Is overpaying the mortgage the best thing to do?
Discussion
Mortgage term reduced to less than 4 years by overpayments thinking let’s be free of debt. The thing is now the lifetime allowance has been temporarily abolished should I be putting the extra money into a pension. I have a final salary pension which was going to exceed the old allowance which is why I have never bothered with AVCs . I’m now thinking I should extend the mortgage term and reduce my tax burden ( earnings above 100K) and salary sacrifice into a pension. Aged 54 and probably going to retire at 58/59
Whilst I agree that Labour will most likely make significant pension changes, usually any changes apply with a reasonable lead time. So whilst it's clearly a risk, the closer you are, the lower that risk should be. It's hard to see how a government could punish those who are still working vs their peers who chose to retire early. So I view 55 as the finish line & into the protected zone - but clearly, I could be wrong on that.
At 55 you can access the tax free amount without any other impact, so I'd be looking to get that to the max if you can - that's still linked to the old LTA and unlikely to ever go any higher IMHO. So once you hit 55 you can lock in that tax free cash if you choose to. You can take just the cash you need at any given point and don't need to take the whole 25% in one go - but not all providers support that option.
Therefore, what I'd be doing is maxing the pension then looking to take whatever tax free cash you need @55 and clearing the mortgage with that.
At 55 you can access the tax free amount without any other impact, so I'd be looking to get that to the max if you can - that's still linked to the old LTA and unlikely to ever go any higher IMHO. So once you hit 55 you can lock in that tax free cash if you choose to. You can take just the cash you need at any given point and don't need to take the whole 25% in one go - but not all providers support that option.
Therefore, what I'd be doing is maxing the pension then looking to take whatever tax free cash you need @55 and clearing the mortgage with that.
bentley01 said:
Mortgage term reduced to less than 4 years by overpayments thinking let’s be free of debt. The thing is now the lifetime allowance has been temporarily abolished should I be putting the extra money into a pension. I have a final salary pension which was going to exceed the old allowance which is why I have never bothered with AVCs . I’m now thinking I should extend the mortgage term and reduce my tax burden ( earnings above 100K) and salary sacrifice into a pension. Aged 54 and probably going to retire at 58/59
If you've already got over £1.1million in your pension then even if you retire at 58 then you are going to not to withdraw it over your "useful" lifetime without paying 40% tax anyway, so I would say you're better reducing your mortgage debt to zero and then consider retiring a year or two earlier. You'll never get those years back and its the best investment you can make - free yourself from the rat race!There no real point in paying it in just to avoid 40% tax now and then paying 40% tax later. However avoiding paying the effective 60% rate when you exceed £100k is a different thing and would be smart to do, but it rather depends on what your gross earnings are and if its viable to get it back under £100k.
The other benefit is that in a pension its outside of IHT, so that's something to consider too.
It sounds like you are in a great position, so Id honestly suggest flexing the retirement age rather than adding to your pension pot. Too many factors to consider by adding even more to your pension, whereas going earlier and spending it sooner is a wonderful problem to have
I just re-read it & you have a final salary pension - so it's worth checking out the terms of the AVC - some allow it to be pooled for tax purposes, which means that you can use the AVC's as tax free cash, so leaving the DB intact. If that's the case, it becomes very attractive.
As Adam suggested, retiring earlier can be an attractive option. I went at 55 and one year in, am loving it.
As Adam suggested, retiring earlier can be an attractive option. I went at 55 and one year in, am loving it.
Thanks for the replies. With regards to early retirement I still love what I do and I’m not ready to give up just yet. Don’t get me wrong like any job there are aspects of it that can be stressful but on the whole I think I would miss it too much to stop. I thought 58 was a reasonable compromise.
One question I need to clarify is how close to the annual 60K limit I am with the company contributions and my current 9% payment. I guess with a Defined Benefit pension you don’t actually have a pot of money.
Can you access part of your 25% tax free amount at 55 but still pay into the Final salary pension?
One question I need to clarify is how close to the annual 60K limit I am with the company contributions and my current 9% payment. I guess with a Defined Benefit pension you don’t actually have a pot of money.
Can you access part of your 25% tax free amount at 55 but still pay into the Final salary pension?
AdamV12V said:
If you've already got over £1.1million in your pension then even if you retire at 58 then you are going to not to withdraw it over your "useful" lifetime without paying 40% tax anyway, so I would say you're better reducing your mortgage debt to zero and then consider retiring a year or two earlier. You'll never get those years back and its the best investment you can make - free yourself from the rat race!
There no real point in paying it in just to avoid 40% tax now and then paying 40% tax later. However avoiding paying the effective 60% rate when you exceed £100k is a different thing and would be smart to do, but it rather depends on what your gross earnings are and if its viable to get it back under £100k.
The other benefit is that in a pension its outside of IHT, so that's something to consider too.
It sounds like you are in a great position, so Id honestly suggest flexing the retirement age rather than adding to your pension pot. Too many factors to consider by adding even more to your pension, whereas going earlier and spending it sooner is a wonderful problem to have
He hasn’t got £1.1m in his pension. He as a notional value for LTA purposes of £1.1m which equates to an annual pension of £55k. He won’t automatically pay 40% as he could commute some of his pension for tax free cash which then MAY reduce his pension below the higher rate threshold.There no real point in paying it in just to avoid 40% tax now and then paying 40% tax later. However avoiding paying the effective 60% rate when you exceed £100k is a different thing and would be smart to do, but it rather depends on what your gross earnings are and if its viable to get it back under £100k.
The other benefit is that in a pension its outside of IHT, so that's something to consider too.
It sounds like you are in a great position, so Id honestly suggest flexing the retirement age rather than adding to your pension pot. Too many factors to consider by adding even more to your pension, whereas going earlier and spending it sooner is a wonderful problem to have
Having said that I’d probably not pay more into a pension and either invest in other vehicles (to give more flexibility over a pension)or pay off more of the mortgage (depending on what the mortagage rate is etc.
With a stand alone SIPP/DC pension then you can access as much of the 25% as you want to, then take more later - as long as the provider supports that flexibility (not all do). You can take tax free cash & continue to contribute.
For a DB pension, it's all in one go - and at the time the regular DB payments start. You don't have to take all 25%, you can decide - but it's a usually a one time event and you can't come back for more later. If the AVC's are 'pooled' with the DB scheme, the same would apply to them.
I have no idea how DB contributions are considered vs the annual cap.
For a DB pension, it's all in one go - and at the time the regular DB payments start. You don't have to take all 25%, you can decide - but it's a usually a one time event and you can't come back for more later. If the AVC's are 'pooled' with the DB scheme, the same would apply to them.
I have no idea how DB contributions are considered vs the annual cap.
Edited by Car bon on Sunday 2nd July 11:17
bentley01 said:
Thanks for the replies. With regards to early retirement I still love what I do and I’m not ready to give up just yet. Don’t get me wrong like any job there are aspects of it that can be stressful but on the whole I think I would miss it too much to stop. I thought 58 was a reasonable compromise.
One question I need to clarify is how close to the annual 60K limit I am with the company contributions and my current 9% payment. I guess with a Defined Benefit pension you don’t actually have a pot of money.
Can you access part of your 25% tax free amount at 55 but still pay into the Final salary pension?
That's a lovely position to be in. Knowing that you will hit LTA and enjoying your job so no need to retire early.One question I need to clarify is how close to the annual 60K limit I am with the company contributions and my current 9% payment. I guess with a Defined Benefit pension you don’t actually have a pot of money.
Can you access part of your 25% tax free amount at 55 but still pay into the Final salary pension?
The 25% tax fee amount, is that part of the final salary pension? If so it would be unlikely that you would be able to tap into that but check with your pension manager for the finer details of your scheme.
Check your pension input amount from your final salary scheme. It is not how much you contribute, it is an annual calculation done by your pension provider (rough calculation is the difference between current year value less last year value, where value = annual pension x 16 and last year value = annual pension inflated for CPI x 16). Because inflation has been high, your pension input amount will be lower than it would have been.
I see where you are coming from with your question. You potentially hit LTA but can contribute AVC to lower your current income tax threshold. The AVC will not bring 25% tax free benefit but will mean you have more investment tied in pension (no dividend income tax and no gains tax).
Presumably you have utilised your ISA allowances for investments then this is not a bad plan. When you retire, you take 25% tax free lump sum and use that to pay off the mortgage which you have extended.
This may take your annuity to below higher rate tax threshold when you take your pension.
The AVC withdrawal may take you over the 40% threshold but at least you avoid dividend income tax and gains tax while that is invested. However if you don't think that will be invested for that long then (1) equity investment might not be the best option since it is better for longer term and (2) you would be better off leaving it in GIA (general investment account) since you only pay 18% gains tax instead of 40% income tax.
Having said that last point, it is likely that if/when Labour get in power they will remove that gap and make gains tax the same as income tax.
Small print: dividend distribution from investments which can be accumulated in your investments are still realised for tax purposes so hence putting in AVC gives you the tax shield; gains tax is only realised when cash in money making more than £3000 gains for future years (AVC gives you the tax shield to avoid this).
Car bon said:
Whilst I agree that Labour will most likely make significant pension changes, usually any changes apply with a reasonable lead time. So whilst it's clearly a risk, the closer you are, the lower that risk should be. It's hard to see how a government could punish those who are still working vs their peers who chose to retire early. So I view 55 as the finish line & into the protected zone - but clearly, I could be wrong on that.
At 55 you can access the tax free amount without any other impact, so I'd be looking to get that to the max if you can - that's still linked to the old LTA and unlikely to ever go any higher IMHO. So once you hit 55 you can lock in that tax free cash if you choose to. You can take just the cash you need at any given point and don't need to take the whole 25% in one go - but not all providers support that option.
Therefore, what I'd be doing is maxing the pension then looking to take whatever tax free cash you need @55 and clearing the mortgage with that.
Interesting point re Labour and pensions.At 55 you can access the tax free amount without any other impact, so I'd be looking to get that to the max if you can - that's still linked to the old LTA and unlikely to ever go any higher IMHO. So once you hit 55 you can lock in that tax free cash if you choose to. You can take just the cash you need at any given point and don't need to take the whole 25% in one go - but not all providers support that option.
Therefore, what I'd be doing is maxing the pension then looking to take whatever tax free cash you need @55 and clearing the mortgage with that.
Wife has just hit 55 and has a few final salary pensions - would taking the 25% now (obvs depending on the terms) and putting it elsewhere protect it from any pension grab?
Square Leg said:
Interesting point re Labour and pensions.
Wife has just hit 55 and has a few final salary pensions - would taking the 25% now (obvs depending on the terms) and putting it elsewhere protect it from any pension grab?
Taking it now does somewhat protect it - retrospective tax is unusual. Likewise, taxing something that you could have taken but deferred, would also be unusual. Hence my conclusion / expectation that any such changes would be forward dated.Wife has just hit 55 and has a few final salary pensions - would taking the 25% now (obvs depending on the terms) and putting it elsewhere protect it from any pension grab?
Final salary (DB) usually only offer the 25% at the time the regular payments start. So taking it now depends on whether starting the regular payments would be a problem.
SIPP/DC allow you to take the 25% any time, so the only real concern is what you'll do with the money. Once outside the pension, any growth is taxable. If you can stuff it into ISA's, then fine, but otherwise you'd need a plan for it.
Car bon said:
I have no idea how DB contributions are considered vs the annual cap.
For DB the annual allowance is impacted by the “Pension Input Amount” which basically is the value of pension benefits that has increased in the year. The scheme administrators would be able to provide you with this. Edited by Car bon on Sunday 2nd July 11:17
If it was me I would find out the PIA, then calculate the headroom I have against the £60k annual allowance, and pay that into a SIPP and/or buy AVCs in order to bring my taxable salary below £100k. Avoiding 45%/60% marginal tax rate whilst increasing future pension benefits would be my priority.
So much good advice from so many people thank you. I will work out the allowance left available in the annual allowance and certainly try and maximise that amount. Am I correct in thinking that you can backdate any unused allowance over the last three years. That might be worth catching up on.
Th current mortgage is fixed at 1.8 until June next year but then who knows what the rates will be.
Th current mortgage is fixed at 1.8 until June next year but then who knows what the rates will be.
bentley01 said:
Am I correct in thinking that you can backdate any unused allowance over the last three years. That might be worth catching up on.
Yes. Find out the PIA for the last 3 years gone. You can carry forward unused allowances from the last 3 years as long as you have enough earnings in the current year to cover i.e. you can potentially pay £180,000 into pensions this tax year (3 x £40k + £60k) as long as your earnings are over £180k, if that makes sense.
Somebody said:
Yes. Find out the PIA for the last 3 years gone.
You can carry forward unused allowances from the last 3 years as long as you have enough earnings in the current year to cover i.e. you can potentially pay £180,000 into pensions this tax year (3 x £40k + £60k) as long as your earnings are over £180k, if that makes sense.
Thanks very much You can carry forward unused allowances from the last 3 years as long as you have enough earnings in the current year to cover i.e. you can potentially pay £180,000 into pensions this tax year (3 x £40k + £60k) as long as your earnings are over £180k, if that makes sense.
bentley01 said:
Mortgage term reduced to less than 4 years by overpayments thinking let’s be free of debt. The thing is now the lifetime allowance has been temporarily abolished should I be putting the extra money into a pension. I have a final salary pension which was going to exceed the old allowance which is why I have never bothered with AVCs . I’m now thinking I should extend the mortgage term and reduce my tax burden ( earnings above 100K) and salary sacrifice into a pension. Aged 54 and probably going to retire at 58/59
Are you going to start accessing your DB scheme at 58/59? If so I know from mine that there is a signifciant actuarial reduction (possibly as much as 50%). It makes sense to access your SIPP and leave the DB scheme until the Scheme NRA.Gassing Station | Finance | Top of Page | What's New | My Stuff