PCLS to pay off mortgage? Convert DB to DC?

pensionpawn

furrygiraffe said:

Hi

Post divorce, have lost all house equity and am now homeless but have good pensions and a little capital. Have to start from scratch, want to buy home, but pay it off asap and live again

Age: 50
Spouse: No, and never again

Target Retirement Age: 63

Children: 4

PENSIONS:

DC Pension: £340K

DB Pension: Pays out £16K/year at 63. 

INTENTIONS:

Intention is buy modest home (£300K) with 10% deposit. Mortgage payments (capital and interest) and child maintenance will take up 55% of income.

OPTION 1 -  Pay down mortgage in 2 stages, keep DB intact:

Age 55: Use PCLS on DC to part pay down mortgage. This could reduce mortgage down to £90K which would free up income to live a bit

Age 63: Use PCLS on DB to pay off mortgage with some left over. Retire. 

OPTION 2 - Pay down mortgage fully at 55, convert DB to DC:

Age 55: Convert DB to DC (CETV for divorce was £400K in 2020). Use PCLS on both DC ports to pay OFF the mortgage. Lots more disposable income, no worries about being made redundant etc

Age 63: Retire

I know everyone says converting DB to DC is a no-no, but for me:

1) Not long lived in my family

2) Kids could inherit both the DC and the newly converted DB->DC pot if something happened to me

3) DB scheme spousal benefits no longer relevant to me

4) Less worry about money (no mortgage) or job security (although its pretty secure)

5) I still would have pretty substantial pensions at age 63

What are your thoughts? Are both options crazy?

Thanks!

Option 3: Buy home with 3% 10 year fixed rate interest only mortgage. Do nothing until 60 other than to maximise payments into DC pension (that is the difference between a repayment and interest only mortgage). Depending on pension growth (I've used 8%) and the contributions you could make to your DC pension, it is likely to be around £750k +- £50k in 10 years. Being optimistic (to make the arithmetic slightly simpler), 25% of £800k is £200k leaving you with £70k to find. That may be possible by drawing down up the the 40% threshold over 2 (tight) tax years (March to April in one year). Your house is paid for at 60, or you could take the mortgage a little longer (possibly a new 3 year fixed rate) to help push your DC pension towards LTA, paying off your mortgage with just the 25% at 63. Interest rates are at an historic low, use that to your advantage.

[Deleted User]

Option 4: do not buy. Rent. Keep your pensions where they are and invested, As your financial situation improves you will be able to afford a better place to rent. I understand psychological pressure to buy and your short term cash flow issues but this is a financial forum. Your long term financial health would benefit from the “do nothing” option. And without family there is little reason to own.