To pay off mortgage before retirement, or not?

BridgetTheCat

I currently work full time with take-home pay approx £2200 a month or £26400pa. For personal reasons I want to retire at the end of 2029 when I’ll be 60.

I have DB pensions (3 deferred, one active) which on current values will give me an income after tax of between £15k and £26k pa depending on the size of lump sum I take. This doesn’t take into account future pay awards or index linking. I will also get PCLSs totalling between £30k and £90k.

I have been saving £400 a month into my cash ISA for some time and now have £49k. The ISA currently pays interest at 5.4% but that ends in September and I know I’m unlikely to get as good a rate going forward.

I currently owe £78k on my mortgage on a fixed rate of 3.7% until November 2027 - monthly payment £715. Using the MSE calculators I’ve worked out that I should have just enough in my ISA to pay it off in full at that point. It will however take all of my savings, including my emergency fund.

Alternatively, I could take a 2 year fix in November 2027 to take me up to retirement and use my PCLSs and part of the ISA savings to pay it off then.

So I’m in a quandary. Option 1 would give me 2 years mortgage free and still in work to rebuild my savings, which I could do quite quickly given I’d have an extra £1100 per month of disposable income. Or option 2 which would retain my emergency fund and protect the tax free status of the savings in my ISA. 

Any thoughts?

Brie

Option 1 will give you 2 years before retirement to put your £400 a month savings plus what you currently pay for your mortgage back into an ISA and your emergency fund.  That will leave your pension money intact for your retirement and you might not need to take a TFLS from all/any of your DB schemes if you didn't want to.  AND it will be a tremendous relief to know that you are mortgage free.  

With option 2 I'd be thinking about how much interest you might be getting and calculate how that compares to the interest you pay on your mortgage.  Lower?  Throw more at the mortgage sooner rather than later.  Higher?  Stick with option 2 as already plotted out.

El_Torro

It's not worth using all of your emergency fund to pay off a mortgage, unless you have no other options. I would go with the other option.

Marcon

If you have £49K in your ISA now, are paying in £400 a month (say 28 x £400 = £11,200), that's £60,200. Not sure how it will hit £78K by November 2027, unless you are topping it up with 'emergency savings' from another source?

BridgetTheCat said:

Or option 2 which would retain my emergency fund and protect the tax free status of the savings in my ISA. 

Do you have a flexible ISA? If so, you might consider a third option: taking cash from that and then 'repaying' it with a lump sum from one of your DB pensions. Provided you put the money back into the same ISA in the same tax year, it will retain its tax free status and doesn't count as 'new money' - ie you can still put in the maximum ISA contribution for that tax year.

MarlowMallard

Marcon said:

If you have £49K in your ISA now, are paying in £400 a month (say 28 x £400 = £11,200), that's £60,200. Not sure how it will hit £78K by November 2027, unless you are topping it up with 'emergency savings' from another source?

The mortgage balance will be smaller in Nov 2027 - if she's paying £715 pcm then nearly £500 is capital repayment, so balance will be roughly £64k by Nov 2027. 

MarlowMallard

BridgetTheCat said:

I have DB pensions (3 deferred, one active) which on current values will give me an income after tax of between £15k and £26k pa depending on the size of lump sum I take. This doesn’t take into account future pay awards or index linking. I will also get PCLSs totalling between £30k and £90k.

 (snip)

Any thoughts?

One thing that stands out here, if you're giving up £11k pa of pension for an extra £60k lump sum, this is a truly awful "commutation ratio" less than 6, so definitely plan on taking the max pension / min lump sum allowed unless you have a life-limiting condition.  (The teachers' scheme has a ratio of 12 which is "poor" and my own scheme is about 17 which is decent ).  If those numbers are right, extend the mortgage a few years if necessary so you keep "enough" savings without taking extra lump sum. 

BridgetTheCat

Marcon said:

If you have £49K in your ISA now, are paying in £400 a month (say 28 x £400 = £11,200), that's £60,200. Not sure how it will hit £78K by November 2027, unless you are topping it up with 'emergency savings' from another source?

BridgetTheCat said:

Or option 2 which would retain my emergency fund and protect the tax free status of the savings in my ISA. 

Do you have a flexible ISA? If so, you might consider a third option: taking cash from that and then 'repaying' it with a lump sum from one of your DB pensions. Provided you put the money back into the same ISA in the same tax year, it will retain its tax free status and doesn't count as 'new money' - ie you can still put in the maximum ISA contribution for that tax year.

You’re forgetting compound interest on the ISA (interest is paid monthly). Plus £400 is just the regular amount. I put in any money I get as gifts, back pay from the annual pay award etc. as well. That should get me to £64k, which as @MarlowMallard said is the amount I’ll owe in November 2027.

I don’t have a flexible ISA at the moment but I’d do it if the interest rate was good enough.

QrizB

MarlowMallard said:

One thing that stands out here, if you're giving up £11k pa of pension for an extra £60k lump sum, this is a truly awful "commutation ratio" less than 6, so definitely plan on taking the max pension / min lump sum allowed unless you have a life-limiting condition.

I was going to say the same thing.

Unless there's a lot more going on that we're not aware of, you shouldn't be giving any thought at all to taking the £90k lump sum. Stick with £30k and the £26k pa pension.

BridgetTheCat

MarlowMallard said:

BridgetTheCat said:

I have DB pensions (3 deferred, one active) which on current values will give me an income after tax of between £15k and £26k pa depending on the size of lump sum I take. This doesn’t take into account future pay awards or index linking. I will also get PCLSs totalling between £30k and £90k.

 (snip)

Any thoughts?

One thing that stands out here, if you're giving up £11k pa of pension for an extra £60k lump sum, this is a truly awful "commutation ratio" less than 6, so definitely plan on taking the max pension / min lump sum allowed unless you have a life-limiting condition.  (The teachers' scheme has a ratio of 12 which is "poor" and my own scheme is about 17 which is decent ).  If those numbers are right, extend the mortgage a few years if necessary so you keep "enough" savings without taking extra lump sum. 

I’ve calculated the income after tax so that’s probably throwing things off a bit since with a higher income a bigger proportion of it is subject to tax. The figures are also for all 4 pensions combined. They all have different rules so different commutation ratios. I don’t plan on taking more than the 30k anyway.

SarahB16

BridgetTheCat said:

I currently work full time with take-home pay approx £2200 a month or £26400pa. For personal reasons I want to retire at the end of 2029 when I’ll be 60.

I have DB pensions (3 deferred, one active) which on current values will give me an income after tax of between £15k and £26k pa depending on the size of lump sum I take. This doesn’t take into account future pay awards or index linking. I will also get PCLSs totalling between £30k and £90k.

I have been saving £400 a month into my cash ISA for some time and now have £49k. The ISA currently pays interest at 5.4% but that ends in September and I know I’m unlikely to get as good a rate going forward.

I currently owe £78k on my mortgage on a fixed rate of 3.7% until November 2027 - monthly payment £715. Using the MSE calculators I’ve worked out that I should have just enough in my ISA to pay it off in full at that point. It will however take all of my savings, including my emergency fund.

Alternatively, I could take a 2 year fix in November 2027 to take me up to retirement and use my PCLSs and part of the ISA savings to pay it off then.

So I’m in a quandary. Option 1 would give me 2 years mortgage free and still in work to rebuild my savings, which I could do quite quickly given I’d have an extra £1100 per month of disposable income. Or option 2 which would retain my emergency fund and protect the tax free status of the savings in my ISA. 

Any thoughts?

You are in an active DB pension scheme.  Is there an option to make salary sacrifice AVC contributions?  If so then I would do that asap and then when you take that DB pension you will also have your AVC pot and I would use that to pay off (or contribute towards paying off) your mortgage.     

BridgetTheCat

SarahB16 said:

You are in an active DB pension scheme.  Is there an option to make salary sacrifice AVC contributions?  If so then I would do that asap and then when you take that DB pension you will also have your AVC pot and I would use that to pay off (or contribute towards paying off) your mortgage.     

I already pay the maximum permitted into AVCs but it’s not much since I’m not allowed to go below minimum wage. The pot will only be about 5k by the time I retire. (Before anyone runs the figures, part of my current income is from PIP, which can’t be used to buy AVCs).