I’ve never really seen myself primarily as a breadwinner, so hope that would not happen to me if I ever get the chance to ‘retire’.
Having just said I was a bit ‘down’ about not having a mortgage… I’ve certainly been pleased the millstone’s gone from my neck since I’ve retired!
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And that’s something I had to learn; so much of my self-image was about what I did rather than who I was. Not really particularly healthy.
Something I was already aware of but retirement exposed further.
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Always suited my own circumstances really.
Problem with a repayment loan, whether for a house, car, boat, whatever, is that to keep the payments level, the first payment is loaded with interest, the final is nearly all capital repayment. As such, it’s not until you’re about a third of the way through that the capital really begins to fall. The mathematical impact differs with rates, the higher the rate the harder it hits.
My first mortgage was in 1990 and rates were a little higher then! The higher the rate, the worse it is through the first third of the term and not much is spent reducing debt. So, on a say a 25 year, £100k mortgage, after about 7 or 8 years, the debt would still be over £90k iirc (I forget the exact maths but you get the idea).
Now, not many people buy their first home and stay in it, the second (and thrd) home is normally much more expensive and most people end up taking another repayment loan on another 25 year basis each time to afford it. (Often 30 years these days). And the maths works out that you’re kinda paying interest on the same money again each time, stretching that term of debt out each time you move.
It’s like taking a 5 year car loan out and waiting for the lender to contact you after just three years to suggest it’s time you bought a new car and ‘recycled’ the car loan. They’ve had their interest, you’re now paying off more capital, they’d like to charge you more interest now please! Repayment loans not running their full term are good business for banks.
On an interest only basis, I’m paying less, though transferring the debt in full on each home move. However the money I’ve built up through investing the ‘saved’ amount in an investment of my choice is of course still alive and ‘transferrable’ such that, if I choose to, I can still pay down all or a chunk of the original debt amount after 25 years, or sooner. Or not.
Clearly, with interest rates now at amazingly stupid levels (my mtg is currently at 1.7% fixed and thats now ‘high’) I choose not, given annual average investment return was running at over 15% prior to 2020. And with a 45% return since Jan 2020, growth alone on the same money as my mortgage debt left invested has paid close on half of my mortgage for me. In a year and a half. Note I am a very careful investor and not adventurous.
I should point out that an Int only mtg does not suit everyone. Many, many people will be far more suited to repayment loan depending on circumstances. It’s odd though that in 30 years we’ve moved from an estimated 80-90% mortgages being int only, to now the same ratio being repayment. IMO I don’t think either is right, should be close to half and half I would have thought…
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Hi
Can you explain your rationale for ‘drawdown’ from your private pension please?
Does that mean cashing in chunks of the capital each year for the next several years?
Do I recall from a previous thread that you were considering total transfer out of your whole pension?
But in the end you decided not to do this?
Thanks
Jim
Hi JimDog, I presume you are referring to my previous thread Early Retirement - how is it for you? and my company final salary pension?
Yes, I transferred my DB pension into my private pension. I thought long and hard about the decision, did lots of my own calculations and got independent advice (which you have to do anyway). Benefits were flexibility about how I access it; that 100% of it will survive me and my wife and pass onto our children; the fact that the offer was very generous helped! Downside is of course that I have given up a guaranteed income for life. I took the decision to transfer before Covid was known about, and then panicked when I saw the stock market crash. However, by the time the transfer was completed (June 2020) the stock market was starting to recover and the sum I transferred has grown very significantly.
I’m not drawing from it yet, but when I do I’ll take some as a fixed monthly income to cover regular outgoings, with additional one-off things taken as a lump sum. At state pension age then I can reduce the amount taken from my private pension.
I will take income using my personal tax allowance, some tax free cash and then a small amount that will be taxed. Each time I withdraw some of my holdings will be sold to release the money. This is all managed on my behalf so there is nothing I need to do.
Sorry for the rambling reply, but I wasn’t quite sure I understood your question.
Edit: This works for me, but these are important decisions that need proper advice, so make sure you get good advice that reflects your own circumstances if you are thinking about this!
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7 or 8% is a solid average return these days. Very sorry to hear of your heavy losses. That would make anyone cringe at further attempts.
However, as with anything that we do; ample training, careful practice, and practical experience are essential in succeeding. This has worked very well for me and many others, even some starting out with 30 or 40 thousand.
Many thanks.
That’s very useful info and helps me understand better what you have done and why.
I am 57 and just took my DB pension with Crown Guarantee from BT, a previous employer.
It gave me a tax free lump sum that we are using to try to move house, plus £10 p.a.
I could have transferred out a large lump sum as you did, but then, as I understood it vaguely from the other thread, I would have had to pay out something like 10% to an IFA to be allowed to do it.
(Presumably, you do not get taxed on the transfer from one pension to another.)
Then manage the funds.
I remember times in the past when managing funds to try to get a living income would not have been much fun.
But probably your transfer out value was much greater than mine, as I only worked at that company for a decade.
So you can chip away at little bits of the pension capital without worrying about it.
Anyway, this is still a real issue for me because I have another pension of a similar size (that is mainly DB) with the universities/USS scheme that I will have to decide to either take in the same way, or in the way that you did.
So any further thoughts you have on how this worked would be very interesting.
e.g. How did you choose the IFA and are they still advising you?
What type of organization(s) run your personal pension?
Have you diversified it among different asset classes, or is it mainly in share-based funds?
What happens if there’s a crash - or do you just leave all that to the fund manager?
(I suppose the gain you’ve made already will cover a medium-sized crash anyway.)
How much roughly can a person transfer out of a personal pension p.a. before being taxed?
Sounds to me like you need some professional advice to identify your options and objectives based on your personal circumstances. You could get this initially from a wealth management firm, or an IFA probably for a small fee, or perhaps even for no cost. You might have some difficulty finding an advisor who will take on a DB pension transfer, and if you go that route there will be a charge but it shouldn’t be anywhere near 10% of the transfer value, unless the transfer value is small in which case it’s probably not worth considering anyway. There is no “tax” in transferring pensions, just the previously mentioned advisor fees. Tax is paid on withdrawal. If you use an advisor then they will help tax and financial planning etc.
The pension is there to be used or “chipped away” at, but of course if you chip too much away then it might not last. Historically the scheme I am invested in returns similar to those @david1111 states, so if I take 5% per annum and inflation is 2.5% then I will never deplete the fund. But crashes do happen from time to time, however they always recover (so far) so whilst it might be a bit scary at the time a well invested fund will usually bounce back stronger.
You asked about investment strategies. I leave that to the advising firm who send me fund switch recommendations occasionally. I have no specific desire to do this myself as I don’t have the experience, and as long as I can see sufficient growth don’t see any requirement to attempt this myself.
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One key item I didn’t mention is that we (myself and my advisor) try to chose stocks/holdings that have a good dividend yield. We try to keep the average dividend return to about 6%, and then only draw the 6% dividend out each year.
This way, it really doesn’t matter what the market is doing. In a pull-back or market correction, a wisely invested portfolio may drop 15 or 20%, but you still get your dividends. Then a year later it’s back in line, and 2 years later it’s well up, especially if you’ve kept a decent cash reserve, in order to jump on a few good stocks that got dragged down with the tide, and are a bargain price. The downturns is where you can really make some money if your investment advisor is on the ball. It also helps if you keep an eye on the market at these times and add some suggestions.
But yes, we appear to approach investing in much the same way. Have a bit of knowledge yourself, be careful and only buy solid companies with good cash reserves, and connect with an experianced, talented, investment advisor/firm with a good track record.
And the portfolio does grow nicely, above the divident yield, so you can take an additionaal draw against that as well if required.
Anyway that’s pretty much my take on investing, and I must say, it works very well.
Best of luck with any, and all, of your Investments.
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How about investing in bitcoin? Last year it was $3 per usd, and now it is $48 per usd. A ~1,600 % in return !!
I am aware of its increase (though a year ago my only awareness was people mining for it) - but what is the risk? Seems to me it is something that could easily crash, all the mind so given its meteoric rise - or is that just my financial naivety/ignorance/lack of understanding? On the cusp of retirement, with enough (I think) for a just comfortable retirement, I don’t want risk!
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@Innocent_Bystander, you know that I am joking ! However, it could be a good investment option for someone who has a couple of million dollars to spare. 
Perfect.
I find this an interesting statement given our history related earlier. In the 1980s when we took out our two endowment backed interest only mortgages, the monthly payment of interest + endowment premium was slightly more than the amount due under a standard repayment mortgage (25 years in each case). And we had no option but to take an approved policy with a “known” firm (I don’t recall what regulation was in place in those days).
Indeed, we suffered a slighter higher rate of interest (1/4%, I think) on the mortgage for the privilege of having an endowment-backed interest only loan!
I know I was influenced to go that route partly by the projected bonus (in 25 years’ time) but also because the MIRAS (tax saving) was more beneficial … something that disappeared a few years later.
Hence I don’t see how you can control your investments so as to achieve a better return than the mortgage interest you’re incurring. Is it simply that any good policy should outperform the current low interest rates … or have times changed so that the borrower no longer needs to underwrite the loan with an investment policy not under his/her direct control?
Apologies for taking this thread away from its subject matter.
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I relate to this, its a good strategy for some, and one I have partly utilised in my time with mortgages
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I believe it’s no longer a requirement to have an investment policy. It’s perfectly ok to have nothing, and to clear the mortgage by downsizing. I’m not saying it’s remotely sensible, and for the majority of people a straight repayment mortgage is the sensible thing. At least you know it will go down over time, and if you get one with flexibility you can pay off chunks with bonuses or whatever, and save huge amounts of interest.
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Correct. There are few lenders who will accept an investment strategy to repay the mortgage, even if you can show them you already have investment capital sufficient to cover the mortgage ten times over!
You have to put down that the ultimate method of repayment would be to sell the property.
You are right, it is tricky to control investments with anything approaching surety of outperforming the mortgage interest, especially when interest rates were (briefly) so very high.
However over a long term, such as a couple of decades or more, a reasonably decent investment strategy should outperform the debt in this capitalist world of ours.
Though a key point to remember is that the amount of interest charged on the debt remains ‘high’ throughout as the debt doesn’t decrease and the amount of beneficial growth on an investment gets better the longer the growth has to compound.
And it is much easier to manage more effectively with today’s wealth of investment options, information, data availability and low interest rates than it was in the ‘80’s.
Yep, the maths of total outlay changes dependent on rates and the amount selected for an investment/endowment, usually assuming a 6/7% pa growth rate.
Investment linked mtgs became relatively cheaper than repayment mtgs when rates were very high c. 1988 to 1991, one of the reasons for their popularity.