Pension options to deal with debts / mortgage situation

zAndy1

Hi,
  This is quite a complicated and depressing scenario I'm in and I'm rather confused about the best plan of attack and would appreciate some advice (I appreciate I'm probably going to need to see an IFA at some point but I have to start somewhere). Wasn't really sure which forum to post this in but it's basically about whether to use my pensions to get out of a financial mess so figured here was as good a place as any. So, situation is this

I'm 55, wife is 50 , combined net income approx £5200 pm
Outstanding mortgage £164k, interest only, 10 years left , rate approx 6% (£820pm interest)
Personal Loan with monthly payments of £395 , 40 payments remaining, interest rate 2.3%, settlement amount approx £14k
Credit card debt of approx £41k (I know and I have no idea how tbh), all apart from about £4000 of that at 0% interest until mid-late 2023, min payments approx £700pm
I'm 55 in December, dc pension funds worth £130k approx (low due to market conditions right now) so a £32500 tax free lump sum available and DB pension that will pay approx £6k pa (estimate) at age 60 or £4.8k at age 55 with no tax free lump sum or £3.8kpa at age 55 with a £25k tax free lump sum (compared with the £170k CETV I received for this last year none of those forecast DB pension options look that attractive really and I'm sure they've been impacted by recent market conditions and will probably be better in 5 years time). 

I'd always assumed I would take the 25% tfls from my DC pensions i.e. approx £32500 and use all of that to reduce my debts but obviously I have a ticking time bomb mortgage situation at age 55 and paying that much interest and higher interest than the loan and my credit cards (which I'm pretty sure but not 100% sure obviously most of which I should be able to transfer to 0% promotions next year). 

So would you take the £25k tax free lump sum from the DB pension (I know, bad idea in any normal scenario) to clear all the debt even though that would mean a reduced pension in retirement and paying 40% tax on the pension income now?

By my calculations paying the whole £57500 off the mortgage would save £3500 interest pa approx but paying the debt off would save around £1200pm in loan and credit card payments so on the face of it I'm probably better off doing that and then overpaying the mortgage by £1000pm to get it paid off by the end of the current term which sounds like a better plan really? 

Yes I know it's a mess, turning 55 and being able to access my pensions is a get out of jail card really although it's not ideal I appreciate that...

Would appreciate any advice before I inevitably I think have to see a financial advisor to get some advice as it's pretty complicated really 

Ta

Albermarle

I would not take the DB pension,  due to having to pay 40% tax on the income.
Taking the tax free cash from the DC, causes less issue, as the remaining 75% can just stay in the pension for later.

One thing that stands out is that you despite having a joint income that is probably in the Top 10% of all households in the UK, you have managed to get in a bit of a mess. As well as looking at the scenarios above, you will have to address your spending. Otherwise whatever you do now, the debts will just build up again. Then later if one of you has to stop work/retire, you will be in even deeper waters and/or looking at a retirement/old age of just scraping by. Or maybe even bankrupt.
So you probably need a debt advisor to help you out of this hole as much as a financial advisor. There is an MSE forum
Reduce Debt & Boost Income — MoneySavingExpert Forum

Marcon

zAndy1 said:

Hi,
  This is quite a complicated and depressing scenario I'm in and I'm rather confused about the best plan of attack and would appreciate some advice (I appreciate I'm probably going to need to see an IFA at some point but I have to start somewhere). Wasn't really sure which forum to post this in but it's basically about whether to use my pensions to get out of a financial mess so figured here was as good a place as any. So, situation is this

I'm 55, wife is 50 , combined net income approx £5200 pm
Outstanding mortgage £164k, interest only, 10 years left , rate approx 6% (£820pm interest)
Personal Loan with monthly payments of £395 , 40 payments remaining, interest rate 2.3%, settlement amount approx £14k
Credit card debt of approx £41k (I know and I have no idea how tbh), all apart from about £4000 of that at 0% interest until mid-late 2023, min payments approx £700pm
I'm 55 in December, dc pension funds worth £130k approx (low due to market conditions right now) so a £32500 tax free lump sum available and DB pension that will pay approx £6k pa (estimate) at age 60 or £4.8k at age 55 with no tax free lump sum or £3.8kpa at age 55 with a £25k tax free lump sum (compared with the £170k CETV I received for this last year none of those forecast DB pension options look that attractive really and I'm sure they've been impacted by recent market conditions and will probably be better in 5 years time). 

I'd always assumed I would take the 25% tfls from my DC pensions i.e. approx £32500 and use all of that to reduce my debts but obviously I have a ticking time bomb mortgage situation at age 55 and paying that much interest and higher interest than the loan and my credit cards (which I'm pretty sure but not 100% sure obviously most of which I should be able to transfer to 0% promotions next year). 

So would you take the £25k tax free lump sum from the DB pension (I know, bad idea in any normal scenario) to clear all the debt even though that would mean a reduced pension in retirement and paying 40% tax on the pension income now?

By my calculations paying the whole £57500 off the mortgage would save £3500 interest pa approx but paying the debt off would save around £1200pm in loan and credit card payments so on the face of it I'm probably better off doing that and then overpaying the mortgage by £1000pm to get it paid off by the end of the current term which sounds like a better plan really? 

Yes I know it's a mess, turning 55 and being able to access my pensions is a get out of jail card really although it's not ideal I appreciate that...

Would appreciate any advice before I inevitably I think have to see a financial advisor to get some advice as it's pretty complicated really 

Ta

You've already had one bankruptcy this century https://forums.moneysavingexpert.com/discussion/1114333/discharged-bankrupt-why-cant-i-get-an-isa#latest and judging by your comment below:

zAndy1 said:

Credit card debt of approx £41k (I know and I have no idea how tbh), all apart from about £4000 of that at 0% interest until mid-late 2023, min payments approx £700pm

you are on target for another.

zAndy1 said:

I'd always assumed I would take the 25% tfls from my DC pensions i.e. approx £32500 and use all of that to reduce my debts but obviously I have a ticking time bomb mortgage situation at age 55 and paying that much interest and higher interest than the loan and my credit cards (which I'm pretty sure but not 100% sure obviously most of which I should be able to transfer to 0% promotions next year). 

Why would a new credit card provider accept you at all, let alone give you a 0% deal to try and entice you, when your finances are in such a mess?

You don't need an IFA at this stage - you need urgent advice to address your debts and try and stop history repeating itself. Start here: https://www.moneysavingexpert.com/loans/debt-help-plan/ (please!).

NannaH

If you have an interest only mortgage,  what happens in 10 years when it needs paying off?
Have you looked on the DFW board for advice on your debts?
Sounds like your credit rating is shot anyway so how about a DMP?  

zAndy1

Ok, thanks for the replies and I kind of expected these responses and yes it's entirely justified. As I am currently more than capable of making the credit card and loan payments I fail to see how I would get much sympathy from a debt advisor really and I am more than happy to take the tax free lump sums to pay off my debts, I'm not intending to go down any path that involves not taking responsibility for them and paying them off in full. If I take the max tfls from the 2 DC pensions that will give me as I said about £32500 which would pay off the majority of the credit card debt. At that point between me and my wife we'd be able to overpay the mortgage by £1000pm very easily (still leaving us enough to quickly pay off any remaining debt) which if my sums are correct would mean it would be paid off in the 10 year remaining term. That to me seems like the most sensible plan of action. Granted it's going to mean some pain but we'd be mortgage free by the time I'm 65 and my wife is 60 which isn't that bad a result in the grand scheme of things. 

zAndy1

Just out of interest btw, I got an annuity quote for my £130k DC pension funds and was quoted £8100pa (single, fixed amount) from age 55. I find that pretty unbelievable really, it's way more than I thought it was going to be

QrizB

zAndy1 said:

So would you take the £25k tax free lump sum from the DB pension (I know, bad idea in any normal scenario) to clear all the debt even though that would mean a reduced pension in retirement and paying 40% tax on the pension income now?

I'm not saying that taking the DB early is a good idea (it could be a terrible one) but if you do choose to do that, you could mitigate the 40% tax problem by increasing your DC pension contributions by an equivalent amount.

Marcon

zAndy1 said:

Ok, thanks for the replies and I kind of expected these responses and yes it's entirely justified. As I am currently more than capable of making the credit card and loan payments I fail to see how I would get much sympathy from a debt advisor really and I am more than happy to take the tax free lump sums to pay off my debts, I'm not intending to go down any path that involves not taking responsibility for them and paying them off in full. If I take the max tfls from the 2 DC pensions that will give me as I said about £32500 which would pay off the majority of the credit card debt. At that point between me and my wife we'd be able to overpay the mortgage by £1000pm very easily (still leaving us enough to quickly pay off any remaining debt) which if my sums are correct would mean it would be paid off in the 10 year remaining term. That to me seems like the most sensible plan of action. Granted it's going to mean some pain but we'd be mortgage free by the time I'm 65 and my wife is 60 which isn't that bad a result in the grand scheme of things. 

You don't need sympathy - you need advice on how to stop the same thing happening again. You've already been bankrupt once, and by your own admission you 'don't know' how you came to be £41K in debt on your credit card. If you use your tax free lump sums to pay off today's debts, that option won't be there when you make the same mistakes and are in a similar boat a few years down the line (and you'll have much reduced pension provision, and possibly no earnings,with which to deal with the situation). Hence the plea to get yourself some debt advice - or more accurately, how to avoid debt advice.

NedS

zAndy1 said:

Just out of interest btw, I got an annuity quote for my £130k DC pension funds and was quoted £8100pa (single, fixed amount) from age 55. I find that pretty unbelievable really, it's way more than I thought it was going to be

That's probably about right for a 30 year expected lifespan based on 30 year gilts returning around 5% - they are simply returning you your own money and pooling the risk you may live longer. Although I think the yield on 30 year gilts has now fallen so the quote may be a little old or out of date now.

zAndy1

Marcon said:

zAndy1 said:

Ok, thanks for the replies and I kind of expected these responses and yes it's entirely justified. As I am currently more than capable of making the credit card and loan payments I fail to see how I would get much sympathy from a debt advisor really and I am more than happy to take the tax free lump sums to pay off my debts, I'm not intending to go down any path that involves not taking responsibility for them and paying them off in full. If I take the max tfls from the 2 DC pensions that will give me as I said about £32500 which would pay off the majority of the credit card debt. At that point between me and my wife we'd be able to overpay the mortgage by £1000pm very easily (still leaving us enough to quickly pay off any remaining debt) which if my sums are correct would mean it would be paid off in the 10 year remaining term. That to me seems like the most sensible plan of action. Granted it's going to mean some pain but we'd be mortgage free by the time I'm 65 and my wife is 60 which isn't that bad a result in the grand scheme of things. 

You don't need sympathy - you need advice on how to stop the same thing happening again. You've already been bankrupt once, and by your own admission you 'don't know' how you came to be £41K in debt on your credit card. If you use your tax free lump sums to pay off today's debts, that option won't be there when you make the same mistakes and are in a similar boat a few years down the line (and you'll have much reduced pension provision, and possibly no earnings,with which to deal with the situation). Hence the plea to get yourself some debt advice - or more accurately, how to avoid debt advice.

Where I'm struggling though is understanding how I'm going to be eligible for help with my debt when I'm comfortably making the payments, haven't missed a payment on anything for years and have a way of repaying the majority of the debt in a couple of months time? Granted when the 0% promotional rates end next year I probably won't be able to make the payments hence my intention to pay things off using my tax free lump sums. I know it's not ideal taking money from my pensions but when it can clear my debt and enable me to use the money I was using to make credit card payments to overpay the mortgage instead surely that's a win/win isn't it and will probably save me more money in the long run than not taking the tax free lump sums. That's my logic anyway

Kim1965

I dont think many on this forum think its a win win. Your spending habits are not in line with most people catering for retirement. You have a good income, it shouldnt  be too much trouble to turn your situation around.