Pension Lump Sum & Mortgage...
Discussion
Just wanted to run something by this forum and get some feedback....
I’m currently in my early 30s but already thinking very hard about retirement and my life after work, and am planning to retire with pension at the earliest opportunity (which I think will be aged 57 assuming no further legislation change after 2028).
Based on my projections I’m anticipating a max PCLS of c. £100k-£125k based on an overall pension of £400-£500k.
We’re looking to move home in a year or two and based on what I know about my pension, I’m calculating what level of mortgage I’m comfortable with us taking out by factoring in the fact that I’m happy to have a c. £100k balance left at age 57 and that essentially when I retire, I take the lump sum, pay the house off and bish bosh.
I was chatting about this to a colleague and they recoiled in horror at my ‘risky’ approach. Is it him or me who is completely missing the point?
I feel like I’m doing all the right things - thinking hard about my life after work even though it’s 25 years away, deliberately paying the right amount in my pension so that I only pay basic rate tax - I’m considering my approach to be quite the opposite of ‘risky’ and actually quite well thought out and prudent. Stretching myself now for a better retirement as it were.
Of course we could just stay put and pay a much smaller mortgage, but I feel like we should get into the highest value house we can afford (obviously taking into account potential interest rises etc and making sure we’re comfortable with the payments) now so that come retirement we have an asset with a bigger value.
I basically just wanted some validation that stretching myself now in order to gain in the future made sound sense, and that actively planning to have an outstanding mortgage balance on retirement roughly equivalent to my PCLS is not an inherently bad thing? We have no kids and are not planning on having any so it certainly doesn’t seem risky to me at all to be thinking along the lines I’m thinking.
I’ve never really given it too much thought until now but I’d suspect paying off a mortgage is what an awful lot of people use a PCLS for?
Thanks!
I’m currently in my early 30s but already thinking very hard about retirement and my life after work, and am planning to retire with pension at the earliest opportunity (which I think will be aged 57 assuming no further legislation change after 2028).
Based on my projections I’m anticipating a max PCLS of c. £100k-£125k based on an overall pension of £400-£500k.
We’re looking to move home in a year or two and based on what I know about my pension, I’m calculating what level of mortgage I’m comfortable with us taking out by factoring in the fact that I’m happy to have a c. £100k balance left at age 57 and that essentially when I retire, I take the lump sum, pay the house off and bish bosh.
I was chatting about this to a colleague and they recoiled in horror at my ‘risky’ approach. Is it him or me who is completely missing the point?
I feel like I’m doing all the right things - thinking hard about my life after work even though it’s 25 years away, deliberately paying the right amount in my pension so that I only pay basic rate tax - I’m considering my approach to be quite the opposite of ‘risky’ and actually quite well thought out and prudent. Stretching myself now for a better retirement as it were.
Of course we could just stay put and pay a much smaller mortgage, but I feel like we should get into the highest value house we can afford (obviously taking into account potential interest rises etc and making sure we’re comfortable with the payments) now so that come retirement we have an asset with a bigger value.
I basically just wanted some validation that stretching myself now in order to gain in the future made sound sense, and that actively planning to have an outstanding mortgage balance on retirement roughly equivalent to my PCLS is not an inherently bad thing? We have no kids and are not planning on having any so it certainly doesn’t seem risky to me at all to be thinking along the lines I’m thinking.
I’ve never really given it too much thought until now but I’d suspect paying off a mortgage is what an awful lot of people use a PCLS for?
Thanks!
I'm no expert but you appear to have it covered.
I guess your income might rise too in the next 25 years so you have a decent chance of over paying that mortgage and / or adding in more pension contributions. Personally I would over pay the mortgage first as this might have a more immediate affect on your lifestyle and I am slightly wary of tying all my money up in a pension which i can't touch until 55. I might be dead by then.
I guess your income might rise too in the next 25 years so you have a decent chance of over paying that mortgage and / or adding in more pension contributions. Personally I would over pay the mortgage first as this might have a more immediate affect on your lifestyle and I am slightly wary of tying all my money up in a pension which i can't touch until 55. I might be dead by then.
river_rat said:
So you are anticipating a pension pot of £500K less the £125K you are taking to clear your mortgage, leaving you £375K in the pot to retire on?
If so, I would say good luck with retiring on that amount - seems way too low unless you have other sources of income?
A very silly statement.If so, I would say good luck with retiring on that amount - seems way too low unless you have other sources of income?
You have no idea of the OP's lifestyle or financial needs.
river_rat said:
So you are anticipating a pension pot of £500K less the £125K you are taking to clear your mortgage, leaving you £375K in the pot to retire on?
If so, I would say good luck with retiring on that amount - seems way too low unless you have other sources of income?
£375k for one person to live out the years on (plus state pension when applicable) when we would have a house fully paid for? Sounds more than enough for me considering we’d probably end up eventually downsizing and/or moving to a less expensive location once we no longer need to work. If so, I would say good luck with retiring on that amount - seems way too low unless you have other sources of income?
I should also add that I’ve been very prudent in my assumptions in modelling my anticipated pension pot. Low interest rates and erring on the side of caution with my salary rises. My pot could be 500-600k after taking the lump sum with a better return and better salary rises but it’s obviously guesswork at this stage.
OP: you don't say whether it's a DB or DC pension, if you're employed or a contractor/selfemployed, if you have any savings as well as your pension or if you will have any other source of income when you retire.
£375k could generate something like £15k a year, BUT you need to factor in 25 years of compounded inflation to work out the actual buying power of that sum of money. No-one knows what the state pension retirement age will be by then but youre looking at covering at least 10 years before it kicks in if you retire at 57.
You might like to do some research on FIRE (Financial Independence Retire Early).
£375k could generate something like £15k a year, BUT you need to factor in 25 years of compounded inflation to work out the actual buying power of that sum of money. No-one knows what the state pension retirement age will be by then but youre looking at covering at least 10 years before it kicks in if you retire at 57.
You might like to do some research on FIRE (Financial Independence Retire Early).
anonymous said:
[redacted]
If he took that much out the fund would be dropping in value by the RPI at the time. Given that at 57 he could need it to last 30 years or more it could end up being a very dismal last few years. You also need to factor in 25 to 55 years of inflation into that £18.75k.rockin said:
Two things,
The former's only true if inflation is reflected in wage increases!- If you're going to buy a fancy house with a big mortgage, inflation is your best friend.
- If you're going to choose low risk investments, inflation is your worst enemy.
You mention "thinking hard about my life after work even though it’s 25 years away, deliberately paying the right amount in my pension so that I only pay basic rate tax"
I would have thought you would *want* to be in (ideally, just in!) high rate tax band, so you get a decent 40% government addition to the pension instead of the basic 20%, surely!!
That represents free money over a long period.....
In general, I though you are not far off the mark, & good on you for thinking ahead!
Of course life throws things at you, including opportunities, that make that length planning more art and less science!
For us, for example, we have expanded our house twice over the past 15 years, to get it just how we want it....but meant we kept some mortgage running longer. We may very well use some of the TFLS at 55 to pay that off.
I would have thought you would *want* to be in (ideally, just in!) high rate tax band, so you get a decent 40% government addition to the pension instead of the basic 20%, surely!!
That represents free money over a long period.....
In general, I though you are not far off the mark, & good on you for thinking ahead!
Of course life throws things at you, including opportunities, that make that length planning more art and less science!
For us, for example, we have expanded our house twice over the past 15 years, to get it just how we want it....but meant we kept some mortgage running longer. We may very well use some of the TFLS at 55 to pay that off.
Based on some basic calcs, I don't see this saving money.
Anyone else? The interest payments on £100k over 25 years is quite considerable compared to a repayment mortgage. (£75k versus £42k)
The compound interest and tax relief by paying into the pension does not beat the repayment mortgage. Obviously it depends on mortgage rates and pensions growth (I used the following figures - 3% mortgage interest rates and 4% compound interest on pension @ 40% tax relief). Approx £200/ month pension contribution gives approx. £103k pension over 25 years.
<PS I might have got the quick calcs completely wrong too
>
Mike
Anyone else? The interest payments on £100k over 25 years is quite considerable compared to a repayment mortgage. (£75k versus £42k)
The compound interest and tax relief by paying into the pension does not beat the repayment mortgage. Obviously it depends on mortgage rates and pensions growth (I used the following figures - 3% mortgage interest rates and 4% compound interest on pension @ 40% tax relief). Approx £200/ month pension contribution gives approx. £103k pension over 25 years.
<PS I might have got the quick calcs completely wrong too
>Mike
OriginalFDM said:
Just wanted to run something by this forum and get some feedback....
I max my contributions into a SIPP so I can pay off the mortgage using the lump sum 10 years early. It can be very tax efficient. I can still afford the mortgage without this, but every little helps.An example:
1. At 50K-60K income with two kids, your marginal tax rate will be around 70% (income tax, employee NI, employer NI, child benefit withdrawal). Hard to believe so best work it all out yourself. (Salary sacrifice is key, with the employer giving you their NI savings, mine does).
2. To get 400K in SIPP via salary sacrifice, need to give up 120K of net income
3. Use 100K lump sum (25%) to clear mortgage
So 120K of net income has been used to clear 100K of mortgage and get a 300K SIPP so you can retire early and no NI has to be paid on income from this. This all excludes investment returns which should help boost the SIPP.
The flaw in your plan may be to buy a house now when the price/income ratio is particularly high.
mikeiow said:
You mention "thinking hard about my life after work even though it’s 25 years away, deliberately paying the right amount in my pension so that I only pay basic rate tax"
I would have thought you would *want* to be in (ideally, just in!) high rate tax band, so you get a decent 40% government addition to the pension instead of the basic 20%, surely!!
That represents free money over a long period.....
Sorry not sure I follow. What’s this government addition to the pension that you mean? I would have thought you would *want* to be in (ideally, just in!) high rate tax band, so you get a decent 40% government addition to the pension instead of the basic 20%, surely!!
That represents free money over a long period.....
I’m talking about making sure I pay enough % into my pension so that my total taxable income sits at the top end of the 20% band instead of the lower end of the 40% band.
If my salary is in the 40% band then I’m paying some tax at 40% whereas if I up my contribution to bring my taxable income down to below the 40% band then I’m saving tax, no?
Sounds like it will work, the figures stack up IMO. And as you say you can always downsize and boost the pension pot if it’s not enough in your later years.
It’s the complete reverse of what we are planning retirement age is similar but on the house front it’s more a case of modest house, clear it ASAP and have a good 10 years mortgage free before retirement to boost savings in case the anticipated pot doesn’t live up to expectations.
It’s the complete reverse of what we are planning retirement age is similar but on the house front it’s more a case of modest house, clear it ASAP and have a good 10 years mortgage free before retirement to boost savings in case the anticipated pot doesn’t live up to expectations.
Thanks for all the advice by the way, genuinely appreciate it. Plenty to think about. A few extra points:
- I’m not really trying to ‘win at both games’ as someone put it - my motivation isn’t really getting every single penny extra in value that I can. It’s just trying to strike that balance between enjoying having a decent (not powerfully built director) income now, and making sure we think about life after work, and making sure we’re not going too far one way or the other.
- For the record the house we’re talking about won’t be some kind of mega mansion that we’re bleeding ourselves dry for. Mortgage would be £1300/m (plan to overpay at £1400/m) on combined income of just under £90k pa.
- Having run the numbers on said mortgage, o/s balance when we’re 57 would actually only be £50k
- I think I was massively over cautious in my pension modelling. All being well the pot could be as high as £650k at 57 or £750k at 60.
- Based on above would leave £600k in the pot to retire at 57 or £750k if I let the mortgage run and worked til 60 and then wouldn’t need to use any lump sum.
I’m probably over thinking things tbh. It’s as much about trying to justify the level of mortgage we’d be comfortable taking out as much as anything
- I’m not really trying to ‘win at both games’ as someone put it - my motivation isn’t really getting every single penny extra in value that I can. It’s just trying to strike that balance between enjoying having a decent (not powerfully built director) income now, and making sure we think about life after work, and making sure we’re not going too far one way or the other.
- For the record the house we’re talking about won’t be some kind of mega mansion that we’re bleeding ourselves dry for. Mortgage would be £1300/m (plan to overpay at £1400/m) on combined income of just under £90k pa.
- Having run the numbers on said mortgage, o/s balance when we’re 57 would actually only be £50k
- I think I was massively over cautious in my pension modelling. All being well the pot could be as high as £650k at 57 or £750k at 60.
- Based on above would leave £600k in the pot to retire at 57 or £750k if I let the mortgage run and worked til 60 and then wouldn’t need to use any lump sum.
I’m probably over thinking things tbh. It’s as much about trying to justify the level of mortgage we’d be comfortable taking out as much as anything
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