Paying off mortgage with pension tax free lump sum?

[Skodillac]

The above. What are the pitfalls? The only one I can think of is that you're putting cash into an asset (property) which may not grow at as good a rate as if it were left in the pension pot.

My situation is that I'm 55 soon, I've got 10 years left on my mortgage, but the 25% tax free lump sum soon available to me out of my pensions would pay that mortgage off. So I'm planning on ploughing the money I'd otherwise be spending paying the mortgage every month into other financial investments instead of servicing mortgage interest and capital repayment. Then I'm planning on working another 5 years to 60, then taking an annuity with the rest of my pension funds, selling the house and downsizing, and investing the remainder of my home equity into income bearing things - then getting a nice Brucie Bonus of full state pension on top at 67.

Good plan? What am I missing? What's the downside here?

Thanks for any thoughts. I'm a finance and pensions dunce, which is embarrassing at 55. Please be gentle, and please avoid finance jargon.

[Milnsey]

What's your mortgage interest rate ? fixed for a while or variable ? Any penalties for early repayment ?

[Skodillac]

Good questions, but probably not something to worry about overly. I'm on a discount variable, which expires this spring, so part of my thinking is that by paying it off now I won't have to remortgage. The two things - my hitting 55 and my mortgage renewal - are roughly aligned.

[GT03ROB]

I had a similar dilemma last year. My TFLS would cover the repayment of the mortgage with a bit to spare. I was also coming off a low fixed rate. Ultimately however my decision was swung by the fact the mortgage term was ending around the time of the election. I took a view not to take a risk on Labour messing with the TFLS so pulled it out & repaid the mortgage. Its another factor to consider.

This things are not strict financial calculations, you have to have peace of mind also.

[Milnsey]

I did it at 55, keeps things simpler and saves messing about renewing mortgage
Fingers crossed the markets stay high

[Milnsey]

TFLS was also a factor for me yes

[greengreenwood7]

only you can do the calcs based on your other situ, but obvs taking 25% tax free now means that the rest of that pot of pension will fall into 'taxable'.....depending how your pot is structured/what assets etc, it may be better to just let that pot grow and keep paying the mortgage - even if its for a few years more. But only you know your own thesis...

to me, and i seem to be in a minority around the PH forum, i'd rather owe the bank money at a measely interest rate on a currency that is devaluing every year and try to max out my gains in investments/pension, and try to balance what tax i may have to pay from various 'pots' in the future.

[Skodillac]

GT03ROB said:

This things are not strict financial calculations, you have to have peace of mind also.

This is a good point and does factor in my thinking.

What I'm looking for are any proper "bear traps" out there which I could fall in to - like I said, I'm a finance dunce and haven't paid much attention to these matters all my life. Truth be told I've got a bit of a money phobia - I don't like having to deal with it.

I'd love to be mortgage free. I think I'd be able to hear my heart singing. But I have a very low appetite for risk, and want to make sure I'm not taking any large ones if I do this. I don't think I am, but thought it wise to check on a forum like this where wise finance heads abound.

[Freakuk]

I cannot advise on this as I'm not qualified to do so certainly from a finance gain/tax perspective.

I guess my question is if you had 25% of your pension pot available what else would/could you do with it that you've been desperate to do but never had the available funds while you still have your health.

Travel the world
Fast cars
Coke & hookers

Basically, if you don't need the cash then from a financial perspective surely it's better to pay off the mortgage now and be better off in the longer term.

[Skodillac]

greengreenwood7 said:

only you can do the calcs based on your other situ, but obvs taking 25% tax free now means that the rest of that pot of pension will fall into 'taxable'.....depending how your pot is structured/what assets etc, it may be better to just let that pot grow and keep paying the mortgage - even if its for a few years more. But only you know your own thesis...

to me, and i seem to be in a minority around the PH forum, i'd rather owe the bank money at a measely interest rate on a currency that is devaluing every year and try to max out my gains in investments/pension, and try to balance what tax i may have to pay from various 'pots' in the future.

Thanks, that's the sort of stuff I'm looking for.

The rest of the pension pot, I intend to buy an annuity with at 60. You say it's falling into 'taxable' - what does this mean for any annuity I buy? Let's do ballpark numbers, say I've got £200k left in it at age 60, having taken 25% out. Let's also assume that 200k buys an income of £10k per annum. What tax am I paying and when?

Cheers.

[ukwill]

Two things you've mentioned stick out to me:
very low appetite for risk
love to be mortgage free

To me that suggests you should pay off your mortgage at 55.

Yes, you may make better returns from leaving the sum invested - but no one knows how the markets will play out. And as you have a low appetite for risk, I doubt whether you'd want that risk. Further, it's a monthly sum you no longer have to pay, and its a great psychological boost.

[Tango13]

Personally I'd take the 25% just in case the government change the rules further down the line and whatever I'd been paying monthly on the mortgage would go into an ISA.

[onetwothreefour]

Skodillac said:

The above. What are the pitfalls? The only one I can think of is that you're putting cash into an asset (property) which may not grow at as good a rate as if it were left in the pension pot.


Good plan? What am I missing?

Assuming you don't move then this is the wrong way to think of it. You're not putting money into an asset - the asset is already there and is yours. You are putting money towards paying off the debt that you used to buy the asset.

If you bought a nice meal out and put in on your credit card, then paying off your credit card isn't "putting money into your asset (food)".

The mortgage debt is independent of what happens to the value of your house - think of it as a fixed term negative savings account. In very crude terms, if you don't have a savings account paying a higher interest rate then paying off the mortgage is worthwhile.

That assumes you don't want to blow it on coke and hookers.

Sorry for the bluntness - am in a rush!

[mikeiow]

ukwill said:

Two things you've mentioned stick out to me:
very low appetite for risk
love to be mortgage free

To me that suggests you should pay off your mortgage at 55.

Yes, you may make better returns from leaving the sum invested - but no one knows how the markets will play out. And as you have a low appetite for risk, I doubt whether you'd want that risk. Further, it's a monthly sum you no longer have to pay, and its a great psychological boost.

I would agree.

A possible bonus: markets (generally) have had a great time the past year or more.
Might mean they take a bit of a dip sometime this year….
Cashing (up to) 25% of your pot to close off your house will be a satisfying position for you, and if markets do drop, well, you took some out before it did.

Pitfalls?
Main one is to avoid touching any of the other 75%. That would trigger the MPAA - see https://www.moneyhelper.org.uk/en/pensions-and-ret... for more on that.

[PM3]

Tango13 said:

Personally I'd take the 25% just in case the government change the rules further down the line and whatever I'd been paying monthly on the mortgage would go into an ISA.

THIS would be my vote. I paid off 7 years ago ( not pension money ) it was a meh feeling at the time , but I lost count of the times it crossed my mind that we fully owned house , so relaxing and changes ones planning thought processes

An aside...the downsize thing can often change with circumstances and plans later.

[IJWS15]

Not sure about this but doesn’t taking money out of dc schemes limit your ability to put more into your pension so you lose the tax benefits of further pension contributions?

Anything you put into an ISA is out of taxed income, pension contributions are untaxed.

[Tighnamara]

IJWS15 said:

Not sure about this but doesn’t taking money out of dc schemes limit your ability to put more into your pension so you lose the tax benefits of further pension contributions?

Anything you put into an ISA is out of taxed income, pension contributions are untaxed.

See Mikes link above

[greengreenwood7]

Skodillac said:

Thanks, that's the sort of stuff I'm looking for.

The rest of the pension pot, I intend to buy an annuity with at 60. You say it's falling into 'taxable' - what does this mean for any annuity I buy? Let's do ballpark numbers, say I've got £200k left in it at age 60, having taken 25% out. Let's also assume that 200k buys an income of £10k per annum. What tax am I paying and when?

Cheers.

as at todays tax rates, you could have an income oif circa 12.5k from your pension with zero tax, so yes the 25% tax free part woudl be negated/wasted if you were only getting 10k a year.
But when you then get state pension, you'd be having 19k a year and paying tax on anything over the 12.5k.

i see you're risk averse, so my stance is probs the wrong one for you but:
i'd rather have my 'pot' increase for another 5 years 'cos 10k isn't going to go far - unless you've a very frugal lifestyle or other bits n bobs.
if you leave the monies intact in the pot now and IF the pension has fairly good growth, the ability to pay off the mortgage doesn't go away.

Put another way (obvs i have no idea of the real numbers).
you carry on paying mtge for 5 years which reduces it, and you pay the princely sum of 4% interest.
Your pension pot continues to grow at 6% on the whole of the amount that's currently in it.
so in 2-3-4-5 years you need less monies from the pot to pay it off but the pot should be larger anyways....
i'm probs a degen, but i've stopped work, and frankly don't give a toss about still having a bit of mtge - because not paying it off allowed my/our monies to grow a heck of a lot more than the interest cost.

There's no right /wrong, because it comes down to mindset and peace of mind, in that respect we're all wired differently.

[Edible Roadkill]

I’m an advocate for paying off the mortgage. I done mine in my 30’s, now while I could have invested at a greater return the security of owning your home gives you an enormous advantage and then I found increases both your saving ability and also your risk appetite.

I’d pay the mortgage if I were you. Then with the home secure look to save and invest.

[Shnozz]

I’d do what I’ve done, as per all other posters on this thread.