Mortgage repaid early!

I had a great chat on the phone with my client earlier today … they have repaid their mortgage! In it’s self this is a milestone moment for all clients. The day you become debt free! 

What makes this even more remarkable is that as of January 2021, this was not on their agenda.  In fact at that time, we had only just been recommended to them by their accountant and they had every intention to work all the way up to their State Pension age, two years down the line.


Their background was a lengthy career with one of the UK’s major insurance companies who dominated financial advice and investment / pension markets for decades.  Being an ex-employee, this client had a suite of policies with their old employer.  All of which made perfect sense at the point they were taken out I should add.

In our first meeting, while the client made coffee, they hinted they had interviewed three IFA’s previously but had not instructed them as they could not tell them anything they didn’t already know from a career in financial services.

At the end of the meeting, we were instructed to be their new financial planner and investment manager. 

Three things instantly jumped off the page for them:

  1. Blending tax-free cash and taxable income

Being with a large insurance company they had become very accustomed to their policies and had a mindset that as none of their colleagues had saw fit to change, then they would not either.

Owing to the amount of capital they had accumulated in their pension fund, they could afford to retire early and begin drawing against the capital, a process known as flexi-access.  In a beautiful combination of tax-free cash and pension income, they can draw £66,000 from their pension fund a year and only pay £7,386 in tax (as they have no other income if they retire.) 

Firstly, this was news to the client as they previously believed they had to draw their entire tax-free cash lump sum at the start of retiring from the pension fund.  Staggering it over a longer period was unknown to them.

  1. Deferring annuity purchase

Secondly, they had become accustomed to skipping through their pension valuation reports to the section entitled “What could you get back when you retire” and had seen the income figure dropping, leading them to think they could not afford to retire. This was a combination of mediocre performance but also worsening annuity rates. 

Annuity purchase for this client is simply too early in their retirement cycle and while they may come back to it, as annuity rates are so low, a flexi-access approach to drawing retirement income is likely to be more tax efficient and provide them with more capital long-term in retirement.  It also avoids them selling all of their investments in one go and so the capital can recover.

  1. Now here comes the magic …

So now we had proven to the client they were wealthier than they thought, and they could draw funds from their pension tax-efficiently over time, avoiding the market pitfalls of bad performance.

We then moved on to their insurance investment bond that had been taken out in the early 00s.  This specific investment bond suffers an annual taxation of 20% on it’s returns even for basic rate taxpayers.  If the holder is a higher rate taxpayer in the year they draw the profits from the bond, they pay a further 20%.

Moving forward, the ISA regime combined with a trading account that annually harvests the client’s capital gains tax allowance is much more efficient for them, allowing them to capture more of their returns.  We modelled that the annual tax charge on the investments dropped from 20% to near zero.

Also, if the client retired before the new tax year started, they would be able to cash in the investment bond at nil taxes in the following new tax year for zero tax! If they kept the policy and drew from it during retirement, they would push themselves into higher rate tax losing another 20%.

Moving forward

For their planning, they now had multiple options of how to draw down on their capital with minimal taxation consequences, simply by getting the sequence of withdrawal right.

First thing they did was to repay their mortgage.

Knowing when to cash in investment policies, when to draw your tax-free cash, when to buy annuities are all hallmarks of our financial planning for clients.

Thanks for reading and…