Will I have enough to retire on if I pay off my mortgage?

admin
18 November 2014

Q

I want to know how I go about ensuring that I have an income for life. I am 61, single, recently redundant and job seeking. I may have to sell my house as I still owe £25,000 on the mortgage and don’t know if I’ll be able to pay it. I have four separate pensions: a small social housing fund, which estimates an annual payment of £1,500 if I retire at 65; a small local authority pension, which will pay me £200 a year; £60,000 in an Aviva pension; and then £4,000 with Scottish Widows. I have no idea what to do and I must say I feel stressed and vulnerable. Do I draw out money to pay off my mortgage? Could I retire on what I’ve got or is that unrealistic? How much will financial advice cost me and how do I know who to trust? I’m scared of making the wrong decisions – choice is not always liberating. I need to know whether to pay off the mortgage and do I still think in terms of an annuity?
From
AS/Nottingham

A

Firstly, I sympathise with you as personal finance, and pensions in particular, seems to get increasingly complicated as the years go by.

Constant meddling by successive governments has left us with a pension system that can be very generous for those who know how to navigate it but leaves many confused. However, it does add competition and flexibility, which means that pension savers can get a much better deal than if that choice didn’t exist.

You are worried about paying your mortgage. If part of this concern is around short-term cashflow implications of your redundancy, then bear in mind that as your Scottish Widows pension is less than £10,000 it would fall under the ‘small pots’ rules. This means that it can be drawn as a lump sum – a quarter would be tax free, with the reminder taxable. Perhaps that would give you the short-term cashflow to allow you to keep up with mortgage payments?

The decisions around paying off the mortgage and "can I afford to retire?" are interlinked. Whether you have enough money to stay in the same house and retire depends on your expenditure. Remember that you will get a state pension on top of your four private schemes.

You should request a state pension forecast (via gov.uk), which will confirm your exact pension age and also what income you can expect. You can then add this expectation to the local authority and social housing pension figures. You should also analyse your expenditure to work out what you will need.

As for the Aviva scheme, you are able to draw up to 25% as a tax-free lump sum which might therefore be around £15,000. The other £45,000 could be used to buy an annuity or, under the flexible pension rules that come in next April, you could draw income directly from the fund. The danger is that you draw too much or the fund falls in value and you risk running out of money.

While annuity purchase is inflexible and the rates might feel quite low, it is simple as it involves no further involvement from you and gives you certainty about what income will hit your bank each month.

If you do go down the annuity route, shop around for the best rate by exercising the "open market option". There are financial advisers who offer one-off annuity advice with their fee paid out of the pension.

Therefore, if they can secure you a better rate then the advice should be very worthwhile. An adviser can double-check whether there are any particular quirks of the Aviva scheme (such as guaranteed annuity rates) that might make drawing a pension via Aviva the better option.

As a guide, a 61-year old might expect a non-increasing pension of around £2,400 a year from this fund after the £15,000 had been drawn. Selecting an index-linked pension (one that rises in line with inflation) would give a much lower initial income level.

Once you know your state pension, then you can decide what is realistic in terms of retirement based on your expenditure. If the £15,000 lump sum is accessed from the Aviva scheme to pay down the mortgage, where does the other £10,000 come from? It can come from the pension under next April’s flexibility but this will reduce your pension income.

There is no set way that advisers work in terms of service and charges. Our approach is to offer an ongoing financial planning and investment service to high earners or to those who have built up investment assets of at least £100,000. We charge a monthly fee but many other advisers will do one-off work such as advising on annuities or hourly rate consultations.

There will be a number of chartered financial planners (thepfs.org) or certified financial planner professionals (financialplanning.org.uk) in your region whom you could ask about advice. You could also visit your local Citizens Advice Bureau to discuss some of your concerns.

Jason Witcombe is an independent financial adviser at Evolve Financial Planning

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