Early retirement encashment and use of Tax Free Lump Sum in lieu of Mortgage top-up?

[Mechman]

Hi there,

I'm 50 later this year and I have a pension with a previous employer who ceased trading, therefore I could take early retirement and use the 25% tax free lump sum instead of topping up my mortgage for some home refurbishments which I'm about to do.

Im in fulltime employment at the moment with another company, and I pay 5% of salary plus 5% Employers contributions into another pension scheme.

I'm wondering which is most sensible - take the lump sum and cover the pension to an ARF or simply top up my mortgage.

If I took early retirement on that pension, I'd intend to use the payments which I'd have been making on the increased mortgage as AVCs into my current employees pension scheme.

My current mortgage will be paid off in 9 years, but if I top up, I'd be rescheduling it to 15 years to keep payments relatively low.

I look at this as a use of accessible cash now, and I use the cash spared on the mortgage as AVC, so in the event of any problems down the line, my mortgage remains small, and I could stop AVCs for a while. Otherwise my mortgage payments increase, admittedly with access at any time to enacting the pension.

Which is the wisest option?

 

[Steven Barrett]

You need to provide more information.

1. What values are your pensions?
2. How much do you want to live on when you retire?
3. How much is the top up mortgage?
4. When do you want to retire?

While Brendan will certainly advocate taking on no debt , you need to run the figures. A client was talking to me this afternoon about the possibility of accessing his pension at 50. We ran figures that if he had €300,000 at 50 and it grew by 5% for 10 years, his fund would grow to €488,000 in that period. That's €75,000 compared to €122,000 in lump sum or €95,300 when discounted back 10 year at 2.5% inflation. of course, there's no guarantee that your fund will grow by that rate either.

Steven
www.bluewaterfp.ie

 

[Mechman]

You need to provide more information.

1. What values are your pensions?
2. How much do you want to live on when you retire?
3. How much is the top up mortgage?
4. When do you want to retire?

While Brendan will certainly advocate taking on no debt , you need to run the figures. A client was talking to me this afternoon about the possibility of accessing his pension at 50. We ran figures that if he had €300,000 at 50 and it grew by 5% for 10 years, his fund would grow to €488,000 in that period. That's €75,000 compared to €122,000 in lump sum or €95,300 when discounted back 10 year at 2.5% inflation. of course, there's no guarantee that your fund will grow by that rate either.

Steven
www.bluewaterfp.ie

Hi Steven,

1. Total is €250k at the moment.
2. I have no idea tbh right now - as much as possible.......
3. Top up would be €60k.
4 Id say I'll have to work till 68, can't see myself able to before that.

Does that help to narrow down the field?

 

[Steven Barrett]

If you cash in 25% of your fund, the remaining 75% will be invested in an A(M)RF and you will not have to draw down any of it for 11 years. At 61, imputed distribution will start and you have to withdraw 4% or pay the tax equivalent. At 60, 75% of your fund will be worth €305,417 (5% growth).

If that money remains in a pension, imputed distribution does not apply and your fund will grow without the need for a withdrawal until you cash it in.

You will however, have to get a loan. Using an interest rate of 5% and a €60,000 loan, if you get a loan over 10 years, you will pay back €79,650. If it's over 18 years, you will pay back €90,288.

The tax free lump sum payable at 60 and 68 is €101,805 and €150,413 respectively (assuming 5% growth).



What you are looking at is sacrificing a potentially bigger tax free lump sum in the future for having no debt for the next 10 - 18 years. If you do opt for the no debt route, you will have to draw down some of your ARF from the age of 61 onwards.

Steven
www.bluewaterfp.ie