Barny's Planning for his Retirement......

Barny1979

So I'm 42 next month, cleared debt apart from mortgage, so looking to invest in my future, I have approximately £1,000 spare to either overpay my mortgage, c£160k, invest in AVCs with work pension or pay into my SIPP, currently c£18k pot. I contribute 8.5% into my Workplace Pension as standard and have 22.5 years on my mortgage left. Sorry if I'm vague on any points.

Albermarle

Couple of questions
What is the deal/interest rate you have with the mortgage?
Why have you opened a SIPP in addition to your workplace pension.
The term AVC's can be confusing , do you mean you are just adding extra to your normal workplace pension or is there a separate AVC scheme for some reason ?

Barny1979

Albermarle said:

Couple of questions
What is the deal/interest rate you have with the mortgage?
Why have you opened a SIPP in addition to your workplace pension.
The term AVC's can be confusing , do you mean you are just adding extra to your normal workplace pension or is there a separate AVC scheme for some reason ?

Hi, 2.59% interest for 5 years since January 2019. I just thought a Private Pension was useful too. It's a separate AVC pot.

Bimbly

How do you pay for your works pension? If it is salary sacrifice, then you are avoiding paying national insurance on your contributions, so this makes it a better deal than paying into a SIPP which only gives you relief on income tax. 

Is your works pension defined benefit (final salary, career average benefits etc) or a defined contribution (pot of money)  scheme? If it is DB, what is the scheme retirement age? If DC, then you can probably get your money at age 58.

What's the deal with accessing your AVCs? Some will only allow you access when you take your full pension. Some will add to your main scheme in a way which allows you to take a larger tax free lump sum. Worth digging out what this will mean for you as this will help you decide where to put your money.

If DB and you want to retire before your scheme retirement age but after 58, then paying into your SIPP might be worth it, as you can get at your money in the gap between the ages. But remember you don't get the salary sacrifice national insurance advantage this way. If you're a higher rate tax payer, SS is still advantageous but less so, so worth doing the sums.

If you want to retire before 58, then having savings outside of a pension would be needed.

Paying into a pension is generally better value for money than paying off a mortgage because of the tax benefits. But paying off the mortgage can have psychological benefits. I reckon you should at least get a better mortgage deal when your fix ends.

Barny1979

Hi, it's Salary Sacrifice, it's a couple of years DB, but primarily CARE. I can take a lump sum or take at pension age with the AVCs. My plan was to overpay initially on the Mortgage, so as to reduce the amount and then on remortgage in 2.5 years, I'd hopefully get a better rate option and then put more into the pension.

Bimbly

A CARE pension scheme is also DB: https://www.pensionsadvisoryservice.org.uk/about-pensions/pensions-basics/workplace-pension-schemes/db-career-average-revalued-earnings-scheme .

So your scheme pension age is important. If, for example, you want to retire at age 65, but your SPA is 68, you will either need to fund that gap or take a reduction for taking it early (actuarial reduction). But it might be an idea to wait until later in life to decide your retirement age and whether you want to save to fund for this gap. You could add to the AVCs for now and then see how you feel at 50/55/60. You might even be in a different job by then! So take advantage of those AVCs while you can.

Salary sacrifice means that paying into your AVCs wins over paying into a SIPP. Only if you want to start funding a retirement gap now and are a higher rate tax payer and don't mind losing 2% nics saving would a SIPP possibly be worth considering. Although, SIPPS can be inherited and, for some people, this is an important factor.

With regard to mortgage, if by overpaying you reduce the loan to value (LTV) which allows you get a cheaper deal when re-mortgaging, then it's definitely worth doing. Often, the tax breaks mean you are better off paying into a pension than paying off a mortgage at low interest. But many people feel better by reducing their mortgage debt and that is valuable too. Your plan is certainly not bad and, if you have the money, many suggest hedging your bets and doing a bit of both. There are lots of threads on here which discuss such pension vs mortgage scenarios.

Hopefully, you also have some savings outside of a pension? Emergency funds are useful for... well, emergencies. Plus, it's always nice to have a savings cushion you can get at before pension age.

This should give you a few things to think about as you decide what to prioritise.

Barny1979

Thank you, some useful thoughts, appreciate it.

kidmugsy

When did you last contribute to your SIPP?

Barny1979

I contribute monthly.