Mortgage or Additional Voluntary Contributions
Discussion
Hi folks. This might be a poorly thought out question, as pensions confuse the hell out of me, but here goes.
I’m currently in a government job in a career average pension. Forecasts say that without lump sum I will get c. £35k per annum when I turn 67.
I also have a pension from 3 previous jobs, which will pay in the region of £10k per annum. Plus state pension.
I did a little bit of playing around on both pension providers websites, and was a bit concerned that if I retire at, say, 60, it would reduce my pension by about 60% (compound interest I guess). I’m 50 by the way.
I’d *like* to retire aged 60, but from the figures it wouldn’t be doable.
My mortgage of c. 200k has 14 years left to repay (current deal about 1.2%) for the next 5 years. Would it be better to, for example, overpay my mortgage to reduce the term (not the payments), or to set up an AVC for the same amount?
My heart says free myself from the mortgage as soon as possible. It might help to know that family history suggests I’ll kick the bucket relatively early, and I have a wife and sprog to look after.
Please be gentle - finance is not my thing!
I’m currently in a government job in a career average pension. Forecasts say that without lump sum I will get c. £35k per annum when I turn 67.
I also have a pension from 3 previous jobs, which will pay in the region of £10k per annum. Plus state pension.
I did a little bit of playing around on both pension providers websites, and was a bit concerned that if I retire at, say, 60, it would reduce my pension by about 60% (compound interest I guess). I’m 50 by the way.
I’d *like* to retire aged 60, but from the figures it wouldn’t be doable.
My mortgage of c. 200k has 14 years left to repay (current deal about 1.2%) for the next 5 years. Would it be better to, for example, overpay my mortgage to reduce the term (not the payments), or to set up an AVC for the same amount?
My heart says free myself from the mortgage as soon as possible. It might help to know that family history suggests I’ll kick the bucket relatively early, and I have a wife and sprog to look after.
Please be gentle - finance is not my thing!
They reduce the payment to offset the increased cost of paying for your pension earlier. Its quite drastic on the face of it, but understandable if its a DB pension where payment is gauranteed for life.
If you go for AVCs check when you can take them and under what terms. If its tied to your main pension it may not give you the freedom you need when you need it.
Essentially you have a few options maybe?
Pay into your own SIPP and make sure the tax gets claimed properly - tops up any payments. If you get the right scheme you could potentially access it from 55/57 so it wont be locked away for too long on the face of it. If you pay into that and make some decent returns on it you will get the tax relief + growth (could then pop into mortgage but tax implications on way out to watch for).
Pay into an ISA. You wont get tax relief but will have the ISA wrapper for growth/payments. But its accessible and you could save, grow then deposit into mortgage at intervals.
Alternatively see if your scheme allows extra years to be purchased (some do) but you will be tied into the schemes reductions on retirement age.
Blend of above or something different
It depends what you want. Income to cover everything or less debt and thus less income needs.
Personally I am working on plugging the gaps between DB schemes, ISAs and SIPP - so that when I hit a specific age, I have financial security whether I stop or continue working.
If you go for AVCs check when you can take them and under what terms. If its tied to your main pension it may not give you the freedom you need when you need it.
Essentially you have a few options maybe?
Pay into your own SIPP and make sure the tax gets claimed properly - tops up any payments. If you get the right scheme you could potentially access it from 55/57 so it wont be locked away for too long on the face of it. If you pay into that and make some decent returns on it you will get the tax relief + growth (could then pop into mortgage but tax implications on way out to watch for).
Pay into an ISA. You wont get tax relief but will have the ISA wrapper for growth/payments. But its accessible and you could save, grow then deposit into mortgage at intervals.
Alternatively see if your scheme allows extra years to be purchased (some do) but you will be tied into the schemes reductions on retirement age.
Blend of above or something different
It depends what you want. Income to cover everything or less debt and thus less income needs.
Personally I am working on plugging the gaps between DB schemes, ISAs and SIPP - so that when I hit a specific age, I have financial security whether I stop or continue working.
These are always age dependent.
Your pension would reduce by 60% if taken 7 years earlier - well OK, but how much do you actually need ? It may be that 60% is 'enough' when added to state pension.
You can't buy back the years - so if you retired @ 60, you maybe just need to fill the gap to state pension @ 67 ?
There's another thread on being poor at retirement - but I'd definitely rather retire earlier with a little less income - as long as it's 'enough'.
Given your age - I'd be stuffing it into a SIPP tax free & then taking it out again once retired to be paying down the mortgage with. If you were 30 or 40 it's a long time to be locking it away for - less of a problem at 50.
Your pension would reduce by 60% if taken 7 years earlier - well OK, but how much do you actually need ? It may be that 60% is 'enough' when added to state pension.
You can't buy back the years - so if you retired @ 60, you maybe just need to fill the gap to state pension @ 67 ?
There's another thread on being poor at retirement - but I'd definitely rather retire earlier with a little less income - as long as it's 'enough'.
Given your age - I'd be stuffing it into a SIPP tax free & then taking it out again once retired to be paying down the mortgage with. If you were 30 or 40 it's a long time to be locking it away for - less of a problem at 50.
I often wonder about this as I’m paying £500/m in to AVCs and also over paying the mortgage by £140/m. I’m fortunate enough to be mid 50’s so could, in theory, retire now but I’ll either keep working to 60 or take VR if it’s offered before then. I could pay the £140 into the AVC but I kind of like the fact I’m paying the mortgage off quicker too - although I doubt it makes the best financial sense 
Thanks for the replies folks. As mentioned, I’m a complete numpty when it comes to finance, so a couple of questions, based on replies (and I will read the other thread, thanks for the link).
Carbon Sasquatch - I have an expensive motorsport habit, plus my mortgage runs out when I’m 64, hence the question about whether it would be best to get rid of that. I know financially it may be better to do SIPPs etc., but I’m suffering from the typical feeling of not wanting debt, even if a mortgage is ‘good debt’.
Halo - I’m confused as to what the benefit of a (cash) ISA is these days? I can’t buy extra years by the way.
In essence, and I know this might sound weird, I wish I’d had proper financial education when I was a kid at school. I’m highly educated by any measure, but I wish I’d had financial education as part of the basic curriculum.
Carbon Sasquatch - I have an expensive motorsport habit, plus my mortgage runs out when I’m 64, hence the question about whether it would be best to get rid of that. I know financially it may be better to do SIPPs etc., but I’m suffering from the typical feeling of not wanting debt, even if a mortgage is ‘good debt’.
Halo - I’m confused as to what the benefit of a (cash) ISA is these days? I can’t buy extra years by the way.
In essence, and I know this might sound weird, I wish I’d had proper financial education when I was a kid at school. I’m highly educated by any measure, but I wish I’d had financial education as part of the basic curriculum.
The 'burden' of mortgage debt and paying it off is a compelling mental and finite target. But at 1.2%, it really is not worth paying it off at present. I am a similar age and similar situation (but with lower mortgage debt and not such a generous pension forecast).
The tax saving going into a pension (dependent on your earnings) can generate 40% instant savings plus the benefits of a few years compound interest. At 55 years old you can then remove 25% of your pension pot tax free......
Very rough calc.
So, if we decide you pay off £60 off your mortgage you will save £3.71 over five years.
If you decide to put the same £60 (net pay) into your SIPP assuming 4% growth over five years you will save £62.
Scale up and down as you require but the tax benefits of a pension wrapper are significant. As others have said, just need to be careful on taking the money back out of the pension.....
The tax saving going into a pension (dependent on your earnings) can generate 40% instant savings plus the benefits of a few years compound interest. At 55 years old you can then remove 25% of your pension pot tax free......
Very rough calc.
So, if we decide you pay off £60 off your mortgage you will save £3.71 over five years.
If you decide to put the same £60 (net pay) into your SIPP assuming 4% growth over five years you will save £62.
Scale up and down as you require but the tax benefits of a pension wrapper are significant. As others have said, just need to be careful on taking the money back out of the pension.....
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