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  • FIRST POST
    • saucer
    • By saucer 13th May 18, 3:32 PM
    • 90Posts
    • 14Thanks
    saucer
    Tax free lump sum to repay mortgage capital
    • #1
    • 13th May 18, 3:32 PM
    Tax free lump sum to repay mortgage capital 13th May 18 at 3:32 PM
    Hi all

    Following advice on this great forum in the past, I have a SIPP to augment my NHS DB Pension. My wife has also a DB pension in the LGPS. We have a flexible tracker mortgage with FD on which interest is due at BoE Base + 0.49%. We have a healthy level of equity in the house if that is relevant. This is not repayable until a point long after we are both due to retire. I know a lot of people would have priortised the mortgage but we have been saving instead via our pensions, especially mine. I earn significantly more than my wife and have tried to minimise the amount of HRT I am paying, though I still pay a bit. She is well below HRT threshold.

    My plan is to pay the interest, which is comfortably affordable even allowing for a rate rise of a few %, and pay any other spare cash into the LGPS AVC and/or SIPP. As far as I can see we should have accumulated more than enough, all things being equal, to pay off the mortgage in full from these before retiring. Moreover I don't think we will be close to the lifetime allowance on hers or mine.

    My question is whether this is a good plan in principle, and if so whether we should prioritise using the SIPP in my name, or her AVC. My wife is 55 in a couple of years, with me a couple after that, so in theory we could access the pensions soon if needed.

    The benefits of using my SIPP, as I see it, is that I would avoid the bit of HRT I pay, and be able to choose how it is invested (maybe not a good thing!). However I am thinking that paying into the LGPS AVC has the real advantage of allowing us build up a good sum that she could take tax free and pay off a lot of the mortgage balance (at least to the point that it is less than 25% of her total pension pot). We would then pay off the rest via my SIPP and or NHS TFLS when I take that.

    I am aware that touching either of our pensions will mean that we would have to effectively stop any further pension contributions, so we would not want to be paying off the mortgage capital until we are ready to stop growing our pensions. I suppose another option would be to go with the option on S+S Isas instead of the pensions.

    Your thoughts would be very much appreciated
Page 1
    • Dox
    • By Dox 13th May 18, 5:33 PM
    • 743 Posts
    • 507 Thanks
    Dox
    • #2
    • 13th May 18, 5:33 PM
    • #2
    • 13th May 18, 5:33 PM
    I am aware that touching either of our pensions will mean that we would have to effectively stop any further pension contributions, so we would not want to be paying off the mortgage capital until we are ready to stop growing our pensions. I suppose another option would be to go with the option on S+S Isas instead of the pensions.
    Originally posted by saucer
    Not necessarily. You are only caught by the money purchase pension allowance, restricting you to tax relief on 4K a year pension contributions, if you access your benefits 'flexibly'. Taking 25% of your SIPP doesn't fall into that category. More info at https://www.pensionsadvisoryservice.org.uk/news/the-money-purchase-annual-allowance-is-dropping-to-4000-how-does-it-affect
    • kidmugsy
    • By kidmugsy 13th May 18, 6:22 PM
    • 11,051 Posts
    • 7,607 Thanks
    kidmugsy
    • #3
    • 13th May 18, 6:22 PM
    • #3
    • 13th May 18, 6:22 PM
    Presumably she can't take a lump sum from the AVC without taking the LGPS pension too? Then in your shoes I wouldn't want her to touch the AVCs until she is ready to retire.

    Why not put more into your SIPP - enough at least to avoid HRT - and then start using TFLS to pay down the mortgage in four years time? As your outgoings correspondingly fall you can aim either to contribute more to her AVC or, if you see an advantage, contribute to a SIPP for her.

    Another possibility is to take the higher risk option of making no attempt to overpay the mortgage: just accumulate more in your pensions (as long as you are not in danger of hitting the Lifetime Allowance).
    Free the dunston one next time too.
    • saucer
    • By saucer 13th May 18, 6:34 PM
    • 90 Posts
    • 14 Thanks
    saucer
    • #4
    • 13th May 18, 6:34 PM
    • #4
    • 13th May 18, 6:34 PM
    Presumably she can't take a lump sum from the AVC without taking the LGPS pension too? Then in your shoes I wouldn't want her to touch the AVCs until she is ready to retire..
    Originally posted by kidmugsy
    The plan is for her to retire at 61 at which point we would pay off the mortgage, all things being equal. I am thinking that the ability to take the LGPS AVC completely tax-free would make this more preferential to a SIPP. Isnt a SIPP only going to be 25% tax free?
  • jamesd
    • #5
    • 14th May 18, 12:03 AM
    • #5
    • 14th May 18, 12:03 AM
    You can take a tax free lump sum or a defined benefit pension income without triggering the money purchase annual allowance that would restrict pension contributions.

    Why pay off the mortgage when she's 61 if the mortgage has a lot longer to run? I could pay mine off now, but won't.

    The LGPS AVC deal is a good one for reducing the lost guaranteed income cost of taking the maximum lump sup. Your higher rate tax saving first, then this looks good.

    Do you have other savings? I'm wondering about the potential to:

    1. Make higher pension contributions then take tax free lump sum from the pensions at 55. No recycling rule issue if you establish a higher regular payment pattern several years before the two years before the tax year in which the lump sum is taken.
    2. Using the 30% VCT relief to further lower your effective income tax rates.
    • MK62
    • By MK62 14th May 18, 8:12 AM
    • 166 Posts
    • 113 Thanks
    MK62
    • #6
    • 14th May 18, 8:12 AM
    • #6
    • 14th May 18, 8:12 AM
    I am aware that touching either of our pensions will mean that we would have to effectively stop any further pension contributions, so we would not want to be paying off the mortgage capital until we are ready to stop growing our pensions. I suppose another option would be to go with the option on S+S Isas instead of the pensions.

    Your thoughts would be very much appreciated
    Originally posted by saucer

    You may have to stop contributing to your current employer schemes, but that doesn't mean you have to stop contributing to your pensions altogether.
    You can still contribute to your SIPP (and your wife's)...even if those contributions were limited (by MPAA or relevant earnings etc etc)

    Stocks and Shares ISAs are another option, but you would probably want to maximise your pension/SIPP contributions first, for the tax relief, especially if you are a 40% tax payer.

    As long as your mortgage interest rate is below your savings/investment return rate, I don't think I'd pay the mortgage off at all (until due that is)......if you are paying BR+0.49% (so 0.99%), that's below what you could get in returns, even sticking the money in a variety of savings accounts.....2%, or thereabouts, should be achievable there.
    Obviously this can change, so just keep an eye on it.


    Then there's that car....cruise....
    • Thrugelmir
    • By Thrugelmir 14th May 18, 5:42 PM
    • 59,217 Posts
    • 52,601 Thanks
    Thrugelmir
    • #7
    • 14th May 18, 5:42 PM
    • #7
    • 14th May 18, 5:42 PM
    As long as your mortgage interest rate is below your savings/investment return rate, I don't think I'd pay the mortgage off at all (until due that is)......
    Originally posted by MK62
    Unless you hold the money as cash. Returns are far from guaranteed.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • saucer
    • By saucer 15th May 18, 11:57 AM
    • 90 Posts
    • 14 Thanks
    saucer
    • #8
    • 15th May 18, 11:57 AM
    • #8
    • 15th May 18, 11:57 AM
    Unless you hold the money as cash. Returns are far from guaranteed.
    Originally posted by Thrugelmir
    Indeed, thanks! That is the reason I would not be brave enough to save to pay off my mortgage via VCTs regardless of the tax breaks. I think we have enough lee way however to do it via both the LGPS AVC and my SIPP
    Last edited by saucer; 15-05-2018 at 12:01 PM.
    • GAD1981
    • By GAD1981 15th May 18, 10:40 PM
    • 15 Posts
    • 12 Thanks
    GAD1981
    • #9
    • 15th May 18, 10:40 PM
    • #9
    • 15th May 18, 10:40 PM
    I think my concern would be there is no guarantee, although it's a bold move for those who do it!
    • saucer
    • By saucer 15th May 18, 10:50 PM
    • 90 Posts
    • 14 Thanks
    saucer
    I think my concern would be there is no guarantee, although it's a bold move for those who do it!
    Originally posted by GAD1981

    Do you mean VCTs or using the AVC to build up the fund to pay off mortgage capital? I spoke to Prudential today and it seems we could have an AVC fund that is quite flexible and could be substantially safe/cash based if we wanted. This would at least mean that the fund would grow modestly and be available tax free, assuming the rules dont change between now and then (8 years or so).
  • jamesd
    That is the reason I would not be brave enough to save to pay off my mortgage via VCTs regardless of the tax breaks.
    Originally posted by saucer
    VCTs are more about smaller company investing to cut the ongoing tax burden. Once you've bought for five years you can just recycle the same money.

    No guarantees refers to investing in general. Includes SIPP and value of AVCs as well as VCTs.
    • saucer
    • By saucer 16th May 18, 10:02 AM
    • 90 Posts
    • 14 Thanks
    saucer
    VCTs are more about smaller company investing to cut the ongoing tax burden. Once you've bought for five years you can just recycle the same money.

    No guarantees refers to investing in general. Includes SIPP and value of AVCs as well as VCTs.
    Originally posted by jamesd

    Thanks James. I thought that but I had a look at VCTs, noting that you seem keen on them, but they look a lot more risky than some other investments, especially when I need to be confident that I will get back most of what I invest. I know this is never guaranteed, but given I will at some stage have to pay off mortgage capital, I am want to be conservative, while getting the benefit of the 100% tax free element of the LGPS AVC.


    I very much appreciate yours and other peoples views on this plan.
    • MK62
    • By MK62 16th May 18, 10:36 AM
    • 166 Posts
    • 113 Thanks
    MK62
    I think you only get that benefit within the overall limit of 25% of your total pension value though.....it's not in addition to that I don't think!
    • saucer
    • By saucer 16th May 18, 11:26 AM
    • 90 Posts
    • 14 Thanks
    saucer
    I think you only get that benefit within the overall limit of 25% of your total pension value though.....it's not in addition to that I don't think!
    Originally posted by MK62

    No I understand that, but as it is we would be looking at a regular pension with a small non-optional lump sum, versus building up a much larger AVC which would still be less than 25% of the total value, and therefore could be taken tax free, under current rules at least. That seems like a good idea/plan to me but I wanted to see what people thought.
    • MK62
    • By MK62 16th May 18, 11:42 AM
    • 166 Posts
    • 113 Thanks
    MK62
    OK, well any tax free lump sum is always welcome, especially you get given tax relief while you save it. If your TFLS from your main account is limited, then it would seem your AVC plan could be a good one, given it could all be tax-free when withdrawn vs the 25% from a SIPP.


    You need to do some modelling and see what return you need to make on your tax relief boosted AVCs, in order to arrive at your desired outcome....and see if you feel it's realistic....and then compare it to paying down the mortgage debt with the same money.
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