Between rock and hard place ?

deejaybee · 9 July 2018 at 7:59PM

Hello all,

I have copied /pasted a bit of a brain dump below ( from mortgages forum ) - i asked for advice on which fixed rate to take next, and that threw up some questions regarding proritising overpaying mortgage or putting it into pension.

The new fixed rate will save me £100 a month, but i could add the same again at least, but at age 58 is it worth it ?

Anyway i will leave it there for now :

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Regarding the overpay mortgage/increase pension payments question:

Now that i have sorted the mortgage out, i am planning to start a thread over on the Pension forum, where i will go into more detail..

But, briefly, i think i am between a rock and a hard place,

I am 58 later this year, and the mortgage is scheduled until age 70 - i dont want to be working at that age, but i accept that until mortgage is paid off, i have to keep grafting - so that points towards overpayment..

On the other hand, i havnt contributed to a pension ( apart from state pension) in the 8 years or so i have been (pseudo) S/E..
Myself and OH are on course for full SP, i have been taking a 2K a year pension since age 55 to build up rainy day fund, and will continue with that.. also have an approx 5K a year pension ( if no TFLS ) at age 65.

But i know they are kiddy figures compared to a lot of folks on here... i went thru a divorce in my 40's which knocked me back a lot financially..

So i am in a quandary whether to try to clear mortgage asap, or whether to improve my pension outlook with not too many years left, or try to do both ? I dont want to work till i drop, but dont want to be retired in poverty either.

My retirement age for SP is 66 and 7 months.

Potentially there is inheritance somewhere over the horizon, and also a recent tribunal decision has raised possibility of getting several years of holiday pay backpaid.

I am NOT including any of those in my outlook/calculations.

Sorry its a bit of a brain dump, hope it makes sense sort of ?

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Brynsam · 9 July 2018 at 9:52PM

The gist of the question (although perhaps not the detail as presented!) does 'sort of' make sense - but a brain dump is no substitute for doing your sums thoroughly. Your attitude to risk will be a major influence.

You need to sit down with a spreadsheet (or pen and paper, plus abacus, as you prefer) and work out which is likely to get you a bigger saving; a better return; and, most importantly, how doing one rather than the other would impact on cashflow.

Not really sure why you say you are between a rock and hard place - you aren't on the breadline and you have choices. Use them wisely and if necessary get yourself some personal financial advice, based on all the facts, not just a few lines pasted on a website. It doesn't give strangers much to go on and won't get you the best outcome.

jamesd · 10 July 2018 at 1:02AM

Please say more about the pension you've been taking for two years. Is it defined benefit, like final salary, did you buy an annuity, are you in capped drawdown, are you in flexi-access drawdown?

There's no real prospect of directly overpaying the mortgage being best. This is because you're 55 or older, so you can pay money into a pension with tax relief and a couple of months later take out the 25% tax free lump sum. So if just getting basic rate tax relief you could pay in £100, have £25 added to give you 20% basic rate relief then take out £31.25 as a tax free lump sum. The remaining £93.75 should normally be left for later because taking it triggers a limit of £4000 a year for your future pension contributions, my initial questions were to try to find out whether you're already subject to this limit. There's a partial workaround that lets you take up to £10000 up to three times.

So at a minimum, run the money through a pension first.

Are you self-employed or an employee of your own limited company?

Is your OH also 55 or older? Are they working or likely to want to pay more than £4000 a year into pensions in the future? Are they currently paying £2880 into a pension and withdrawing £3600 after the tax relief has been added each year? You're entitled to the basic rate relief on 2880 net een if not working and not paying tax.

deejaybee · 10 July 2018 at 6:50AM

Hello jamesd

Apologies, i should have added more information.

The pension i am currently taking is final salary based ( Royal Mail ).
I worked there for 4 +1/2 years ( was meant to be just an in between job, as i had done around 12 years in IT previously ).

While at RM i transferred 3 small pensions into their scheme ( 2 x occupational and 1 x private ) so i ended up with around 11 years worth of service in RM scheme.

I took the RM pension at age 55, as i needed the lump sum to pay back family who had kindly helped us out when we got back on property ladder. ( i fully realise taking it early is not the best thing to do ).

It is index-linked, but does include an allowance ( 600 ish per year ) which stops at state pension age ( something to do with lower earnings allowance )

I have been saving the £2K ish per year, to build up rainy day fund, as the nature of my " self employment" is not the most secure, although i have done 8 years or so up to now.

Currently i am officially self employed on a sole trader basis, although the courier company who provide my work has just been taken to an employment tribunal by GMB union & Leigh Day - the result was that we should be classed as " workers under direction" - which would mean that we are still self employed, but with more rights such as holiday pay etc. The company has another 30 days or so to decide if they will appeal the ruling, which i imagine they will do.

I earn an average sort of "salary", around 25-28K profit per tax year, after expenses, so although the recent tribunal also targeted couriers not reaching national minimum wage, i am fortunate in doing a very rural round which attracts a premium rate ( not so fortunate this time of year trying to avoid holiday makers who cannot reverse in the lanes ! )

My wife is 53, her pension provision is even worse than mine !

She works around 32 hours a week on not much more than NMW, she has worked for very small companies these last few years which have not had pension schemes, BUT her current employer ( been there 1 year ) has very recently joined auto-enrolment, so she has started a NEST scheme. ( we are going to check which fund she is paying into, and percentages going in etc )

Apart from that, she has a deferred NHS fund, around £1K a year from memory, and a small ( 5K ish ) pot, i think with prudential, which she is planning to take as a "trivial" pot at age 55 if possible.

Hope that helps ?

If overpaying the mortgage is not the best, i guess i would be looking at TFLS's / inheritance / backpaid holiday pay / lottery win to clear it early ? ;-)

atush · 10 July 2018 at 8:44AM

I would concentrate on PP contributions for both of you now, instead of overpayments. Knowing your interest rate will help.

Later, when you take the tfls, use this to pay a lump sum off mtg.

Every 80 you both put in, nets you another 20. In her dase plus hervemployers contributions. So have her join Today.

deejaybee · 10 July 2018 at 9:06AM

Hi atush,

thanks for input.

mortgage rate will be 1.99 for 3 years from Oct 1st.

Yep, my wife has joined the Nest scheme as of a couple of months ago, we need to confirm what % of her pay is going in ( they have started putting her monthly payslips in " the cloud" rather than hard copies, and it isnt functioning properly at present :-( )

So it looks like PP is the way to go, i will give Hargreaves Lansdown a call and get some info posted out.

Off to work in a bit, check back later.

justme111 · 10 July 2018 at 9:31AM

so what is a rock and what is a hard place?
(rhetoric question for you to ponder)
so you pay tax and NI on about 15k a year , right? which would be what - about 4 -5 k out of your 26 k income? how much are your mortgage payments a year? Let's say £8000.
It means you need about 13 k without mortgage to have the same lifestyle. Between full SP and your 2 pensions (2k +5k ) you have it covered.
Whether you would be able to stop working earlier depends on whether you would be able to reduce your spending now to put money freed either into mortgage (cycling it through pension first as jamesd described) or into pension. The exact best course of action depending in your mortgage rate ,how much you have spare, abiity to overpay, attitude to risk and desire and abiity to introduce some complexity into your affairs.

jamesd · 10 July 2018 at 1:10PM

Your OH should use the "small pots rule" if she wants to take out anything beyond the tax free lump sum. If she uses the UFPLS method instead her annual allowance for pension contributions will be reduced to 4000. The small pots rule can be used up to three times per human lifetime to take out up to 10000 from a pension pot and it must also be all of the money in that pot. It's 25% tax free, 75% taxable. It'll be worthwhile to add money to get the pot closer to 10000 before doing it.

jamesd · 10 July 2018 at 1:29PM

Since the pension you're getting is defined benefit you haven't caused the reduction in your annual allowance tob 4000 a year.

You might ask HL how they handle this sequence:

1. you pay in 10600
2. you wait for tax relief of 2650 to be paid into the pot by HMRC taking it to 13250
3. you take a tax free lump sum of 3312.50 and place the remaining 9937.50 into flexi-access drawdown
4. you use the small pots rule to withdraw the 9937.50

The amounts are deliberately a little below the maximums because HL will pay some interest and you must stay below 10000 for step 4.

The first benefit for you is getting out the 3312.50 free of tax, which makes a tax gain for you of 662.50. But on top of that you reduce your NI bill by eliminating it on the 13250. No NI to pay on the 9937.50, just income tax. Assuming 9% class 4 NI that's another 1192.50 you save. Total gain for you of 1855.

deejaybee · 10 July 2018 at 7:56PM

justme111 wrote: »

so what is a rock and what is a hard place?
(rhetoric question for you to ponder)
so you pay tax and NI on about 15k a year , right? which would be what - about 4 -5 k out of your 26 k income? how much are your mortgage payments a year? Let's say £8000.
It means you need about 13 k without mortgage to have the same lifestyle. Between full SP and your 2 pensions (2k +5k ) you have it covered.
Whether you would be able to stop working earlier depends on whether you would be able to reduce your spending now to put money freed either into mortgage (cycling it through pension first as jamesd described) or into pension. The exact best course of action depending in your mortgage rate ,how much you have spare, abiity to overpay, attitude to risk and desire and abiity to introduce some complexity into your affairs.

My tax + NI is running at around 6K per year ( my 2K pension income obviously bumps up my overall figure )

mortgage will be around 10 K per year

So if i take 10 K + 6 K from 28 K , that leaves 12 K to find

That obviously ignores what my OH earns ( around 12K )

deejaybee · 10 July 2018 at 8:00PM

jamesd wrote: »

Since the pension you're getting is defined benefit you haven't caused the reduction in your annual allowance tob 4000 a year.

You might ask HL how they handle this sequence:

1. you pay in 10600
2. you wait for tax relief of 2650 to be paid into the pot by HMRC taking it to 13250
3. you take a tax free lump sum of 3312.50 and place the remaining 9937.50 into flexi-access drawdown
4. you use the small pots rule to withdraw the 9937.50

The amounts are deliberately a little below the maximums because HL will pay some interest and you must stay below 10000 for step 4.

The first benefit for you is getting out the 3312.50 free of tax, which makes a tax gain for you of 662.50. But on top of that you reduce your NI bill by eliminating it on the 13250. No NI to pay on the 9937.50, just income tax. Assuming 9% class 4 NI that's another 1192.50 you save. Total gain for you of 1855.

James, is the 10,600 to go in as a lump sum ( which i dont have ) or to be trickled in at 100/200/300 etc a month ?
And as you mention interest, i assumed you mean a HL cash account.

Between rock and hard place ?

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