Plan a pension lump sum to pay off mortgage?

[PensionAndMortgage]

I can’t work out whether this is a genius or dumb thing to do. Or possibly what lots of people already do as standard. And I realise the figures are involved are big, so apologies in advance if it’s insensitive.

I am 50. There is no way I can keep working at current pace much past 57. I am very lucky to earn about £230k including bonus. Sole wage earner for extended family.

Mortgage is £400k. Paying £3k per month but need to overpay massively to pay off by 57.

Pension pot (for 2 of us) is currently just over £500k.

Rather than overpaying the mortgage, wouldn’t I be better to pay the maximum into my pension? I could pay £500k into it over the next 7 years, which (with interest) put the pot at about £1.2m which means I could take 25% out tax free at 57 and pay off the mortgage at that point.

My thinking is I could then, at 57, take an easier job and build up savings in an ISA, because I think I would have reached the “lifetime cap” at that point? But we would still have a pot of 900k.

i know the answer if that I need to speak to an IFA, but I just wanted to know if my thinking was sensible or mad, or if I have missed something really obvious.

Perfectly sensible plan to explore (with IFA perhaps), much more tax efficient. Lots of people do something like that. Of course becomes a finer balance if the lifetime allowance is reinstated and is around the old level. But you’re a way off atm

With your pension contributions would you not be restricted by the annual allowance? I think this is £60k but reduces by £2 for every £1 above the threshold which is taxable income + pension contributions.
If you and your employer have been making contributions for the last few years, based on your salary I would expect you have had a tax liability in previous years.

Agree with @Iloveshoes123 I think your maths is out. You can pay £60k per annum into pension for the taxable benefit but any more than this and you'll be taxed on it. And if Labour win the election they may well put it back down to £40k pa. If you're saying the pension pot for 2 of you is in your name (ie just one pot) then your £500k over the next 7 years isn't doable, unless you are happy to exceed the annual allowance, which would be daft.

You could utilise previous years' allowances if you haven't maxed them out (previous 3 years).

But yes I would say it's a sensible thing to do - money into pension for the tax benefit and then when you retire you can take 25% lump sum and hopefully pay off your mortgage.

But speak to an IFA as it's more complicated than what I've written.

I’d put maximum in pension of £60k per annum over mortgage any day of the week as you get 40% tax relief, make sure it’s invested properly and getting a decent return of 7% or over.

I’m considering not paying off mortgage - depends on dependants etc but we also have a 400k mortgage on a property worth £1.1M with only 1 dependant so my thoughts are to pay off £200k and then either get a retirement interest only or a lifetime mortgage for the rest.

You can only take 268k out of pension anyway (25% of the old LTA) so you’d need to get to at least 1.07M to get to that, which you could probably do if you upped your contributions now to 60k per annum.

I certainly wouldn’t be paying 3k a month into paying off a mortgage at your salary level (for the tax relief).

Sorry this should have said £1 for every £2. I think the adjusted income limit is £260k, If you earn £230k and you pay in £60k into your pension your adjusted income will be £290k meaning the allowance reduces by £15k and you will pay tax on this.
In short it makes sense to pay whatever you can into your pension tax free but I'm not sure that would be very much given your income level.

There’s loads of compound interest calculators online - you can play around with numbers and see where you’d be - a quick play on 500K to start with, investing 4.2K a month (your 3k after tax plus 40% tax) at a return of 6% which is fairly achievable and you’d have £1,197,000 after 7 years.

The tax free lump sum is remaining at 25% of the previous LTA limit, ie will still be capped at around £268k. Just in case you were not aware.

Thank you all. I didn’t know that the tax free amount was capped at £268 but that makes sense and would still make it very worth while.

I didn’t know about the £1 for every £2 rule. So my annual allowance is only £45k? Which means I could pay in £315k over that period, plus unused allowance from last 3 years.

Why would it only be 40% tax relief?

Can you make voluntary contributions via salary sacrifice as that would reduce your adjusted income? Also did you max out your contributions in the last three years because if not you can carry forward your unused allowances from the last three years?

As PP have noted, a Labour government might reduce annual allowances and/or reinstate the lifetime allowance.

And yes, you would get 45% tax relief (and NI saving too if contributions paid through salary sacrifice). It's massively tax efficient to pay maximum pension contributions if you can.

You need to see an IFA. It's too complicated for a SM thread. Your pension pot seems low compared to your salary. Have you been a high earner for your entire career?

Are you planning to downsize when you retire?

https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance#adjusted

You can work out your annual allowance here

I don’t understand the taper. I read the link, and googled, but I don’t quite get it because it seems to be adding on and taking off things almost at random and some are gross and some are net.

So (with round figures) if I earned a total of £230k and want to maximise the amount I put into pension with tax relief, and I do it all through salary sacrifice… does that mean

a) I could pay £60k in because it’s all salary sacrifice so that means salary is reduced to £170k, and therefore I’m under the limits

or

b) if I wanted to pay £60k in then I would need to add £60k to the £230k to work out how much it was over the limits, then deduct £260k limit, and then half the remainder to work out what I needed to pay tax on (so would be paying tax on £215k in this example - I.e. could only put in £45k with tax relief)

(and yes I will see an IFA)

You can get all the advice and answers you need on Money Saving Expert - the pensions/retirement forum has a lot of very knowledgeable people who can explain this all better. By all means use an IFA as well for peace of mind, but I managed to get an awful lot of knowledge over there in the last few years. Changed my whole attitude to future planning for the better.

Thanks @Loubilou23 I have found MSE to be quite unfriendly, hence asking for advice here instead where people tend to be a bit nicer 🙂

Max out your pension £60k this year) then overpay your mortgage as much as possible, it's well worth doing. See where you are at once you reach late 50's - i would also explore whether you can go down to 4 days a week for 3 years or so. I'm the same age as you are and the state retirement age is drifting further into the future! We are aiming for 60

Persevere! There are a couple of know it alls on there, but if you ignore the pompousness and slight arrogance you can get all the answers you need :)

I spent ages looking at 'net' income, threshold income and adjusted income the other day - the most complicated explanation is actually the HMRC one, there are a few other websites that have some easier examples that you might be applicable. You might be able to still pay £60k a year - you need to be calculate your adjusted income for this (needs to be under 260k to avoid reduction) - and only if your threshold income is > 200k. Good luck!!

PS - don't forget you can carry forward unused allowance for 3 years.

Have you got an emergency fund in savings?

Salary sacrifice gets added back so you cannot get around the tapering that way, you will however reduce your taxable income

I did this after speaking to an FA.

I was overpaying by £400 a month on my mortgage and it would be paid off when I'm 55 with the overpayment inc.

If I put £400 a month into a private pension, I not only get an additional £100 a month paid in via the government, so it makes it £500 a month into my pension but I also claim back another 20% on my contributions via self assessment.

This gives me enough money to pay off the remainder of my mortgage when I'm 55 if I take a lump sum from my pension

Remember your allowance is the GROSS pension figure you put in, so your contribution plus the 20% you get back from the government

Also, it includes your employer contibutions

@PickledPurplePickle does that mean 60k is actually 48k out of your own pocket?

I don’t think if you want to pay £60k you need to add that to your £230k to find your tapered AA, that would be lunacy even from this government.

I think you need to add back in certain contributions you have already made (depending on whether they had tax relief or not) and contributions made by your employer. You don’t need to add on contributions you haven’t made yet!

On the general plan, we’re doing something similar (or were until interest rate hikes), we currently have an interest only mortgage & I’ve been maximising my pension contributions with the “saving”.

The interest rate rises are giving me pause for thought, though, as our monthly payment will be massive in 4 years’ time, so I’m considering taking the tax hit (I don’t earn quite as much as you) and putting it into a S&S isa with a view to clearing as much of the mortgage as possible in 4 years. I’m 11 years to retirement, though, if I was closer I’d keep on with the pension.

Did you manage to find a simple calculator or any tool where you can feed information in?

This last tax year I will have earn't £265,000 plus my employer puts in £15,000 into my pension and I also get £8K car allowance.

I would have thought it would be pretty simple to put those numbers into a calculator somewhere to work out what I can pay into my pension for this tax period but I haven't yet found a simple calculator!! If you have had luck please let me know :)