Contracted out pot

SwottyWatty

I am 61 years old. I have defined benefit pension with work that kicks in at 65. But, I also have a contracted out of SERPS pension pot standing at around £53k. There is nothing going into the pot so any small gains are being eaten up by fees.
I am currently on a variable mortgage tariff of over 8% but only owe £52k (8 yrs left) . I am wondering if it would be better to draw down on this pot to pay off my mortgage. I will get the full state pension at 67 and if i wait until 67 to retire my defined benefit company pension will pay about the same as the state pension so in effect doubling my state pension. 
1. Will i lose tax on 75% of the drawdown? @40%?
2. Do you think it would be worth it to have an extra £700 per month for the next 8 years instead.

af1963

Taking the full £53k of which about £40k would be taxable means that *some* of it may be taxed at 40%, depending on what other income you have in the year.

(Assuming you are still earning more than the tax allowance, the full £40k would be taxed at *at least* 20%  ( or a mix of 19%, 20% and 21% if in Scotland.) So you'd start by paying pay at least £8k in tax. If your total income including the taxable pension withdrawal goes over about £50k, the excess above £50k would be taxed at 40%.  ( above about £44k in Scotland, taxed at 42%)

What would you do with the money saved on mortgage payments ?  ( If you paid it all back into pensions: £8400 per year, grossed up to £10500, for 8 years, would build up to over £80k, even with zero growth in the pension. )

If your investments are growing over that 8 years, the balance would shift in favour of keeping the pension invested and continuing to pay the mortgage  ( essentially, if your pension can 'earn' more than the 8% it's costing you.) .  

No scope for mortgaging at a lower rate ?

dunstonh

 There is nothing going into the pot so any small gains are being eaten up by fees.

That doesn't sound right.    Middle of the road investment returns after charges are typically around 5-7% p.a. (zig zagging on its way but typically averaging around that amount)

 I am wondering if it would be better to draw down on this pot to pay off my mortgage. 

If you do that, you will trigger the MPAA which could harm your retirement planning.   You are also using money put aside for retirement for something that should be paid from income in your working life.  i.e. robbing your retirement years.

1. Will i lose tax on 75% of the drawdown? @40%?

yes.

2. Do you think it would be worth it to have an extra £700 per month for the next 8 years instead.

If you put it back into the pension (subject to MPAA - you may need to use S&S ISAs as well) then yes.  If you waste it on spending now, your older self may not thank you.

What is best will depend on your current and future scenarios.  Your spouse/partner, if you have one, should also be factored in.  If they have little or no retirement provision, then if you die first, the removal of one state pension and 50% on the DB scheme could harm their living standards significantly.   This other pension could make all the difference.   So, again, its all about your current and future situation.

SwottyWatty

Yeah it must be in a poorly managed fund as it has LOST about 2k in value since end of Covid

Albermarle

 But, I also have a contracted out of SERPS pension pot standing at around £53k. There is nothing going into the pot so any small gains are being eaten up by fees.

This seems unlikely. If that is really happening then the problem is that the pension is  badly invested, and you should look into the details of why this has been happening.

Marcon

SwottyWatty said:

I am 61 years old. I have defined benefit pension with work that kicks in at 65. But, I also have a contracted out of SERPS pension pot standing at around £53k. There is nothing going into the pot so any small gains are being eaten up by fees.

Where are your funds invested - ie what sort of funds - equities, bonds, deposit...?

What are the fees - do you actually know, or are you just assuming (as many of us do!)?

SwottyWatty

No scope for mortgaging at a lower rate ?
 Yes i can get 5.19 on a 2 year fixed

SwottyWatty

My older self is not likely to miss the £20 per week extra pension it would grant me.

SwottyWatty

Taking the full £53k of which about £40k would be taxable means that *some* of it may be taxed at 40%, depending on what other income you have in the year.

Unfortunately or fortunately my salary is very close to the tax threshold into 40%.
That said, as that is not likely to change, anything after  i take the 25% lump would be drawn down at 40% bit by bit anyway unless i did not touch it until i retired and by income dropped.

dunstonh

SwottyWatty said:

My older self is not likely to miss the £20 per week extra pension it would grant me.

£53k is not £20pw.  its £53k.  Forget the pension projections on statements.  They are pessimistic and method that 99% do not use.    At its current value, that's £220pm.

xylophone

If you do that, you will trigger the MPAA which could harm your retirement planning. 

It appears that the only pension to which he is currently contributing is a Defined Benefit  (not money purchase)pension.

What is the MPAA?

The MPAA (money purchase annual allowance) was introduced with pension freedoms and this limits the amount of money which can be contributed to a money purchase scheme once pensions have been flexibly accessed before a tax charge is payable. 

That said, as that is not likely to change, anything after  i take the 25% lump would be drawn down at 40% bit by bit anyway unless i did not touch it until i retired and by income dropped.

Presumably the old SERPS pension is in an old scheme which does not support flexible access?

If so, would it be worth considering transferring to a SIPP and taking the PCLS for use in reducing the mortgage?

It would be possible to leave the balance invested within the pension if you wished.

Is it possible to remortgage to a lower rate?