Musings by the FIRE-side

chile_paul2

Interesting to read people's comments and different views on the mortgage options, thank you all. As I see it we have 4 options:

1. Sell off S&S ISA's and Cash ISA's and pay off mortgage in full - Lowest risk, but also low flexibility. Lose 4+ years worth of ISA allowances and therefore end up paying more tax in the future on any interest on savings / capital gains every single year. In theory there would be no reason in the future if we needed funds for any reason we couldn't remortgage, but this would presumably be potentially harder under traditional affordability criteria (in the early retirement bridge period before pensions are accessible)
2. Offset mortgage - on the basis that we have the money available to cover the entire cost of the mortgage which can be released from ISA's and be moved straight into the offset account, this should be equally low risk as option 1. The advantage then comes from a) being able to move the money back into flexible ISA's each tax year end (at the cost of a few days interest) therefore retaining the ISA allowance and b) provides the flexibility of being able to access this money without needing to apply for a mortgage again in the future. With this option, assuming you have the money to cover the balance the interest rate charged becomes irrelevant because you only incur interest for a couple of days per year. This option may be less attractive if I had to pay a significant arrangement fee to the mortgage provider, but as I plan to stay with the same provider these are normally waived I believe? The only risk I see here is a political risk that a future government withdraws the flexible ISA option, in which case I would revert to option 1.
3. Retain mortgage and continue to pay off as normal (either interest only or capital and interest) - As @Bostonerimus1 says this is a high risk strategy as you are 'gambling' on the fact that stock markets will outperform interest rates. At a mortgage rate of 1.25% and with a solid career with a good salary that was a gamble I was quite happy to make, but with mortgage rates now over 4% and a plan for early retirement and therefore no income to cover any stockmarket underperformance or crash this no longer seems as attractive an option
4. A hybrid option - This would involve using some of the ISA/cash to reduce the mortgage, but not fully clearing it. We’d still retain a meaningful invested portfolio and keep some liquidity. This might reduce risk without giving up all tax-efficient investment capacity.

kempiejon

I looked at offsets when we came of the fixed rate last year, the couple I checked had a fee that would have used up much of savings.

chile_paul2

https://forums.moneysavingexpert.com/discussion/comment/81988547#Comment_81988547

That's precisely my reason for wanting to protect the ISA allowance rather than pay off the mortgage now.

The thinking being that the TFLS from my pension at 57 can be used to pay off the mortgage - it would be far more than I could pay into an ISA in one year.

I then have a substantial amount of savings in an ISA that is protected from tax in subsequent years. At £12k per annum my DB pension will likely use up much of my personal allowance once it is in payment and any income that I take from my DC pension over and above DB + ISA savings would be taxable.

chile_paul2

@hugheskevi did you have anything in mind on this?

It is worth thinking what you will do between those ages regarding taxable income - using up at least personal allowance in taxable income is very valuable.

It's a good point, and I certainly have considered doing some part time work / consulting in those early retirement years. I know you are in a similar position and have read your posts with interest, but didn't spot anything about your plans for taxable income up to the personal allowance in those bridge years?

The biggest pain running it is that the provider will not take monthly repayments from the offset account, so I need to arrange for funds to be available in my current account for a direct debit repayment, and then move the money back

As the mortgage I'm looking at is interest only and offset, then unless I'm missing something there wouldn't be a monthly repayment if the mortgage is fully offset, there is no requirement to repay the capital……I'm aware there are very few of these mortgages available on the market!

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/81988692#Comment_81988692

I'll have zero or very low taxable income in 27/28 through to 31/32 inclusive, so 5 years of unused allowances. My wife should be the same.

As well as the tax benefits, getting a National Insurance qualifying year is a consideration, saving on the cost of Class 3 voluntary contributions.

Things I have mused about are:

• Consultancy work, taken as income and dividends. If little or no work is secured, just take enough income from the company to get a NI qualifying year.
• Very part-time work somewhere - I may well have tried to negotiate working 1 day a week at my old job, but getting paid to leave was better.
• Some local unskilled work, if I wanted something more as a hobby
• Claiming contributory-based JSA for 6 months in 2027/28
• Claiming DB pensions from age 50 (protected minimum pension age from age 50) - but this involves some very large deductions that probably make it undesirable. Fiscal drag sweetens the deal though as the pension foregone in the future would be subject to 40% whilst the pension taken early would get taxed partly at 0% and partly at 20%. I will review this as we get closer to 50 for both of us and do whatever is most financially advantageous based on the figures at the time.

I haven't been able to come up with anything decisive yet.

SarahB16

…for most people the worst strategy is to take the mortgage into retirement.

For most people yes, but are we most people or are we more financially astute.

If you have a large LGPS AVC lump sum it is difficult to know how to invest that when in retirement. £20k per annum into an ISA but where can the rest of the money go? I intend to continue to put £20k per annum into an ISA as I approach retirement but using the LGPS AVC lump sum to pay off an interest only mortgage (and have other funds that can be relied upon if needed) seems like a good idea to me instead of having a repayment mortgage when a 40% tax payer and therefore missing out on the 40% tax relief.

Simon11

• "Much smaller scale, but I think I've made the decision to install solar panels and batteries. It's a £10k investment and arguably that money may give a better return sitting in investments, but it's good for the planet and acts as a good hedge for future inflation in electricity prices"

Have you thought about investing in balcony style solar panels which should hopefully be available to purchase in a few months? Would be much, much cheaper to install as you can install it yourself and then add additional panels/ batteries as you wish! I plan to purchase a few to put onto our balcony fences and on part of the roof which is flaf.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81988856#Comment_81988856

ISAs aren't your only option, there's always a general investment account.

Personal finances are a balancing act and the amounts you pay into ISAs, DC pensions and mortgage repayments have to be chosen. ISAs and DC pensions tend to be invested in the stock and bond markets and I see adding a repayment mortgage as a diversifier rather than putting all your eggs in the investment markets basket. I took the old fashioned approach of a repayment mortgage first and then contributing as much as I could to tax advantages accounts and general investing. Luckily I was able to max out those contributions fairly quickly so didn't really have to make a choice.

NormalNorman

https://forums.moneysavingexpert.com/discussion/comment/81988878#Comment_81988878

I did a solar quote on the EST website yesterday. It said I would save £700 a year. Electricity only costs me £500 per year! It's probably trying to insert some export. But having had solar panels under FIT in the past the export component was a waste of time being so low. Going back to the EST quote it said 14 years payback. Plus I would have to change from a very cheap tariff to a more expensive option that has an export component and hope the smart meter works correctly which it didn't in the past and caused massive issues with an EV. Anyway car and solar free and think I'll keep it that way for a simple life. Junk bonds would have a much bigger return, lol!

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81988812#Comment_81988812

I retired a few years before I could take my DB pension with enough in a saving account to fund those years. Hence my income went from being quite high to below the poverty level and I found myself being bombarded with benefit programs from the state. I quickly settled into retired life and went on some nice holidays and always had stuff to do around the house and in town with friends. Then an old colleague offered me some part time work at his start up company and I've been doing that for just over 10 years. I've paid a lot more in tax, but most of the income has been invested or given away to family. Also being a self-employed consultant has allowed me to continue voluntary Class 2 NI and also similar contributions to the US equivalent system increasing my eventual state pension amounts.