Terminal Gratuity: pay off mortgage or invest? [Archive]

OKOC

11th Jul 2006, 14:49

MilSpFunc

11th Jul 2006, 15:12

I retire in 3 months time and up until now I have always intended to use my Terminal Gratuity to pay off part of my mortgage. I have just done the Financial Aspects of Retirement Course which sadly now no longer benefits from a session with an Independent Financial Advisor, which it used to, and the question of what best to do with your Gratuity wasn't covered on the course.
I can afford to keep paying my mortgage premiums, as luckily I am going into full time employment.
I know we are all different but I really would appreciate any advice please on whether to pay off part of the mortgage (5% fix) or invest, and in what.:confused:

It all depends on what your aspirations are I suppose. First priority would be to pay off any high priced loans e.g. credit card debts or other loans. If you can invest and gain interest above the mortgage rate, remebering the tax man will take a % of your interest, then best to invest and keep paying the mortgage out of income. Always handy to have some money available to meet surprise costs such as major repairs, kids education, weddings etc. etc. depending on where you are in the family support stakes.

Main thing is to lock the money into something that prevents you from spending it on frivolous items like cars and electrical goods - it may look like a big number but it will soon go if not looked after.

OKOC

11th Jul 2006, 15:13

Thanks for your reply-the fix has 15 months to go and I can pay off a maximum of 10% which equates to £15,000 without penalty.

A2QFI

11th Jul 2006, 15:17

I am NOT an IFA. If you want to speculate, you could make money or you could lose a lot of it. I bought a 'tracker' ISA 7 years ago and a certain group who "Quote you miserable" have charged me fees and percentages to turn £3000 into less than £2000. Right now I only put money in cash ISAs. That said I made 50% in 2 years by investing in a Cash ISA linked to the Halifax house price index and this was good result, at the time. However, a Cash ISA, into which you can only put £3k a year and earn 5% is safe but doesn't generate much money. Broadly, if you can't earn more %age interest after paying tax at your income tax rate, than the %age rate of your mortgage, you are better off paying something or all off your mortgage, IMHO. It may amuse you to know that the original idea of the cash lump sum was to enable one to pay cash for a house on retirement - days long gone! in 1977 my lump sum was £5400 and my house was £11,500.

airborne_artist

11th Jul 2006, 15:57

I'd suggest that such a large change in your circumstances warranted a total review of your financial assets/liabilities/risks, and so just pulling one lever, which might appear sensible, may have other, longer-term, but irreversible effects that you can not forsee.

I think a trip to an IFA with all your savings, insurances and incomes details would be sensible.

I've PM'd you one who has strong Services experience, and so will be able to assist. He's based in Wiltshire, so just around the corner from your location.

ase engineer

11th Jul 2006, 21:44

I'm NOT a financial adviser, either.
If you can find an investment paying more interest than you are paying on your mortgage then I'd put it in that, if you can't - then pay off the mortgage and save the monthly payments. Some places advertise jolly good rates for regular savings that a lump sum investment won't get.

Blacksheep

12th Jul 2006, 02:27

"Independent Financial Advisor" means that he doesn't work for a company. In other words, he's on commission. Commissions are good in the military. Everwhere else they're the scum of the earth. Listen carefully, as this is the best piece of financial advice you'll ever get. Never buy any financial product from anyone who's on commission. The sharks are cruising out there, they're after your money and you're the only one who has your own best interest in mind. Look after your money yourself, if you don't know how, keep it in a deposit account while you learn.

My own suggestion:
Take your money and split it three ways. Put one third into Gilts. Your Bank Manager (who is not on commission and will charge for advice) can help you choose a good spread of short, medium and long term ones. Put another third into ordinary shares. Buy into companies that are not likely to go bust in a downturn - bakeries, jam, beer etc. Put the last third into property - sell your house and trade up. The pension should pay the mortgage, your new civilian job will look after the rest.

Oh, and if your new job has a company pension scheme (the civil service has the best :OK) don't opt out.

Monty77

12th Jul 2006, 04:43

Buy yourself one toy - widescreen tv, something like that. Buy Mrs OKOC (if there is one) similar. That will purge the "because I'm worth it" factor. Stick the equivalent of 2 months pay in an easy access building society as a panic fund and use the rest to put a large hole in the mortgage. Remember a mortgage is only a large debt and a significant proportion of the monthly payment goes to the bank for being good enough to lend it to you in the first place. Imagine being mortgage-free. That gives you a lot of extra each month to put where YOU want, not into the bank's coffers.

BEagle

12th Jul 2006, 05:51

With 6 years to go to the point at which the endowment policy covering the mortgage is due to mature (fortunately, unlike many, mine will actually cover it!) I put an amount equal to the mortgage into the lowest risk possible. £30K into premium bonds (has so far made £2K +), the rest into a building society with a reasonable rate. Which means that, should I have a change of circumstances, I can always pay the mortgage off now and the endowment maturity will come in 2009. Plus you never know, one day Ernie may come up trumps and every month there's always that to look forward to on around the 3rd working day when the results come out!

The rest? Some toys, some invested in higher risk tracker ISA and some used for other things.

The job keeps the £1500 per month (net) pension topped up - but greedy Gordon takes a fair chunk and, no longer on PAYE, the unwelcome arrival of tax bills is a bit of a pi$$er!

I also discovered credit card management again after many years using debit cards. Use a credit card which gives you fringe benefits (I use Lufthansa Visa as it gives me points towards 'Miles and More' which I can use for personal travel) - arrange for it to be paid off in full automatically every month. Use on-line banking to keep the maximum possible in your savings account,with just enough in your current account to avoid paying any bank charges. Then use on-line banking to transfer whatever is needed to pay off the credit card bill just in time. Transfers between accounts are instant, so keeping an eye on the balance in current whilst keeping the maximum in savings is very simple.

airborne_artist

12th Jul 2006, 07:03

n other words, he's on commission. Commissions are good in the military. Everwhere else they're the scum of the earth. Listen carefully, as this is the best piece of financial advice you'll ever get. Never buy any financial product from anyone who's on commission.

A bit of a generalisation. IFAs are now well-regulated, and will get into very deep water if they sell products not suitable for the client's circumstances.

The IFA I have suggested by PM to posters will work on either a commission basis, or an hourly rate, and provides detailed quotes for both.

FJJP

12th Jul 2006, 07:47

I left at 55. Not a financial adviser. I took my gratuity and paid a chunk of it over to my mortgage; I was determined to keep my pension intact. However, a friend pointed me to a financial adviser company with a top class National reputation - they and their fund managers regularily feature well in the financial press [pm or e-mail me if you want details].

They did a full health check and spent many hours over a number of evenings in our home in person discussing all the options. In the end, I was persuaded to commute and invest, and with their advice I now have a mixed [mainly low risk] portfolio that has grown substantially in the past 4 years. [For example, one of the investments £25K started in Jan 2004 is now worth £37K, very safe and readily available to cash-in].

Unless you have an in-depth knowledge of the financial system, investments available and all the pro's and con's, you MUST use an independant financial adviser - just make sure they don't charge you any fees. If you don't, it will take only one dodgy investment to wipe out your capital [or at best leave you with a lot less]. Everybody's circumstances are unique and advice suitable for one is not necessarily good for the next man. [I guess Blacksheep had a bad experience].

dalek

12th Jul 2006, 08:14

Pay off mortgage. It makes you feel great.

FFP

12th Jul 2006, 08:18

Is the general concensus to commute the max possible ? I know I'd rather have it tax free now than pay more to the Gov over the years.

Sure individual circumstances differ, but on the whole ?

FJJP

12th Jul 2006, 08:31

FFP

See my post #11. Don't do anything until you get advice. The most important bit is:

Everybody's circumstances are unique and advice suitable for one is not necessarily good for the next man.

FJJP

PerArdua

12th Jul 2006, 08:36

As has been stated before personal circumstances differ but I leave in less than 3 years time and plan to blow 20K on a newer car and invest the rest as the mortgage was taken on when house prices were realistic and while the thought of clearing it off is a good one I just feel that my family and I should enjoy the money as I have earnt it over the past 20 odd years of hot and dusty conflicts.

PA

R 21

12th Jul 2006, 08:39

Paying of some of / all of your morgage is an investment. If the property is rising steadily surely its a great investment ?

FFP

12th Jul 2006, 09:13

I think there is a lot to be said for paying off the mortgage. It needs to be considered against early repayment penalties / time to run / amount outstanding etc but to have your house paid off has to be a priority.

Certainly is mine. Way things are going it should be paid off 4 mths before I leave at my 38 point.

Melchett01

12th Jul 2006, 10:16

FJJP

Check PMs. Regards

Melchett

buoy15

12th Jul 2006, 15:24

OKOC
Pay it off - I did - 3 months of interest is dead money (eg - 3 x £340 = £1020 - big saving) and you still have to pay off the capital - I paid off 15 years of mortgage with my gratuity - up front capital payment of £5700.23p (interest over that period would have been £44,900) - and I would have still had to have pay off the capital (total = £105,100.23 at today's BofE rates)
Don't expect champagne or big bands - all I got was a tacky receipt from the Halifax with a cursory 'thank you' - just like I'd bought a gallon of petrol
Paying off your mortgage really pisses them off - they are no longer scrrewing you for interest - and yes, I felt really good when I signed the cheque and said under my breath - Fcuk you! - I suspect she heard me, which made it even more satisfying!
The gratuity is a windfall - you never had it before, so you won't miss it, and as a bonus, you should allocate your now defunct mortgage payments into an ISA or similar investment - youv'e already budgeted for that so you won't feel the pinch - meanwhile it's earning
Don't go mad and buy a new car or kitchen - wait 5 years, then you can buy both and still have your original investment
Take a look a Martin Shaw's "MoneySaving Expert.com" for extra help
Be Brave - Do It - Fcuk the banks

MilSpFunc

13th Jul 2006, 08:32

The other great thing about paying off the mortgage is that if you do need money in the future you can always re-mortgage at lower rates than other loans available.

Paul Wilson

13th Jul 2006, 17:07

If you are thinking of investing rather than paying off the mortgage, you have to remember that except for ISA's you will generally be paying income tax at your marginal rate on the interest.

For a higher rate tax payer this is 40%. So a 10% return - which is UNHEARD OF for "normal" investments, turns into a 6% return after tax - around where the mortgage rates are.

Pay off Loans, Credit cards and Mortgage, but keep 3 months salary for instant access.

As for Financial Advisors there are now 3 types - 1. Tied to the organisation they work for. 2. Working from a limited panel of companies (they are allowed to call themselves Independant) and 3. Fully independant.

A good rule of thumb guide is to ask if they will rebate commisions back to you and work on an hourly rate, if they will you're onto a winner. It will cost a fair chunk - around £100 per hour, but you get zero bias in his or her advice

cazatou

13th Jul 2006, 20:38

Just remember that your "Pension" is classified as a "Government Pension"; and that, no matter where you live on this Planet, HMG
WILL continue to tax you in the UK on that Pension.

So No 1 Priority is, if you intend to reside overseas, to ensure that there is a "Dual Taxation Treaty" between your "Residence of Choice" and UK. It may also be benificial to "commute" the maximum dependant on Taxation rates; but one would need Specialist advice on that.

tarbaby

14th Jul 2006, 04:38

No job is permanent and when you are unemployed the greatest millstone is the mortgage. If this happens do not expect any sympathy from banks and building societies. Even you are employed, the mortgage outgoings can still represent a fair chunk of your after tax earnings. Pay the mortgage off and feel the relief. Best thing I ever did.

Not Long Here

14th Jul 2006, 04:55

Cazatou,

I am in receipt of an RAF Pension and the Inland Revenue have just agreed to permit "Paymaster" to pay it gross to me. However, it has to be declared at the end of the Tax Year to the New Zealand IRD and at that point I pay the tax on it.

But in the meantime its a nice little earner:}

Certainly commuting makes sense as it reduces the ongoing tax burden to me particularly as NZ Tax ends up as more than UK Tax for the same salary/pension combination.

(BTW for NZ read any country with a dual taxation agreement)

RayDarr

14th Jul 2006, 08:54

Always pay off your debts with the highest interest debts first. Clear the mortgage if you can. This is what we did when I left the mob in '87. Continue to pay the mortgage payments to yourself, and the family saving soon add up.
Whenever we needed a new washing machine/fridge/TV etc we asked the shop how much it would cost over 2 years. Then bought it cash and payed the HP payments into our savings for the next 2 years. In edffect we were our own bank.
Also joined the RAuxAF working on the view that if civi job went tits up, I would still have an income, and RAF stuff is easy to an old hand init???
Result is all the advantages of mess life, access to gym, etc etc and the pay from a civi job. Also enough dosh to be able to retire from my civi job in 14 more days. Staying in the RAuxAF though. to trickle feed the bank account, while now taking long holidays in exotic locations.

Blacksheep

14th Jul 2006, 16:15

I guess Blacksheep had a bad experienceIndeed. Along with so many others I can name - "the unacceptable face of capitalism" as Ted Heath aptly called it.

But finding one of these mythical money magicians is a trifle tricky. You may PM me for an e-mail address FJJP if you've one to recommend. I retire again soon. :(

cazatou

14th Jul 2006, 19:08

Not Long Here,

That does seem to be a new development. Perhaps you could let the RAF Pensions Society/ RAFA /British Legion have copies of the correspondance. It could affect a lot of people.

Even after 5 letters to HM Inland Revenue, I have not yet had a reply regarding my new address; mind you , I haven't had one from Barnwood either.