Have I stuffed up my future retirement?

Hopefuljoy

Hello! I am 57 and have spent the last few weekends trying to work out what to do. In brief I have over 26 years TPS with NPA 65 (67 for small career avg but will take that early). If I were 65 today I would draw £16690 and it is about to rise by 10.1% in April.  Thereafter I am forecasting it will grow at a rate of 2.5% average per year and it is linked to the CPI so will not erode as I defer it.  I am building my LGPS DB pension and my current statement forecasts £6,000 retiring at 67. This is all great and I should ideally be looking at a great retirement combining all that with state pension which I have also set at a growth of 2.5% pa on my spreadsheets. 

However, I have been STUPID!!!! I am on an interest only mortgage as when I left teaching I could not afford to carry on with my repayment mortgage as I went to a much less paying job. Over the last four years I did not pay anything off (I was making capital repayments each month while teaching) and my outstanding balance is £87000 to be paid off in full at 67. On my salary I am now paying off £250 per month. At 60 when my fixed deal expires I will owe around £75,000 with 6 years to pay it off!

I am not going to move to a higher paid job or position as I have chronic depression and know my limits so my income is pretty set for the forseeable.  On average over the last decade wage increases have been 1.5% pa so the value is eroding over time.

I am already near the bottom of the housing ladder for this area (south east) and there is not enough equity in the home to enable me to move in the area.  I have had a terrible experiences of teaching and domestic abuse over the years and am now in a lovely local non-teaching role with amazing people and relatively stable mental health. So I am not moving to a cheaper area. Again I know my limits and my wobbly brain wouldn't cope well. 

I have made an assumption that there is not going to be any inheritance due to nursing home fees (mum is already in one and dad is coming up to 90 and may well have to go into one at some stage).  They are self funding and come from very long lived families!

Anyhow, enough background.  As it stands I have made some plans based on the following.  Draw TPS at 57 years which will give me a pension of around £12,300 taxed fully at 20% and presumably not attracting NI payments.  Combined with my monthly salary I can then make the maximum overpayment per month (capped at 10% of capital) until 60. At that rate I will have paid off 30K by then.  From then until 65 keep overpaying and the mortgage will be paid off 2 years early.  I can either retire then taking my LGPS or go part time until the state pension kicks in.

The inevitable price to be paid though is future retirement income and that is what is freaking me out. My net income today is £1,451 and if you take out my total mortgage payment per month I technically need £981 at todays prices to have a frugal but pleasant life.  This enables me to save 360pcm towards annual expenses including one holiday a year, car stuff, insurances, presents, etc. I also save £100pcm into my emergency pot.  So as long as my future pension has the same purchasing power as this then I should be okay?

I need to know that if I take my TPS in four months time I will not be making a huge mistake for my future pensioner self. At the moment I am spread sheeted out and going around in circles!

Has anyone else done something similar?  How did it work out? Am I mad to think it will all be okay? Can anyone offer some wisdom or reassurance?  


 

NedS

Do either of your pensions provide a lump sum upon retirement? If so, could you use this to help pay off the outstanding mortgage balance? Taking a tax free lump sum may be more tax efficient than drawing pensions early with actuarial reduction, and paying income tax to pay off mortgage whilst still working.

bluenose1

Can imagine how upset you are but main thing is not to panic and think all the financial options through carefully.
As NedS says do you get a tax free lump sum on retirement as this could help reduce the capital you owe?.
I am no expert but my thoughts would be can you change to a repayment mortgage when your current deal ends or even at 67, you can still have a mortgage that extends into retirement if you have sufficient income. Looks like you will have considerably more income in retirement than you have now. I would be very careful about cashing my pension in to pay my mortgage off as it may make more financial sense to explore changing your type of mortgage and potentially extending the length of it rather than taking a permanent actuarial reduction. 
MSE have mortgage repayment calculators, so would be worth you looking at the different options.

If it were me based on what you have said I would look into a repayment mortgage and possibly not even start that until 67 when your income increases if paying off the capital now would cause you to have 10 years of living too frugally. Your income in retirement,  if you get full SP will be at least £32,000 before tax/ approx £28,000 pa/ £2.333 per month after tax. So you will have an increased income of £882 based on today. And that doesn't even include this years 10% inflation increase.

I honestly dont think the situation is as bad as you think, I just think you need to plan more long term how to pay it off.

Gary1984

I think you've actually been very astute financially as you prioritised pensions saving over mortgage capital payment which was absolutely the right thing to do. Being mortgage free but with little pension provision would be a much worse scenario.

Sounds like you live frugally and are content with life. You'll be absolutely fine.

As others have said a repayment mortgage that stretches into retirement might be the best thing for you. I'd avoid the actuarial reduction to your pension if you can help it. It sounds like your pensions will be enough to support a small mortgage in retirement.

barnstar2077

I would contact your mortgage company and try to extend the repayment term.  Explain that you will have a good income into retirement and see how far you can push it.  The longer the better in my opinion. 

kpk2000

If by TPS you means Teachers pension Scheme then the service before 2015 should be final salary with a NPA of 60. I have been teaching since 2005 and have nearly 10 years of NPA60 so a good chunk of yours should also be this which means no reduction for taken at 60 and a tax free lump sum of 3 times the pension.

Or perhaps I have misread something!

LHW99

kpk2000 said:

If by TPS you means Teachers pension Scheme then the service before 2015 should be final salary with a NPA of 60. I have been teaching since 2005 and have nearly 10 years of NPA60 so a good chunk of yours should also be this which means no reduction for taken at 60 and a tax free lump sum of 3 times the pension.

Or perhaps I have misread something!

Plus inflation linking!

Pipthecat

I read your statement as "In three years time, I have the opportunity to purchase the house I want for only £75k.  How should I fund this?  Given my age, should I consider using my pension tax free lump sum or pension income?"

If you did not have the mortgage when would you plan on retiring?

Is your mortgage the driver for your planned retirement at 57?  If so, as mentioned above, I would look at the various options to fund your home into retirement before making any decisions.  With interest rates expected to fall over the next couple of years you may find yourself able to re-mortgage to something affordable aged 60.  

MX5huggy

Does your employer offer  Salary Sacrifice AVC’s as a top up to pension? This maybe better than paying off the mortgage by building up a tax free lump sum to be taken when you take the LGPS. The basics are you can pay off £68 of mortgage or Salary Sacrifice £100 in to the AVC hope it grows then you’ll have £100 plus the growth out tax free. 

Hopefuljoy

Hello people and thank you for your input so far.  Here are my thoughts on what you have suggested now that I have reflected on them.  You have all been very helpful.

Some people have mentioned taking a mortgage into my retirement and I have done some figures on this.  On the face of it a mortgage term for 20 years from age 60 would be a reasonable idea and I did start looking into it seriously a few months ago.  At the typical interest rate today a repayment mortgage would work out at about £500 pcm which would look very comfortable.  HOWEVER, there is a problem here.  Banks are withdrawing from offering extended mortgages into retirement and I have discovered in the small print that they are allowing extensions up to 75 OR retirement date, whichever is sooner.  As I intend to retire from my main job at 65 I would be stuffed. The only mortgages being offered for elders are Retirement interest only most of which heavily penalise you for overpaying.

So on reflection I do not see extending my mortgage as a viable option.  The additional factor for me is that I am seriously risk averse and will constantly worry about all of the what ifs with the economy which will put a blight on my life from 60. You raising the idea has been really useful as it has made me realise that my overall driver is to pay off the mortgage before I retire, albeit with a smaller pension.

@kpk2000 My TPS is made up mainly of a lot of years transferred in and as luck would have it I started teaching 6 months after the retirement age rose to 65!  I am not going to take lump sums out of my pensions as although it looks like it gets me out of a hole it would drastically reduce my pension and take me back to a worse position ultimately than if I took my TPS at 57 with no lump sum. 

@Pipthecat Your question really made me think.  If I did not have the mortgage my ideal plan would be to draw the TPS early at 60 and cut down my hours to three days per week for the last 5 years before taking my LGPS early at 65.  I would then use savings to bridge the gap to retirement.  If only that was still possible!!!  I am happy to keep working to 65 though as my job (Library Assistant) is so enjoyable and stress free and due to all the running around and standing I am currently fit and healthy.

@MX5huggy Coincidentally I have just started paying into the LGPS AVCs, albeit it at a measly £50 per month. That is all I afford on my salary and I will crunch some numbers to see if adding the £250 I currently use to pay off capital would make a serious enough dent by 65 to make it worth while.  The thing that worries me is that the value of the AVCs is able to go up and down and as I have said before I am risk averse to quite a degree.  Plodding even!

@barnstar2077 I will call the mortgage company today! Stupidly I never thought of that.

@bluenose1 Thank you for your calming words. I'm going to call my mortgage company and see what they say about extending the term at 60 (can't now as I'm on a fixed rate) and whether they are prepared to extend or remortgage to people with a decent pension.

@Gary1984 Thank you for encouraging me!. You are right about me being quite frugal and content with life.  I'm going to mull over what others have suggested and relook at my numbers.  I think one of the things freaking me out has been the thought of the pension I would be sacrificing over my lifetime rather than the peace of mind and life I can achieve by getting rid of the mortgage on time and not having as much money in retirement.  I'm going to revisit my figures for my LGPS, TPS and state pension combined and workout how they will compare to my current net income needs.  If combined they add up to more net than the £981 PCM I could comfortably live on today (but I will compound that to what its equivalent may be in 8 years time) then I don't think I have anything to worry about.

Once again thanks to you all and I will get back to you when I've had a rest from the numbers and thought some more!



 

Albermarle

 as I have said before I am risk averse to quite a degree.  Plodding even!

To be cautious or conservative ( small c )  is fine, if that is your personality.

However to be too risk averse, can actually be quite negative for your finances. 

A good saying to note is ' that to take no risks, is the biggest risk of all'