Quick sense check please

[Snakey]

Not investment advice, just tell me if I'm missing something obvious or if there's a better way of doing it.

I have three and a half years (give or take) until I can get my hands on my pension money. Prior to that, I'd planned to spend down my cash and not need to sell more than a few grand of unsheltered investments (let's call these my GIA - General Investment Account - for ease of typing). What wasn't planned was that I now want to repay my £75k interest-only mortgage in March when my fixed rate runs out. The original plan was to renew for three more years and then use some of my pension lump sum to clear it. The rationale for the change of mind is that I can't move providers with no income, and to renew I'd be looking at >5% plus a £1,499 fee (it would need to be a three-year fix). This feels daft when the money is sitting in e.g. Premium Bonds which pay a lot less. But there goes the cash that I'd been planning to spend on living costs and leave my investments alone to soar . Drat and double drat.

Here's what it all looks like:
80 cash at bank (mostly at 5.2%)
15 rubbish EIS investments I wish I'd never made, and God only knows when I'll see this (apparently in the next year or so, but yeah)
145 GIA
------
240 Total unsheltered
300 ISA
-----
540 Total available

Now clearly £540k for three years would not be a problem. But I have it in my head that I not only don't want to touch the ISA balance but I also want to add the maximum to it each year.

So here's how the £240k gets spent:
80 to the ISA (I haven't yet paid in for this current year as every time I went in to my GIA to sell it was standing at a loss and I couldn't bring myself...)
75 to repay the mortgage
20 major works on the flat (work is done, still paying it off)
65 for living expenses (finally decided to live a little)
----
240

You will note that despite the absence of a cushion, the massive safety net of the ISA ensures that there is no realistic scenario under which I'm going to starve - or, worse, have to go back to work. So this is the most first-world of first-world problems and one I'm delighted to have. However! Turns out this doesn't stop me from wanting to make this all as efficient as possible. I have nobody I can talk this through with in my real life. So if I'm going wonky with my thinking, please would you all help me make it better!

Potential things I could be talked into/out of:
1. Decision to repay the mortgage.
2. Decision to continue funding the ISA.
3. Timing of selling from the GIA.
4. Things I haven't even thought of.

The third bit is what I'm thinking about at the moment, as I dither over pressing the button to sell from my GIA. My cash flow plan shows me needing the following GIA proceeds each year (ending 5 April):
25 to 5/4/24
35 to 5/4/25
45 to 5/4/26
35 to 5/4/27

Of the above numbers, 20 each year would be immediately repurchased inside the ISA and so I feel like that's OK. That is to say, I don't feel like I need to take steps to protect that £80k from market movements. Obviously if I have to sell low and subsequently get the growth in the ISA that spoils my cunning plan a little, but it isn't the same as crystallising a loss.

The other 5, 15, 25 and 15 would be sell-to-spend. Received wisdom seems to be that you shouldn't invest if you'll need the money in the next five years, but I hate to sell at a loss or a break-even (like I would be if I did it now) when it might increase in value if I leave it and I do have my CGT annual allowance each year. And I feel like I could maybe take some chances, since I do have the ISA if I really need it.

But how much would be sensible to take out, and when? I have the 5.2% interest rate available to me until next September, so the initial £5k can sit in there until it's needed. Beyond that, I'm not sure that there is much available, Regular Savers being the absolute opposite of what I need. Should I be selling the full £60k right now, and putting £15k in a one-year bond, £25k into a two-year bond and £15k into a three-year bond even though I would really need it monthly not in one annual lump? Or stick it into the 5.2% account and see what happens by next September? Or leave it invested until I absolutely need it? Or something else?

My freelance income seems to be tailing off - I've earned about £6k so far this year but there's only about £800 in the pipeline. So I should have some of my tax allowance left each year to cover unsheltered dividend and interest income, albeit not endless amounts.

Thanks for reading, sorry for the length.

[JohnB]

TLDR, but you need to be sure you won't be hitting any capital gains over £6k (£3k from April 2024), and I don't believe in cash buffers, and certainly not 5 year ones.

[SoBo65]

I would probably clear the mortgage either in one go or over a few years. Alternatively, would your current lender offer an offset mortgage?

[Howard]

This is not advice but I really enjoyed paying off my mortgage.

I guess the only reason for keeping yours at current interest rates, after the fix ends, is if you strongly believe your investment of the cash involved will appreciate at a significantly higher rate?

Regards

Howard

[kempiejon]

What wasn't planned was that I now want to repay my £75k interest-only mortgage in March when my fixed rate runs out. The original plan was to renew for three more years and then use some of my pension lump sum to clear it. The rationale for the change of mind is that I can't move providers with no income, and to renew I'd be looking at >5% plus a £1,499 fee

I have run the scenario of clearing the mortgage in my head a few times. So far I have not bothered as I think the money works harder for me invested. When we come off the 1.8% in a couple of summers I'll think again. I do overpay each month but only by a rounding error. I can see the piece of mind that comes with being mortgage free.
Double check for costs, your plan makes financial sense. You need to manage your personal draw down prior to the pension access. Take enough from your GIA to maximise the capital gains allowance.
Don't anchor on the cost of GIA investments.

[TUK020]

1. Clearing all debt is a wonderful moment. It also helps simplify all future financial planning. I repaid my mortgage early and am very pleased that I did. You have cash balance to do this.
2. Transfer funds into the ISA at max rate, and as soon as possible. Don't worry about timing of market, just sell in GIA, transfer to S&S ISA, and rebuy.
If at any point you needed to access more than you have in the GIA, you can always raid the ISA.
3. As another poster pointed out, you probably want to keep an eye on any CGT liability in your GIA

[Itsallaguess]

Clearing all debt is a wonderful moment. It also helps simplify all future financial planning.

I repaid my mortgage early and am very pleased that I did. You have cash balance to do this.

Paying off my mortgage many years early was one of the financial highlights of my life, and I maintain the view that for me at least, no matter what a calculator might have told me in terms of alternative uses for that surplus capital at the time, the psychological benefit and boosted financial-confidence both at the time and in the many years since, has far outweighed anything those 'potential alternative uses' of it might have delivered for me...

It's not *just* about the money...

Cheers,

Itsallaguess

[DrFfybes]

Hi Snakey,

I can see you spent a lot of time thinking about this and typing it up.

Will the higher interest payments (£300/month?) completely scupper your plans? If so then you need to either cover them from extra income, or get rid of the debt. If you are tight for that sort of amount then that is a margin of safety I'd not be comfortable with.

I think you should pay off a lot of your mortgage when the rate ends. As others have said, psychologically it makes a big difference to many people. In fact my personal requirement for stopping work in my early 50s was ZERO debt.

You are correct, anything from GIA into ISA doesn't really matter if the GIA is at a loss or not, as you're buying back at approx the same price (especailly if you move cash into the ISA first as you can sell and buy at the same time). In fact it might be beneficial to have a loss to carry forwards. As for the rest, you're wanting £5k up to May 2024 which should be easy from this year's divis on £145k depending on investment choices.

Can you find some other part time work, stacking shelves at night in ASDA pays £12/hour So there's always that sort of thing to tide you over if required.

The original plan was to renew for three more years and then use some of my pension lump sum to clear it. The rationale for the change of mind is that I can't move providers with no income, and to renew I'd be looking at >5% plus a £1,499 fee (it would need to be a three-year fix). This feels daft when the money is sitting in e.g. Premium Bonds which pay a lot less. But there goes the cash that I'd been planning to spend on living costs and leave my investments alone to soar. Drat and double drat.

Will they actually let you renew with no income, or can you blag it on previous years' figures? But really this is the big issue. You had been ignoring this and quietly hoping it would sort itself out until you could access your lump sum, but you've had a couple of years' warning it was going to go up and don't appear to have factored this in to your plans unless it used to be a much larger loan. This debt is as much as the cash you wanted to live on for the next 3 years and so you should have been factoring this in much earlier and perhaps looking at your lump sum as something like a cash buffer to get you through to State Pension age.

Paul

[Gerry557]

I think I would look at this as a Cash flow issue. So how much extra will the new mortgage cost you. £315 less your current amount. Add £42 for fees.

Can this option be changed? Normally there is a fee free option for slightly more on the interest rate. You might find you get a deal with your current provider on affordability rather than earnings.

You mention a pension and using that to pay off the mortgage. Can you expand on how this is made up. I suppose it also depends on your personal tax rates now and then.

If not earning how much of your personal allowance remains. You might be looking to maintain flexibility and to offset tax rates now and later.

Topping up the ISA seems a no brainier, partners allowance too? The premium bonds converted to income in the ISA should offset so of the extra costs. Again keep in the ISA till unwrapped used up.

If you are rebuying the same assets inside the ISA it's only trading costs and stamp to worry about, so not that much in relation. The ISA allowance is use it or loose it.

How much tax can you save over the period by moving things around, again this might offset the current higher outgoings due now.

If you do pay off the mortgage now what will you do with the £75k unwrapped from the pension. What tax will you be paying on that pension. Do you have a state pension as well.

You have work out if the extra hit now is offset by savings later and that you can survive the time. Even so you can take income from the ISA when you have used up the unsheltered monies.

[scrumpyjack]

In your position I would certainly pay off the mortgage, selling if necessary from the GIA.

Bear in mind that by keeping a mortgage, you are in effect borrowing to invest in the Stock Market whilst having no earned income. That is a pretty risky thing to do!

[Snakey]

Thanks everybody for taking the time to read all of that - typing it out helped me get my thoughts straight, that's for sure - and for your thoughts and ideas, all of which I'm taking on board. I really appreciate it.

To answer some questions: my mortgage is with Santander and there are no affordability checks if I renew with them. They don't do offset mortgages any more, although admittedly this was just from looking on their website, I haven't specifically phoned them up to say "are you sure you don't still do them?" - I will ask that nearer the time when I am requesting the completion statement thingy, which I'll be doing after Christmas.

Pension is entirely DC, currently £1.2m, sitting mainly in low-cost global trackers inside a SIPP. No HMRC protections, so I can have whatever the maximum lump sum is. I turn 55 before they raise it to 57, so that's OK.

As at 5 April 2023 I qualified (yay!) for the full State pension (when I'm 67 or 68, obvs), although I'm going to keep getting the Class 2 NI credits each year while I can just in case. The Government promised ten years' notice of future adverse changes, so I'm not safe for a while yet.

My birthday's near the end of the tax year. Up until recently the LTA made it sensible to take, on my 55th birthday, the whole lump sum plus £50k taxable, and then £50k a year thereafter or whatever the top of basic rate band may be. No point re-working those plans in detail until there's certainty (presumably the first Budget after the next General Election) - suffice to say for now that it's all clover from the day I turn 55, especially if I'm also sitting on a £380k ISA by then!

With the lump sum, if it still makes sense to withdraw it, I need to extend my lease (currently ~86 years, no idea of cost (£10-40k, maybe?) but hoping the currently-vague potential changes to the leasehold system might make it cheaper). Was going to repay mortgage. Stock up the ISA on the 6 April. Refill my Premium Bonds as a cash reserve so I don't have to sell shares in a downturn (assuming we aren't in the middle of a dip at the time of doing this, of course, which would rather defeat the object). New kitchen and bathroom - both are basic and were already shabby when I bought the place ten years ago, as it was an ex-rental, so I'm really looking forward to that bit and might splash out. Not sure what else yet. Refill GIA and maybe some bonds, to soak up the small tax-free allowances. World cruise, I dunno. Can't wait to have this problem.

No partner, no kids or other dependents, IHT planning seems pointless when the value of my flat alone is way above £325k and also I'm only 51 so statistically I might as well wait and see what the rules are a quarter of a century from now before putting thought into that, never mind making sacrifices in order to prioritise it. I mean how p'd off would I be if I put the bulk of my ISA into a trust for my niblings only to see IHT abolished in the March Budget! (I do have a Will and a brace of POAs.)

[DuncanM]

Agree with all the others who recommend paying off the mortgage. As others have said, when you are debt free it makes financial planning so much easier. The question about whether you can generate more returns from the cash than you would pay in interest disappears. Sure, if you can guarantee you can make more with the cash then don't pay off the mortgage, but returns vary as do interest rates.

[Artistxman]

Sorry for coming in late, I have been thinking hypothetically about similar scenario long time from now. One of the things, I wondered is paying off mortgage is a finite thing with interest saved over a certain number of years. On the other hand, if you can pay the additional interest - isn't the investment of the same amount perpetual until you liquidate- particularly in ISA or something like a VCT? Am I being too simplistic? Let's assume you model paying extra interest for 5 more years vs investing the same amount and expect to see a return for 10-20 years...?

[Dicky99]

Sorry for coming in late, I have been thinking hypothetically about similar scenario long time from now. One of the things, I wondered is paying off mortgage is a finite thing with interest saved over a certain number of years. On the other hand, if you can pay the additional interest - isn't the investment of the same amount perpetual until you liquidate- particularly in ISA or something like a VCT? Am I being too simplistic? Let's assume you model paying extra interest for 5 more years vs investing the same amount and expect to see a return for 10-20 years...?

Anybody who has both a mortgage and investments totalling more than the principle of the mortgage is making that judgement call either consciously or otherwise.