Pros & Cons for taking 25% lump sum?

madaboutspots

Apologies if this has already been asked and answered.

Hubby and I both have DB pensions with 20 yrs each contributions. The rest we see as extra pocket money.

He has 2 more DC smaller pots around £18k each. Both also still contributing to auto enrol via Nest.

He’s 55 next year and is wondering what to consider before “possibly “ taking 25% of one or both DC pensions and leaving everything else alone. 

He’s only tempted because we’d love to be shot of the mortgage and this would finish it off with change - depending how much else we find.

It’s absolutely not a done deal. We’re both cautious, low risk types. 

Just wondering the up and downsides to either option aside from the obvious mortgage freedom.

Happy to provide more info if needed. Don’t expect to “need” anything other than our plump little DBs & SP once we actually come of age. Highly likely to receive substantial inheritance x 2 as well in time.

Thanks in advance 👍

Marcon

madaboutspots said:

Apologies if this has already been asked and answered.

Hubby and I both have DB pensions with 20 yrs each contributions. The rest we see as extra pocket money.

He has 2 more DC smaller pots around £18k each. Both also still contributing to auto enrol via Nest.

He’s 55 next year and is wondering what to consider before “possibly “ taking 25% of one or both DC pensions and leaving everything else alone. 

He’s only tempted because we’d love to be shot of the mortgage and this would finish it off with change - depending how much else we find.

It’s absolutely not a done deal. We’re both cautious, low risk types. 

Just wondering the up and downsides to either option aside from the obvious mortgage freedom.

Happy to provide more info if needed. Don’t expect to “need” anything other than our plump little DBs & SP once we actually come of age. Highly likely to receive substantial inheritance x 2 as well in time.

Thanks in advance 👍

Lots of threads on just this topic - if you use the 'search the forum' box above, it'll help you to filter out relevant ones.

Beware triggering the Money Purchase Annual Allowance if you take anything more than the 25% tax free cash from your DC schemes. You're then limited to a maximum of £4,000 a year (including tax relief on your personal contributions, plus any employer contributions) if you have a sudden burst of enthusiasm for topping up a DC pot!

One on lump sums from DB schemes might also be helpful: https://forums.moneysavingexpert.com/discussion/6409267/lump-sum-question#latest

dunstonh

He’s only tempted because we’d love to be shot of the mortgage and this would finish it off with change - depending how much else we find.

Not normally a good idea as you would be wasting money designated for your retiring years on something that should be paid for in your working years.  Plus, it usually means taking it out of the pension where it will be making more than the interest you are paying on the mortgage.    

It’s absolutely not a done deal. We’re both cautious, low risk types.

That is good as it means you are probably against robbing your retirement years of a chunk of money.

Simon11

What mortgage rate are you on and if fixed, for how long?

madaboutspots

Simon11 said:

What mortgage rate are you on and if fixed, for how long?

2.09% ends 31.12.23 with estimated £25k left to find.

re other replies…
thank you. I get what you’re saying but my figures show we’ll have more per month/year after taxes when we retire than we do now - without the DCs or Nest and with no mortgage. It’s this that started the thinking that we can afford to raid our future because there’s already an imbalance.

We shouldn’t need more than we do now should we? Surely not when we’ll already be up £800/month with the mortgage gone?

In case it helps - both DBs are based on salaries that are double what we currently earn. We took a decision about 5 years ago to take an ethical and enjoyable job and leave the money chasing to others. Got tired of the corporate world. So now we already know we can live on less than we did and don’t miss it.

I’m not trying to sway the argument one way - I just want to clarify in case our future needs more than we realise and we’ve missed something. 

L9XSS

Did just that, had been overpaying the mortgage for years, and as salary increased had been focusing on a SIPP. I have a healthy £20k + DB pension payable from 60 years of age. I had about 30k left on my Mortgage with 3 years left to run, I will as on track to have the 25 year term paid off 8 years early. In the end I took two small pots (10k each after moving these to HL and Fidelity from my main SIPP). This cleared the mortgage 10 years and 6 month early just as rates were starting to rise each fortnight. The satisfaction of knowing the house is paid off, focussing this extra cash into pension payments for the next 5 years outweighs the £20k I took from the SIPP.

ader42

The DC pots aren’t particularly large and 25% of 2x18k is only 9k

In the current climate I think a guaranteed return of around 5% by not paying that on a mortgage rate is not to be sneezed at.

If you wanted you could always just up your pension contributions once the mortgage is gone - or at least have the flexibility to do so if you want which isn’t a bad thing - especially as you will get another round of tax relief off the government  

dunstonh

Is early retirement a possibility?  even if its just a year or two?  If so, those pensions could be used to fill the gap and get all the money out tax free.

Do not underestimate the importance of capital in retirement.   If these pensions are £18k each and you are contemplating using the 25% to pay off the mortgage then this suggests you have no other savings or investments.   If you did, you would use those first.

You could live another 40 years from now.   You may have a nice income level but what is available to pay for capital expenditure?   Gas/Oil boilers needing to be replaced with heat pumps.  Currently, cost you tens or even into the hundred thousands mark if you need building improvements.    40 years could mean new windows and doors. Roofing.  Cost of moving house,  replacement cars. Decorating.  Holidays etc.     Your retirement needs will be met from income and capital.