Question
I am 48 years old. At the end of 2009 I remortgaged to undertake some rennovations on my home and the current balance on my offset mortgage is £140k and the current interest rate is base +0.75%. In addition there is a reserve of £29k. I estimate that endowments from my original mortgage will mature in November 2013 realising circa £40k. The balance of the mortgage matures in 2024.
I will shortly inherit approx £120k. In terms of other assets I have £15k in cash ISAs, £60k invested in a growth-moderate risk portfolio and I also have £4k with Equitable Life from when I was paying AVCs (I have done nothing with this or paid any further AVCs since the problems with Equitable Life).
I currently have 17 years of contributions into a LGPS final salary scheme, I also have a deferred pension from previous employemnt last valued in 2005 at £1,100 p.a. Would ARC's be worth considering?
I am looking for adivice on how I should best utilise my inheritance; reduce or pay-off my mortgage (although it looks like interst rates are going to remain low for at least the next 12 months), or invest for retirement? I would love to think I could retire early but have resigned myself over the last couple of years that it won't be possible because the normal retirement date is increasing, the cost is increasing and the benefits are decreasing.
Answer
There's no right or wrong answer as to whether you invest your inheritance towards retirement or use it to pay off your mortgage.
On the one hand your mortgage rate, base rate + 0.75% (just 1.25% at current 0.5% base rate) deal is exceptionally good and you could earn more than this from putting cash in a good savings account.
But on the other, interest rates could rise over time and investment returns are, as ever, uncertain (unless you stick to fixed rate savings accounts).
I share your view that interest rates are unlikely to increase by much, if anything, over the next year or two (our economy probably remains too fragile for the Bank of England to consider rises). On this basis it's tempting to do something else with the money other than repay the mortgage in the hope of earning higher returns.
The trouble is, investing should realistically mean taking a 5-10 year view during which time we will almost certainly interest rates rise to more usual levels, pushing up the cost of the mortgage.
On balance, you might consider something very broadly along the following lines:
Put £40,000 of the inheritance in your offset mortgage cash account. This will reduce your monthly mortgage payments (equivalent to tax-free interest on the cash), but keep the money accessible should you want to use it in future.
Use £50,000 to boost your retirement provision, by buying extra pension in your LGPS (via a lump sum, ARCs or AVCs) and/or using a stakeholder or self-invested pension.
Invest the remaining £50,000 in a similar way to your existing portfolio, using cash and shares ISAs where possible.
The maturing endowment money can then be used to further reduce/offset the mortgage (or invest, depending on interest rate outlook at that time), leaving an effective outstanding balance of around £60,000 in November 2013. The savings on your monthly mortgage payments can be used to invest or further boost pension provision. Or, if interest rate rises push up the monthly payments, at least reducing the mortgage to £60,000 should lessen the pain (you could cash in some investments to repay the mortgage in full if necessary).
Your LGPS will, for service up to 31 March 2008, pay a pension of 1/80th of your final salary for each year worked plus a tax-free lump sum of three times your pension. For service thereafter you’ll receive a pension of 1/60th of your final salary for each year worked with the option to sacrifice some of this (at a rate £1 for each £12 of lump sum) for a tax-free lump sum of no more than 25% of your pension fund value (deemed to be 20 x your pension).
Buying extra LGPS pension entitlement via a lump sum or regular payments has the benefit that there's no investment risk, you'll know exactly how much you'll receive for a given contribution. For a male aged 48 it'll probably cost around £2,600 (eligible for tax relief) per extra £250 pension at age 65 (£2,900 for a female), you can get exact figures from your scheme administrator.
Given it'd cost around £5,600 to buy a £250 annual annuity at age 65, you'd need to earn about 4.6% a year on the money otherwise to match these benefits - possible, but not certain (please note my calculations are very approximate, not up to actuarial standards!).
Perhaps consider splitting the pension contribution between buying extra annual LGPS pension and an investment linked pension such as a AVC/stakeholder/SIPP, depending on how optimistic you are about future investment performance.
Holding cash and investments within ISAs, where possible, is a good idea as the income isn't subject to tax. This could prove especially useful in retirement as it won't affect your additional age related personal income tax allowance (assuming it still exists then!).
If you have a spouse it'd also be a good idea to factor their position into the above too, to ensure you optimise your combined tax allowances and that you're both provided for during retirement (especially after first death). For example, if your spouse is likely to be a non-taxpayer during retirement then making some pension contributions on their behalf (with the intention of the resulting pension income using their annual personal income tax allowance) generally makes sense.
Giving specific advice is beyond the scope of this site, but I hope the above gives you some general pointers and ideas.
I am 48 years old. At the end of 2009 I remortgaged to undertake some rennovations on my home and the current balance on my offset mortgage is £140k and the current interest rate is base +0.75%. In addition there is a reserve of £29k. I estimate that endowments from my original mortgage will mature in November 2013 realising circa £40k. The balance of the mortgage matures in 2024.
I will shortly inherit approx £120k. In terms of other assets I have £15k in cash ISAs, £60k invested in a growth-moderate risk portfolio and I also have £4k with Equitable Life from when I was paying AVCs (I have done nothing with this or paid any further AVCs since the problems with Equitable Life).
I currently have 17 years of contributions into a LGPS final salary scheme, I also have a deferred pension from previous employemnt last valued in 2005 at £1,100 p.a. Would ARC's be worth considering?
I am looking for adivice on how I should best utilise my inheritance; reduce or pay-off my mortgage (although it looks like interst rates are going to remain low for at least the next 12 months), or invest for retirement? I would love to think I could retire early but have resigned myself over the last couple of years that it won't be possible because the normal retirement date is increasing, the cost is increasing and the benefits are decreasing.
Answer
There's no right or wrong answer as to whether you invest your inheritance towards retirement or use it to pay off your mortgage.
On the one hand your mortgage rate, base rate + 0.75% (just 1.25% at current 0.5% base rate) deal is exceptionally good and you could earn more than this from putting cash in a good savings account.
But on the other, interest rates could rise over time and investment returns are, as ever, uncertain (unless you stick to fixed rate savings accounts).
I share your view that interest rates are unlikely to increase by much, if anything, over the next year or two (our economy probably remains too fragile for the Bank of England to consider rises). On this basis it's tempting to do something else with the money other than repay the mortgage in the hope of earning higher returns.
The trouble is, investing should realistically mean taking a 5-10 year view during which time we will almost certainly interest rates rise to more usual levels, pushing up the cost of the mortgage.
On balance, you might consider something very broadly along the following lines:
Put £40,000 of the inheritance in your offset mortgage cash account. This will reduce your monthly mortgage payments (equivalent to tax-free interest on the cash), but keep the money accessible should you want to use it in future.
Use £50,000 to boost your retirement provision, by buying extra pension in your LGPS (via a lump sum, ARCs or AVCs) and/or using a stakeholder or self-invested pension.
Invest the remaining £50,000 in a similar way to your existing portfolio, using cash and shares ISAs where possible.
The maturing endowment money can then be used to further reduce/offset the mortgage (or invest, depending on interest rate outlook at that time), leaving an effective outstanding balance of around £60,000 in November 2013. The savings on your monthly mortgage payments can be used to invest or further boost pension provision. Or, if interest rate rises push up the monthly payments, at least reducing the mortgage to £60,000 should lessen the pain (you could cash in some investments to repay the mortgage in full if necessary).
Your LGPS will, for service up to 31 March 2008, pay a pension of 1/80th of your final salary for each year worked plus a tax-free lump sum of three times your pension. For service thereafter you’ll receive a pension of 1/60th of your final salary for each year worked with the option to sacrifice some of this (at a rate £1 for each £12 of lump sum) for a tax-free lump sum of no more than 25% of your pension fund value (deemed to be 20 x your pension).
Buying extra LGPS pension entitlement via a lump sum or regular payments has the benefit that there's no investment risk, you'll know exactly how much you'll receive for a given contribution. For a male aged 48 it'll probably cost around £2,600 (eligible for tax relief) per extra £250 pension at age 65 (£2,900 for a female), you can get exact figures from your scheme administrator.
Given it'd cost around £5,600 to buy a £250 annual annuity at age 65, you'd need to earn about 4.6% a year on the money otherwise to match these benefits - possible, but not certain (please note my calculations are very approximate, not up to actuarial standards!).
Perhaps consider splitting the pension contribution between buying extra annual LGPS pension and an investment linked pension such as a AVC/stakeholder/SIPP, depending on how optimistic you are about future investment performance.
Holding cash and investments within ISAs, where possible, is a good idea as the income isn't subject to tax. This could prove especially useful in retirement as it won't affect your additional age related personal income tax allowance (assuming it still exists then!).
If you have a spouse it'd also be a good idea to factor their position into the above too, to ensure you optimise your combined tax allowances and that you're both provided for during retirement (especially after first death). For example, if your spouse is likely to be a non-taxpayer during retirement then making some pension contributions on their behalf (with the intention of the resulting pension income using their annual personal income tax allowance) generally makes sense.
Giving specific advice is beyond the scope of this site, but I hope the above gives you some general pointers and ideas.
Read this Q and A at http://www.candidmoney.com/questions/question474.aspx
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