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  • FIRST POST
    • bonwitco
    • By bonwitco 9th May 18, 10:04 PM
    • 4Posts
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    bonwitco
    Mortgage and Pensions
    • #1
    • 9th May 18, 10:04 PM
    Mortgage and Pensions 9th May 18 at 10:04 PM
    Hi. I'm 58. In full time employment. Live with my wife who works part time (same age) but we have an outstanding interest only mortgage which ends in 2024. Current mortgage balance is app. £110k with an interest rate of 3.5%. I am a member of a defined benefit pension scheme which currently stands at providing a lump sum of £90k and a reduced pension of £13k. I also have another small pension with a current pot value of app £40k. This has an annual growth of app 4% over the past number of years. If I wanted to retire age 60, would it be best to pay an extra £500 per month on the mortgage or pay this £500 into the other pension scheme between now and age 60? I ask as I am assuming I could take the smaller pension as "drawdown"? My understanding being that with a drawdown you can withdraw amounts annually which would be taxed at the basic rate (up to the basic rate tax allowance) without paying extra income tax? Or are there better ways of maximising our available cash at retirement?
Page 1
    • Dox
    • By Dox 10th May 18, 12:27 AM
    • 1,200 Posts
    • 908 Thanks
    Dox
    • #2
    • 10th May 18, 12:27 AM
    • #2
    • 10th May 18, 12:27 AM
    Is your smaller pension in an arrangement which will permit drawdown? If not, you will need to transfer to one which will, if you decide this is how you want to proceed. If it's a DC pot, financial advice is not a legal requirement before the transfer can proceed, unless the scheme has guarantees or similar.

    Not really enough info to comment helpfully on the remainder of your question but I'm sure someone else will feel able to add more useful comments than I can. In the meantime worth doing your sums and seeing how the figures stack up.
    • Spreadsheetman
    • By Spreadsheetman 10th May 18, 8:14 AM
    • 189 Posts
    • 219 Thanks
    Spreadsheetman
    • #3
    • 10th May 18, 8:14 AM
    • #3
    • 10th May 18, 8:14 AM
    What is the plan for paying off the mortgage capital? Is that from the DB pension lump sum plus 20k from elsewhere?

    You can draw the DC pension down as you say (assuming your scheme allows it - if it doesn't then a transfer elsewhere is straightforward) except you will get 25% tax free and the rest will be subject to normal taxation.
    • MallyGirl
    • By MallyGirl 10th May 18, 9:56 AM
    • 3,368 Posts
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    MallyGirl
    • #4
    • 10th May 18, 9:56 AM
    • #4
    • 10th May 18, 9:56 AM
    If I wanted to retire age 60, would it be best to pay an extra £500 per month on the mortgage or pay this £500 into the other pension scheme between now and age 60?
    Originally posted by bonwitco
    Any money you pay into a pension is tax free so you will get an instant boost of 25% (or more if you are a high rate tax payer). If by salary sacrifice then you can save on NI as well
    Last edited by MallyGirl; 10-05-2018 at 10:13 AM.
    • atush
    • By atush 10th May 18, 12:04 PM
    • 17,505 Posts
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    atush
    • #5
    • 10th May 18, 12:04 PM
    • #5
    • 10th May 18, 12:04 PM
    What was your original plan to pay off the mtg?

    3.5% is a pretty high rate. I might use some to pay off mtg, the rest to pension.

    Pensions do get the TR bump, but 3.5% is pretty high in these days of low bank rates.
  • jamesd
    • #6
    • 10th May 18, 2:46 PM
    • #6
    • 10th May 18, 2:46 PM
    Yes, paying into a defined contribution pension looks like a good move. Don't be in any hurry to pay off the mortgage, just make those pension contributions to benefit from the tax relief.

    I also mean don't just pay it off at 60. Higher income is usually a better deal than lump sum for defined benefit pensions but there are exceptions, like those which have a compulsory lump sum.

    Since you've reached 55 you can take a 25% tax free lump sum from the £40k now and recycle it into new pension contributions to get tax relief again. To stay within the recycling limits, either:

    1. take the payment into a bank account in your sole name then give it to your wife for her to make contributions in her name (pension), or
    2. take no more than £7,500 tax free lump sum in each rolling 12 month period, not tax year, and make contributions in your name.

    The 75% can be left in a flexi-access drawdown account until you're willing to have your contributions capped at £4,000 a year. Given the tax taking money out, having you wife do it seems like the best tax planning. Maybe for the £500 a month as well if her income doesn't cap her below that. Assuming you both get the same relief on the way in.

    Then see how close you can get to having these pots get to the mortgage balance.
    • kidmugsy
    • By kidmugsy 10th May 18, 7:01 PM
    • 12,480 Posts
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    kidmugsy
    • #7
    • 10th May 18, 7:01 PM
    • #7
    • 10th May 18, 7:01 PM
    Not only might you look to get the interest rate down when the chance arises, you could also look to extend a reduced mortgage if it were financially advantageous. Some providers offer mortgages to a ripe old age now.
    Free the dunston one next time too.
    • bonwitco
    • By bonwitco 12th May 18, 10:59 AM
    • 4 Posts
    • 3 Thanks
    bonwitco
    • #8
    • 12th May 18, 10:59 AM
    • #8
    • 12th May 18, 10:59 AM
    Hi. After gathering "up-to-date" information for all of you (and myself) who took the time to respond with very helpful information. The current mortgage interest rate is 2.49%. Defined as 1.99% above BBR? My DB pension scheme allows a maximum of 25% as a lump sum. It also currently offers (in addition) to pay a calculated amount of your state pension from retirement until your reach state pension age. At which point this additional amount is stopped. The personal pension, to which I am not currently contributing to, is described as "A type of pension personal savings plan". In the annual statement is the type "Personal pension plan - unitised with profit" with a paragraph explaining "; "As you hold investments in the Unitised with profits series 1 fund, the annual rate of bonus for accumulation units is guaranteed to be not less than 4%". I have requested from them confirmation that this has the facility to be used as a drawdown. I am assuming the personal pension giving a 4% minimum rate of bonus to be rather good in the current financial climate? But can I ask for confirmation that the drawdown type of pension allows you to take annual lump sums without paying tax? I have also asked about making contributions to this plan in the hope it does offer a flexible drawdown. The DB pension does not accept any additional contributions. They do however offer the option of AVC,s which I believe can be added to the DB pot on retirement but there is no definition of the interest I can expect to obtain from these AVCs and you must select your own type(s) of investment, i.e. low or high risk.
    Last edited by bonwitco; 12-05-2018 at 12:50 PM. Reason: sentence in the wrong place
    • kidmugsy
    • By kidmugsy 12th May 18, 1:14 PM
    • 12,480 Posts
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    kidmugsy
    • #9
    • 12th May 18, 1:14 PM
    • #9
    • 12th May 18, 1:14 PM
    My DB pension scheme allows a maximum of 25% as a lump sum. ... The DB pension does not accept any additional contributions. They do however offer the option of AVCs which I believe can be added to the DB pot on retirement but there is no definition of the interest I can expect to obtain from these AVCs and you must select your own type(s) of investment, i.e. low or high risk
    Originally posted by bonwitco
    If you plan to withdraw the AVCs in only two years time you'd surely opt for the lowest risk available, which may well be a cash or deposit fund. In some schemes AVCs are very effective at giving you a larger TFLS. You should probably read the rules closely.

    The personal pension, to which I am not currently contributing to, is described as "A type of pension personal savings plan". In the annual statement is the type "Personal pension plan - unitised with profit" with a paragraph explaining "; "As you hold investments in the Unitised with profits series 1 fund, the annual rate of bonus for accumulation units is guaranteed to be not less than 4%". ... . I am assuming the personal pension giving a 4% minimum rate of bonus to be rather good in the current financial climate?
    Originally posted by bonwitco
    It sounds pretty handy for someone only a couple of years away from retirement.

    But can I ask for confirmation that the drawdown type of pension allows you to take annual lump sums without paying tax? I have also asked about making contributions to this plan in the hope it does offer a flexible drawdown.
    Originally posted by bonwitco
    There may be a problem there: if the pension was designed in an era before mass use of drawdown they may not have the software to support drawdown of the flexible sort you presumably want. You'll just have to ask. In your shoes I'd also ask whether transferring out to a more modern pension would necessarily put your capital at risk (e.g. by a market value reduction), or cost you your bonuses.
    Free the dunston one next time too.
    • FatherAbraham
    • By FatherAbraham 13th May 18, 12:15 PM
    • 917 Posts
    • 682 Thanks
    FatherAbraham
    Any money you pay into a pension is tax free so you will get an instant boost of 25% (or more if you are a high rate tax payer). If by salary sacrifice then you can save on NI as well
    Originally posted by MallyGirl
    Nonsense. Money paid into a pension is tax deferred.

    Stop over-egging the pudding.

    Warmest regards,
    FA
    • atush
    • By atush 13th May 18, 6:42 PM
    • 17,505 Posts
    • 11,013 Thanks
    atush
    You stop underegging it then.

    There is a net gain with pension, even if tax is paid at BR. But many people draw a pension using their full PA and dont pay tax on the income up to that level.
  • jamesd
    Nonsense. Money paid into a pension is tax deferred.FA
    Originally posted by FatherAbraham
    Lets use a real example, the roughly £10,000 part of my pay where I get:

    1. 40% income tax relief. £10,000 into the pension, net cost £6,000 so far.
    2. 12% employee NI saved because the higher rate income isn't from the job where the sacrifice is happening. Net cost now £4,800, £10,000 in the pension.
    3. 6.8% added by my employer as part of their employer NI saving. Net cost £4,800, £10,680 in the pension.

    I'm 55 or older so now:

    4. I take a tax free lumps sum of 25% and place the 75% into flexi-access drawdown for later. £10,680 * 0.25 = £2,670 out, £8,010 left in the pension. Net cost now £2,130 with £8,010 taxable in the pension.

    I can do this now, in and just after the current tax year, so you might not like the calculation, but it's reality for me and I do intend to do it.

    5. Later, I draw out £45,000 a year of taxable pension money to be within the basic rate band, long before I reach my state pension age but when retired. £11,500 is tax free within my personal allowance and the remaining £33,500 is taxed at 20% so net out is £11,500 + 0.80 * £33,500 = £38,300. Effective tax rate on the £45,000 is (45,000 - 38,300) / 45,000 * 100 = 14.89%.

    Applying that effective tax rate to the £8,010 from earlier that's £8,010 * (1 - 0.1489) = £6,817.31 after tax out from a net cost of £2,130, a pure tax and NI gain of £6,817.31 - £2,130 = £4,687.31.

    £4,687.31 tax and NI gain on £10,000 of contribution by me, 46.87% gain on the money, after taking into account deferred taxation, before investment performance.

    This is an unusually good portion of my income and most of my pension contributions don't do as well but it's no less real because it's unusually good. Definitely would be over-egging it to expect this on all contributions.

    Then I'll eliminate the income tax on the way out with VCT buying.

    It was good to see your posts today.
    Last edited by jamesd; 13-05-2018 at 8:29 PM.
    • bonwitco
    • By bonwitco 29th Jan 19, 10:33 PM
    • 4 Posts
    • 3 Thanks
    bonwitco
    Hi. Another thing I have recently been made aware of about my defined benefit pension scheme is that you can take the cash equivalent. i.e. one option is as stated earlier. If the pot value is £320k. Option 1. An annual pension of £18k with no lump sum. Option 2. A reduced pension of £13k & 25% lump sum of app. £90k or. Option 3. Take the cash value or CETV which would be approximately £432k. I am told if I take the cash value then I get 25% tax free then pay tax on the balance. Currently I am a 40% tax payer so this would be a considerable amount to give away to the tax people! I have also been made aware of SIPP and SSAS. Iím becoming more and more confused! Is it possible to take the CETV without paying the tax, put it in the bank and allow yourself a set amount per year as a pension, paying the income tax monthly/annually? Or is it a must that you invest the money in a pension scheme? The reason I ask is. Personal pension schemes cost money. When I die (if I go before my wife) the defined benefit pension continues at 50% of what I was receiving. When my wife dies, the benefits stop. If I took the CETV and did not have to pay 40% tax on 75% of this sum then I could make the pension last over 28 years. Assuming I go before the pension fund diminishes to zero then there would be money left for my children but itís becoming more and more apparent that you must purchase a pension from a pension provider. Could someone simplify the growing complexity of pensions for me to be able to maximise the money I have possibly available from my defined benefit pension?
    • kidmugsy
    • By kidmugsy 29th Jan 19, 11:44 PM
    • 12,480 Posts
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    kidmugsy
    my defined benefit pension scheme is that you can take the cash equivalent. i.e. one option is as stated earlier. If the pot value is £320k. ...
    Originally posted by bonwitco
    There is no pot: a DB pension consists of a set of promises not a pot of money. Why not tell us what the promises are? 50% widow's pension? Inflation-linking to what .. perhaps CPI uncapped? CPI limited to 2.5%? ...

    Option 1. An annual pension of £18k with no lump sum. Option 2. A reduced pension of £13k ... lump sum of app. £90k
    Originally posted by bonwitco
    Giving up an index-linked £5k p.a. seems an expensive way to buy £90k of capital even if you allow for the £5k being taxed and the £90k being tax-free. Unless the index-linking protection is feeble.



    Option 3. Take the ... CETV which would be approximately £432k. I am told if I take the cash value then I get 25% tax free then pay tax on the balance. ... Is it possible to take the CETV without paying the tax, put it in the bank and allow yourself a set amount per year as a pension, paying the income tax monthly/annually? Or is it a must that you invest the money in a pension scheme?
    Originally posted by bonwitco
    You are confused. If you took the CETV then you end up with a pension scheme with a pension provider. You give them instructions. For example you might tell them to pay you the whole Tax-Free Lump Sum (approx £108k) and a monthly (taxable) £2,000. You will also instruct them what the capital is to be invested in. If you choose a mass market provider your choice of investments will probably be narrower than for a niche provider but the charges you pay will be probably be lower. To effect such a transfer you are obliged to hire an IFA: he will explain to you how you might manage your new pension.

    Quite possibly though, he will tell you that unless you have an objective reason to expect a short life for you and your wife you would be wiser to stay in your DB scheme. The multiple you are being offered, equal to 24, is rather underwhelming.
    Free the dunston one next time too.
    • GunJack
    • By GunJack 30th Jan 19, 11:07 AM
    • 10,538 Posts
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    GunJack
    What age can you take the DB pension without actuarial reduction??
    ......Gettin' There, Wherever There is......
  • jamesd
    If you were to transfer it would be into a personal pension. Just like your other one you can take 25% of any portion of it as a tax free lump sum and you can take bits of the taxable 75% whenever you like, with the money you take added to your taxable income in the tax year you take it, administered via PAYE operated by the pension scheme.

    24x multiple isn't particularly good, perhaps a public sector pension.

    Drawdown: safe withdrawal rates has lots of information on income drawdown and how much income you could prudently take depending on the drawdown rules you choose. Starting at about 5% - £21,600 - but potentially skipping inflation increases or taking cuts beyond that if investments do badly, assuming you use the Guyton-Klinger rules.
    • xylophone
    • By xylophone 7th Feb 19, 2:51 PM
    • 28,388 Posts
    • 17,179 Thanks
    xylophone
    You would be required to take advice from a Pension Transfer Specialist before transfer of your DB pension to a DC scheme.

    This would not be cheap.

    Without a positive recommendation to transfer, your choice of pension
    provider would be limited.

    https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/495377/pension-benefits-with-a-guarantee-factsheet-jan-2016.pdf

    https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-transfers-conversions/
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