the pension to give you 20% basic rate relief taking the pension to 30k. You tell HMRC and they adjust your tax code to give you higher rate relief of 6k. You take a 25% tax free lump sum of 7.5k from the pension and put the 75% taxable into a flexi-access drawdown pot that you take nothing from until you stop work or are about to reach 75. So:

24k net in
13.5k out: 6k from HMRC and 7.5k out in lump sum
22.5k in drawdown pot for later

That 22.5k only cost you 10.5k so before tax on the way out you've more than doubled your money. Assuming you draw at basic rate it's 18k after tax for a cost of 10.5k.

7.5k of tax free lump sum is a specific number. There are restrictions on recycling pension lump sums and HMRC might think you're doing that. One thing explicitly permitted is 7.5k of tax free lump sum every rolling 12 months (not tax year).

There's the potential to greatly reduce the mortgage capital cost.

The lifetime allowance needs considering. DB pensions of 10k and 18k may have used 560k already. Current one is 4k (80k of LTA) increasing by 1.1k (22k of LTA) a year. So there does seem to be room to make pension contributions.

A maximum possible efficiency plan might look like this:

a. equity release to reduce or eliminate mortgage payments
b. maximum pension contributions, limited by the annual allowance and available cay-forward. Your DB pension is using some as well
c. live on the pensions
d. stop work when you've accumulated enough to pay off the mortgage, if you want to

Looks as though you have about 270k of mortgage. About 300k of lifetime allowance available if I assume 5 more years of DB. So enough to route it all via pensions and save yourself perhaps 50k due to the pension gains.

Do you have some specific desire to repay the mortgage quickly? If not, this sort of thing can get out out of work faster through increased efficiency and taking longer to pay.