55 in a few weeks taking pension to pay off Mortgage

butler0641

Hi all just checking my thinking and decision making on my upcoming 55th Birthday in a few weeks is correct. 

I earn about 33k a year I have a repayment mortgage of 44k I have three private pensions I intend to take two private One I intend to take completely as a lump sum just over 10k total 25% tax free so tax free part is just over 2.5k The other I intend to take the maximum lump sum just over 30k of which 11k is tax free and a pension of 4.5k ongoing per year.

Half of the cash about 20k I will put to my mortgage no fees. Bringing my repayments down from £750 per month presently. 

The other 20k 3k to improve my ground floor two bed flat with a garden in a trendy part of London last valued at £450k seven years ago. 5k to pay of credit card debt and the rest about 10k for holidays and reserves. 

The question I have is tax implications by my working out it’s not worth trying to spread this over two tax years as the amounts are small. 

The taxed part 7.5k first one 19k second so 26.5k roughly plus around 23k of my salary so this tax year income around 59.5k so 9.5k at the 40%. Pretty rough figures. 

I am saving this tax year by paying off mortgage so repayments lower. The extra £400 each month pension. 

So not worth trying to get all of the lump sums at the 20% tax rate by spreading over two tax years? 

msallen

You won't be able to pay an extra £400 a month into your pension if take even a single penny of taxable income from your pension. 
Once you have taken taxable income from it you are limited to £4K contributions per year (gross).

butler0641

Sorry what I meant was I’d be receiving £400 extra income each month 

dunstonh

I am saving this tax year by paying off mortgage so repayments lower. The extra £400 each month pension. 

By accessing the 75% element of the pension, your pension annual allowance (including yours and employer contributions) will be restricted to just £4000 gross pa.   That is a significant limit for many people in their 50s when they are normally trying to pile as much into pensions as possible.

Robbing your retirement years to pay off the mortgage early in your working years is usually not a good idea.   Plus, investment returns tend to be higher than the interest rates you pay on the mortgage.     So, statistically, its unlikely to be a good thing you are doing.   There could be viable reasons but its not clear from your posts.    You are just paying tax unnecessarily by the looks of it.

penners324

This very likely a terrible idea as it severely impact on your pension pot for when you do retire.

Look up MPAA rules

MX5huggy

Although he’s talking about someone younger than you in the main. James Shack’s latest video covers just this. The pension should beat paying off the mortgage in most circumstances. 

https://youtu.be/MWadHLKMgB4

eskbanker

butler0641 said:

I have three private pensions I intend to take two private One I intend to take completely as a lump sum just over 10k total 25% tax free so tax free part is just over 2.5k The other I intend to take the maximum lump sum just over 30k of which 11k is tax free and a pension of 4.5k ongoing per year.

Will the third pension provide enough income to support you in retirement (when combined with the £4.5K and eventually your state pension)?

Grumpy_chap

butler0641 said:

Hi all just checking my thinking and decision making on my upcoming 55th Birthday in a few weeks is correct. 

I earn about 33k a year I have a repayment mortgage of 44k I have three private pensions I intend to take two private One I intend to take completely as a lump sum just over 10k total 25% tax free so tax free part is just over 2.5k The other I intend to take the maximum lump sum just over 30k of which 11k is tax free and a pension of 4.5k ongoing per year.

Half of the cash about 20k I will put to my mortgage no fees. Bringing my repayments down from £750 per month presently. 

The other 20k 3k to improve my ground floor two bed flat with a garden in a trendy part of London last valued at £450k seven years ago. 5k to pay of credit card debt and the rest about 10k for holidays and reserves. 

The question I have is tax implications by my working out it’s not worth trying to spread this over two tax years as the amounts are small. 

The taxed part 7.5k first one 19k second so 26.5k roughly plus around 23k of my salary so this tax year income around 59.5k so 9.5k at the 40%. Pretty rough figures. 

I am saving this tax year by paying off mortgage so repayments lower. The extra £400 each month pension. 

So not worth trying to get all of the lump sums at the 20% tax rate by spreading over two tax years? 

I am struggling to follow exactly what you propose here but it does not seem to be a good idea from the amount of detail posted.

1. Your pension provision seems small.  If you draw the majority of it now and repay mortgage / home improvements / credit card, what do you propose to live on?

2. Doing what you propose and suffering tax on what pension you do have will undermine the whole basis of your hard work in building this pension fund so far.

3. If you do as you propose, the small pots rule may be relevant for some of your pension funds - but you may be outside the constraints for that.

4.  If you draw the majority of your pension now, that severely restricts what can be contributed in the future, even to the point it may prevent future employer contributions.

Have you taken any financial advice.

Some of the detail in the OP seems a little confused - that may be because of trying to make things simple and concise.  It might be worth looking at the DFW (debt-free wannabee) area of the forum and preparing a SoA (statement of affairs).  Not because you have an extreme debt problem but because that is where the SoA templates are referenced and that could be a good tool for you to use to prepare your own budgets for now and future and make your own assessment of the options.  You don't need to share the SoA, just do it for your own purposes and to aid your own clarity.

butler0641

A bit more information. The two pensions I intend to take were from previous jobs one of the two was when I was a teenager for a couple of years. The other a job I left over 8 years ago. 

My present employer pays into a pension which I am not taking. So from the comments are my employers contributions to my pension capped at 4k, presently I do not contribute. 

I have no children enjoy excellent health and a quality lifestyle. So keeping costs low is important my biggest outlaw is my mortgage living a quality life and being in the fortunate position in owning most of my flat so a good asset in the future for any unforeseen costs.

the last comment about state pension which I will get in full plus the company pension I still have to take and the 4.5k PLUS my property I think will easily cover costs.  

I am looking to enjoy life to the full rather than saving for a comfortable retirement which seems the conventional wisdom.  So thanks for your comments don’t see how I’m “robbing” or is a a “terrible idea” but happy for greater consideration.

dunstonh

My present employer pays into a pension which I am not taking. So from the comments are my employers contributions to my pension capped at 4k, presently I do not contribute. 

The minute you access a penny of the 75% element of a pension, the annual allowance is reduced to £4000 and you are legally required to tell any future or current pension scheme.  So, yes, it will affect you.

I am looking to enjoy life to the full rather than saving for a comfortable retirement which seems the conventional wisdom.  So thanks for your comments don’t see how I’m “robbing” or is a a “terrible idea” but happy for greater consideration.

It is not conventional wisdom to pay tax unnecessarily in the process of reducing your lifestyle in your retirement years (of which you could have 25-40 years worth) to pay for increased living standards for a handful of years in your working life.

Look at all the replies.  Not one thinks this is a good idea.   Take our comments seriously as this is something you need to get right as there is no going back if you get it wrong.

penners324

Enjoy life now and live just above the bread line in retirement (which could be 40 years).