Increasing Pension v Paying off Mortgage

gandw69

New to forum and as approaching the big 50 so thought it time to review my financial planning.
I am lucky enough to have a differed DB Pension which is payable from 50 at approx 28k pa. I intend to take a tax free lump sum of 70k 
my wife has a small pension about 8k pa payable from 60 
I am still working a higher rate tax payer and have a DC Scheme current value 80k with Scottish Widows Pension Portfolio Two Pension (Series 2) I intend to continue to pay into this but only enough to get my full employers contribution.
I owe about 110k  on my mortgage which is currently fixed for next 18 months at a low rate.
I have 50k of the tax free lump sum to invest and approx 30k pa to invest for the next 5 years
I would like to have the option of retiring at 55 having paid off my mortgage. 
My question and would appreciate  views on paying off mortgage v maxing my contributions into pension to reduce tax and the paying off mortgage later possibly with a future lump sum. And am keen to know views on SIPPS platforms and funds with low costs I  am reasonably comfortable with a risk level of 6/10. I am conscious of the recycling Rules and would want to end up with any penalties. 

Jonesy1977

Firstly, excellent, great position to be in!  Personally I would not pay down the mortgage due to the current and likely future rates in the timeframe you are looking at .  I would max contributions probably Vanguard SIPP and literally pick my comfort level from a variety of low cost options or simply go with life strategy and away we go!   

princeofpounds

Invest in your pension, almost certainly. Of course no-one can give you a definitive answer, as the returns on investment instruments with market risk are always uncertain.

However, consider the following:

- The real-terms cost of your mortgage is probably very low. UK inflation is about 0.7%, you mortgage rate might be, what, 1.8%? So the real cost of your mortgage is only about 1%. If you can find better returns, after tax, than that they you should pursue them instead. That's not a particularly high bar, so pursuing investments may well make sense (one reason why markets have done well of course).

- You are not a million miles away from being able to access your pension and the tax-free lump sum. Given that you are a higher rate tax payer currently, then there should be very significant tax advantages to putting it into your pension (certainly enough to cover the cost of borrowing those funds from your mortgage.

One potential exception however would be if making a small amount of repayment on your mortgage puts you into a much better LTV category, so you can remortgage to a more attractive deal on the full amount. That could be a better return on investment, but you'd have to be in quite a specific situation, which seems unlikely given the low value of your mortgage.

Albermarle

I am lucky enough to have a differed DB Pension which is payable from 50 at approx 28k pa. I intend to take a tax free lump sum of 70k 
my wife has a small pension about 8k pa payable from 60 

Normally when you take a tax free lump sum from a DB pension , it means taking a reduced pension. Due to the fact that unusually you can take this at 50 and have probably 35 years of pension ahead of you (maybe more ) does the calculation really justify taking the lump sum ? The value of the guaranteed income foregone may well outweigh any possible gains on mortgage or SIPP in future .

DB pensions are very valuable . Yours and your wife's 'small' ones together are probably worth about £1.5 million Pounds.

jamesd

I'm assuming that you're now or about to be 50. Also that you plan to take the DB almost immediately and are already a higher rate tax payer, so all 28k will be taxed at higher rate.

There are no rules restricting recycling of pension income, just the tax free lump sums. A 28k higher income then enables 28k gross more a year of pension contributions as part of recycling limit calculations. Within the recycling restrictions, an increase of 30% of the lump sum over 5 yeas is permitted, 4.2k a year more. So now you're at an unambiguously allowed 32.4k a year increase on what you have been paying. Though all of the 30% could be in one year, so do the 21k (5 years spread is the 4.2k) as fast as you can within your higher rate relief range. What has been your past average contribution level? This might already take you to the 40k a year annual allowance, though carry-forward of unused allowance from the past three years can be done.

Is your DB scheme one where there's a set tax free amount? 

The mortgage part is quite easy. If you were to get only basic rate tax relief from DC contributions you'd make a 6.25% tax gain. The basic plan is pay in, at 55 take maximum tax free lump sum and take taxable money to use your remaining basic rate band to also reduce the mortgage, taking as long as it takes paying only basic rate tax. With higher rate relief on the way in and basic rate tax on the way out, 80 net contribution gets 100 in the pension and 20 back from HMRC so real net is 60. On the way out 25 is tax free and 75 after 20% tax is 60 delivering you 85 after tax for your 60 cost, a 41.6% gain. Investment performance up or down in addition.

As a lifetime allowance check the DB will use 28k * 20 + 70k = 630k. 80k DC now plus 5 years at 40k would add 280k for a total of 910k. This seems to allow sufficient room for investment growth within the allowance.

gandw69

Thanks for all the comments very helpful 
to answer some points - I am 50 in few months and the DB pension is approx 28k pa after I have taken the 70k lump sum or £ 30,500 if I don’t.  I am still working and plan to for at least 5 years so the DB will be taxed at 40% so I guess it will be sensible to take the tax free lump sum. 

I will probably spread some contributions into a SIPP for my wife as she will be under personal allowance until she receives her state pension so she can take drawdown without paying tax for 10 years. 
Just one question  what level of financial protection does a SIPP have, I understand investments go up and down but if a SIPP provider went bust are you protected ?

Jonesy1977

gandw69 said:

Thanks for all the comments very helpful 
to answer some points - I am 50 in few months and the DB pension is approx 28k pa after I have taken the 70k lump sum or £ 30,500 if I don’t.  I am still working and plan to for at least 5 years so the DB will be taxed at 40% so I guess it will be sensible to take the tax free lump sum. 

I will probably spread some contributions into a SIPP for my wife as she will be under personal allowance until she receives her state pension so she can take drawdown without paying tax for 10 years. 
Just one question  what level of financial protection does a SIPP have, I understand investments go up and down but if a SIPP provider went bust are you protected ?

It should not impact your funds as the provider is simply managing your funds which are invested on your behalf.  You would still own the assets and they would be transferred to another sipp provider to manage.

Albermarle

Just one question  what level of financial protection does a SIPP have, I understand investments go up and down but if a SIPP provider went bust are you protected ?
This is a very common question on this forum .
As said above you investments are not actually with the SIPP provider, so should not be an issue.
Anyway the SIPP provider is covered with £85K . Basically this would cover fraud ( taking your money but not investing it for example) or massive incompetence. The general opinion is that it is extremely unlikely that a mainstream SIPP provider would go bust and many people hold hundreds of thousands of Pounds with them.

dunstonh

Just one question  what level of financial protection does a SIPP have, I understand investments go up and down but if a SIPP provider went bust are you protected ?

On the assets you hold in the SIPP, it will range from zero to 100% of the amount invested.

Direct assets: shares, ETFs, ITs and unregulated investments have no FSCS protection

UT/OEICs have £85,000 protection per fund house.

Pension funds have 100% FSCS protection irrespective of value (some mirror funds may only get £85k).

atush

gandw69 said:

Thanks for all the comments very helpful 
to answer some points - I am 50 in few months and the DB pension is approx 28k pa after I have taken the 70k lump sum or £ 30,500 if I don’t.  I am still working and plan to for at least 5 years so the DB will be taxed at 40% so I guess it will be sensible to take the tax free lump sum. 

I will probably spread some contributions into a SIPP for my wife as she will be under personal allowance until she receives her state pension so she can take drawdown without paying tax for 10 years. 
Just one question  what level of financial protection does a SIPP have, I understand investments go up and down but if a SIPP provider went bust are you protected ?

Can you defer your DB pension for a few years (up to 5 when you fully retire)?  Would save you a load of tax, and probbly increase the pension.