Method or Madness? Paying off Mortgage in full with Workplace Pension

davestewart68

JReacher1 said:

You don’t have to take the tax free sum at 55. The later you leave it the bigger your 25% lump sum would be. If you get generous workplace contributions from your employer I would be tempted to leave it as late as possible to withdraw the 25%. 

Yeah, doing nothing is one of the options I modelled, but for the last almost 3 years, my pension fund has stagnated thanks to Covid and Putin.  I'm in favour of doing something, but I'm not too sure what just yet.

davestewart68

Qyburn said:

So you could earn more from savings account interest, than you'd save by overpaying. Do you have unused ISA allowance? 

I don't have any ISAs.  As much as I know financial matters matter, I do find trying to work it out rather dull.  I'd much rather be travelling the world in my motorhome, which is what Phase 2 retirement looks like for me (Phase 1 being doing something to clear the mortgage early and possibly dropping to a 4 day working week). I think the options I have are as follows:

1. Do nothing, let the mortgage run it's course, leave the pension and keep paying into it.  Pros: Pension grows. Cons: Highest interest accrual on the mortgage (c. £9600 over the next 10 years).
2. Draw all the pension, pay off the mortgage in full. Pros: Lowest interest accrual on the mortgage, mostly made up of ERC. Cons: Very high tax exposure (c. £55k in FY23-24).
3. Draw down mortgage enough to overpay mortgage by 10% each year. Pros: Reduces interest accrual to c. £5700. Reduces tax exposure. Cons: Mortgage still there for 5 years.
4. Draw 25% tax free and invest it, use cash to overpay mortgage by 10% each year. Pros: As above. Cons, need to not spend the cash on another brainwave idea.

Pension performance since Covid and Russia-Ukraine conflict has been abysmal.  I've not started to lose yet, but the balance is about the same today as it was in Mar 20, even having paid 5% (matched by employer ) each month.

Pat38493

Based on information given option 2 is very likely worst.

Your optimal might be option 1 for now but keep under annual review.

Poor pension growth in 2022 is not necessarily an issue as pretty much all of us had a bad year and that’s expected every so often.   What funds is your pension invested in?  

davestewart68

Pat38493 said:

Based on information given option 2 is very likely worst.

Your optimal might be option 1 for now but keep under annual review.

Poor pension growth in 2022 is not necessarily an issue as pretty much all of us had a bad year and that’s expected every so often.   What funds is your pension invested in?  

I'm torn between doing .nothing and doing something, because in Aug I can do something. But what to do is what I hope this will answer, coupled with advice from and IFA. 

Funding is managed by the provider. I don't have enough experience to know what to shift them to. 

davestewart68

One thing that bothers me a lot is that I've been paying £560 a month into my pension, yet for the last 3 years, the balance has roundly not changed.  So where has the c. £20k gone??

Merlin139

davestewart68 said:

Merlin139 said:

Are you on the AFPS 75? If so have you factored into your calculations the increase you will get in your Forces Pension at 55?

Yes, I'm on AFP75. I left on 31 Dec 2009 so I'm assessing the accumulated CPI increase between Jan 10 and Aug 23 to be in the region of 40% +. I've also ascertained that the CPI increase is the pension value pre-commutation, which is a figure I'm unsighted to, but as I took maximum commutation, that can only work in my favour. For the 23-24FY, the increase will only be in effect from Aug-Mar, so the net tax exposure increase actually remains at about the existing level.

From the date you left I can tell you that your Pension will increase at a rate of 1.2932. Based on the figures from the :

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1048396/Pensions_Increase_Multiplier_Tables_2022.xlsm

The increase for 2023 10.1% based on September 2022 CPI.

You would have been sent a letter from the APC around the time of your discharge telling you what the value of your awarded pension was and how much you could raise through commutation. You may have filed it away somewhere safe. 

I don't know if it helps but what I opted to do when I reached 55 a few years ago was to have my Tax Code set against my Forces Pension. Paying tax on the balance. Then everything else I earn I pay tax on. 

Notepad_Phil

davestewart68 said:

One thing that bothers me a lot is that I've been paying £560 a month into my pension, yet for the last 3 years, the balance has roundly not changed.  So where has the c. £20k gone??

I don't know what funds you have been buying into, but generally the answer would be:

At least some (and probably quite a lot) of the £20k has been used to buy units of your chosen funds at cheaper prices than they were - so providing you keep these funds invested, then this means that when markets recover your £20k will be worth more than if they had been used to buy funds at higher prices.

Pat38493

davestewart68 said:

One thing that bothers me a lot is that I've been paying £560 a month into my pension, yet for the last 3 years, the balance has roundly not changed.  So where has the c. £20k gone??

This is exactly what I think I arrived her posting many months ago and I've seen many posts like it since.  As said by notepad_phil, it's better to think of it in terms of the number of units you are purchasing rather than today's value.  Today's value is entirely irrelevant unless you are are actually taking the money out today.  When the fund value is low, it actually gives you an opportunity to purchase units of the fund at a "bargain" price.  Buy low, sell high and all that stuff.

enthusiasticsaver

Most peoples pensions have dropped this year.  That only matters if you are planning to draw on it.  Which is why i suggest now is not the time.  

penners324

You'd pay a large amount of tax, pay an ERC and limit all future pension contributions to MPAA.

Yes, it's a very mad idea