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  • FIRST POST
    • Easysilence
    • By Easysilence 14th Nov 17, 8:24 PM
    • 5Posts
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    Easysilence
    Using Pension Pot to pay off mortgage?
    • #1
    • 14th Nov 17, 8:24 PM
    Using Pension Pot to pay off mortgage? 14th Nov 17 at 8:24 PM
    Hi,

    I have a fairly hefty mortgage which runs for another 14 years. I have a pension pot from my last employment which is about £10k short of what I owe. I'm increasingly not liking the amount of interest I'm paying on my mortgage so am thinking, use the pension pot to pay it off then put the money which would have been the mortgage payments to go into my current pension pot. Can anyone advise what the pitfalls would be?

    Many thanks for your help
Page 1
    • ermine
    • By ermine 14th Nov 17, 8:34 PM
    • 606 Posts
    • 885 Thanks
    ermine
    • #2
    • 14th Nov 17, 8:34 PM
    • #2
    • 14th Nov 17, 8:34 PM
    Can anyone advise what the pitfalls would be?

    Many thanks for your help
    Originally posted by Easysilence
    Being skint in retirement?

    Seriously, though, interest rates are at all-time lows. The long-term (integrated over periods of >10 years) return on investment on equities is ~4% real. How come you're paying more on your mortgage than your pension would be gaining?

    For a more accurate impression you need to say roughly how old you are to see how far away from retirement you'd be, and what other retirement savings you have. If you have enough for your retirement in other savings, perhaps paying it off is OK, though it's hard to see why you should be in too much of a hurry to pay off a mortgage rather than investing the money.
    • bostonerimus
    • By bostonerimus 14th Nov 17, 8:46 PM
    • 1,133 Posts
    • 641 Thanks
    bostonerimus
    • #3
    • 14th Nov 17, 8:46 PM
    • #3
    • 14th Nov 17, 8:46 PM
    What is the interest rate on your mortgage? It would have to be really high for your suggestion to make any sense.
    Misanthrope in search of similar for mutual loathing
    • Keep pedalling
    • By Keep pedalling 14th Nov 17, 8:48 PM
    • 3,951 Posts
    • 4,309 Thanks
    Keep pedalling
    • #4
    • 14th Nov 17, 8:48 PM
    • #4
    • 14th Nov 17, 8:48 PM
    Hi,

    I have a fairly hefty mortgage which runs for another 14 years. I have a pension pot from my last employment which is about £10k short of what I owe. I'm increasingly not liking the amount of interest I'm paying on my mortgage so am thinking, use the pension pot to pay it off then put the money which would have been the mortgage payments to go into my current pension pot. Can anyone advise what the pitfalls would be?

    Many thanks for your help
    Originally posted by Easysilence
    Pitfall 1 - if you are under 55 you can't touch it.

    Pitfall 2 - if you are over 55 prepaired to pay a large portion in tax, so you will be way off only owing another £10k
    • Easysilence
    • By Easysilence 14th Nov 17, 8:56 PM
    • 5 Posts
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    Easysilence
    • #5
    • 14th Nov 17, 8:56 PM
    • #5
    • 14th Nov 17, 8:56 PM
    Duh ... didn't think about the pot growing, I've been burying my head in the sand about the whole getting old thing and know so little about pensions ...

    I want to pay off my mortgage. £300 a month of it is interest - I am making overpayments on it because I hate the idea that I'll still be paying a mortgage when I'm 65 and a half. Instead of doing this would I be better to bump up the pension pot .... ?
    • LHW99
    • By LHW99 14th Nov 17, 9:59 PM
    • 966 Posts
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    LHW99
    • #6
    • 14th Nov 17, 9:59 PM
    • #6
    • 14th Nov 17, 9:59 PM
    Is this a company pension? If so, will the company pay in any extra if you increase your payments?
    Even if a private scheme, payments up to the level of your earned after tax income get tax relief paid in from the government.
    Both "free" money
    • Easysilence
    • By Easysilence 14th Nov 17, 10:15 PM
    • 5 Posts
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    Easysilence
    • #7
    • 14th Nov 17, 10:15 PM
    • #7
    • 14th Nov 17, 10:15 PM
    It is a company scheme, but my present employer will only match my contributions up to 3% and I am already contributing more than that.
    • jamesperrett
    • By jamesperrett 14th Nov 17, 10:21 PM
    • 685 Posts
    • 340 Thanks
    jamesperrett
    • #8
    • 14th Nov 17, 10:21 PM
    • #8
    • 14th Nov 17, 10:21 PM
    Have you looked at switching your mortgage recently? If you've now paid enough to put in you in a higher equity band you may find cheaper deals are available. It makes far more sense to pay any extra money you have into your pension rather than overpaying the mortgage.
    • Easysilence
    • By Easysilence 14th Nov 17, 10:36 PM
    • 5 Posts
    • 0 Thanks
    Easysilence
    • #9
    • 14th Nov 17, 10:36 PM
    • #9
    • 14th Nov 17, 10:36 PM
    Yeah that does make sense, I suppose it's me not wanting to look ahead that far but liking the idea of having a few mortgage free years before I retire. It's a fixed rate mortgage which I'm stuck in for nearly 2 more years, I will shop around when it's finished though.
    • ermine
    • By ermine 15th Nov 17, 8:40 AM
    • 606 Posts
    • 885 Thanks
    ermine
    liking the idea of having a few mortgage free years before I retire.
    Originally posted by Easysilence
    That's a really bad idea. BTDT - I was daft enough to pay off my mortgage before I retired. Then work turned crappy and I wanted to retire early, at 52. Having paid off that mortgage very seriously constrained my disposable income for 5 years of early retirement. Retiring early was still a great move and I don't regret it in the slightest, but were I still carrying that mortgage I could use the pension commencement lump sum to discharge the rest of it in a few years time. Or just carry it till fruition if interest rates remain at rock bottom, take the PCLS and put it to work in an ISA until about 5 years from mortgage redemption, when you need to derisk market exposure.

    Seriously, just don't get hung up on having a mortgage when interest rates are this low. What you need is a sensible plan to discharge the capital once you have retired. That's what your 25% tax-free pension commencement lump sum is for
    • TrickyDicky101
    • By TrickyDicky101 15th Nov 17, 9:20 AM
    • 2,801 Posts
    • 1,814 Thanks
    TrickyDicky101
    What you need is a sensible plan to discharge the capital once you have retired. That's what your 25% tax-free pension commencement lump sum is for
    Originally posted by ermine
    I'm* planning on spending my 25% on wine, women and song - the remaining 75% I'm just going to waste.





    * My wife may have other ideas ;-)
    • jerrysimon
    • By jerrysimon 15th Nov 17, 9:36 AM
    • 251 Posts
    • 185 Thanks
    jerrysimon
    Its strange how we feel about mortgages as we get older. I retired early this year in March aged 56, took my 40 year PS pension early with reduction for 3.5 years.

    A few years ago I paid off a 80K mortgage using inheritance from my father. Looking back it would probably have been wiser to have paid that into a SIPP for my wife as she does not pay tax and earns less than 2.5K/year. Of course back then I didn't know about SIPPs as I only came to this forum about 2 years ago. We did set up a small SIPP as a result.

    So I now have a 54K lump sum sitting in the bank/BS earning next to nothing (planning some DIY/small extension). However I still like knowing I have no mortgage and of course don't have to find another £250+ in payments each month to account for.

    If I had put it in a SIPP I guess I would have gained about 20-25K but then of course over and above the 25% you can draw out tax free, we would still be limited by the ammount we could draw out each year for my wife. I would also have to invest the SIPP given we could not draw it all out for five or six years without incurring tax.
    Last edited by jerrysimon; 15-11-2017 at 9:40 AM.
    • Anonymous101
    • By Anonymous101 15th Nov 17, 9:43 AM
    • 1,012 Posts
    • 370 Thanks
    Anonymous101
    Yeah that does make sense, I suppose it's me not wanting to look ahead that far but liking the idea of having a few mortgage free years before I retire. It's a fixed rate mortgage which I'm stuck in for nearly 2 more years, I will shop around when it's finished though.
    Originally posted by Easysilence
    Think of it a little differently. You're not stuck. You would need to pay a fee to exit your current mortgage but if rates are substantially cheaper you could save much more than the fee by switching.

    Also as others have said the likelihood is that your mortgage (even on a higher than average rate) is costing you much less than your pension pot is earning you. So even without factoring in fee's for accessing your pension, tax and early repayment charges on the mortgage it isn't worth paying it off.

    In fact there is an argument that you should be investing your over payment amounts rather than paying them off the mortgage but that's another discussion.
    • Anonymous101
    • By Anonymous101 15th Nov 17, 9:52 AM
    • 1,012 Posts
    • 370 Thanks
    Anonymous101
    Its strange how we feel about mortgages as we get older. I retired early this year in March aged 56, took my 40 year PS pension early with reduction for 3.5 years.

    A few years ago I paid off a 80K mortgage using inheritance from my father. Looking back it would probably have been wiser to have paid that into a SIPP for my wife as she does not pay tax and earns less than 2.5K/year. Of course back then I didn't know about SIPPs as I only came to this forum about 2 years ago. We did set up a small SIPP as a result.

    So I now have a 54K lump sum sitting in the bank/BS earning next to nothing (planning some DIY/small extension). However I still like knowing I have no mortgage and of course don't have to find another £250+ in payments each month to account for.

    If I had put it in a SIPP I guess I would have gained about 20-25K but then of course over and above the 25% you can draw out tax free, we would still be limited by the ammount we could draw out each year for my wife. I would also have to invest the SIPP given we could not draw it all out for five or six years without incurring tax.
    Originally posted by jerrysimon
    You could of course have invested the money in exactly the same funds through an ISA rather than a pension and still maintained the possibility of access should you have needed it.

    People find mortgages very emotive and often choose to make poorer financial decisions for the emotional benefit of not having a mortgage. Its perfectly understandable but we should understand the costs before we make the decision.
    • bostonerimus
    • By bostonerimus 15th Nov 17, 1:21 PM
    • 1,133 Posts
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    bostonerimus
    We still don't know the terms and interest rate of your mortgage, but I agree that going into retirement without a mortgage can greatly decreased cash flow worries. There's nothing wrong in making extra monthly mortgage payments (if you can) and also saving to a pension and an ISA. Investing and finances does not need to be just one thing or the other, but I would probably prioritize the pension savings because of the tax advantage and possibility of greater return than your mortgage interest rate.
    Misanthrope in search of similar for mutual loathing
    • AnotherJoe
    • By AnotherJoe 15th Nov 17, 2:11 PM
    • 7,600 Posts
    • 8,201 Thanks
    AnotherJoe
    People find mortgages very emotive and often choose to make poorer financial decisions for the emotional benefit of not having a mortgage. Its perfectly understandable but we should understand the costs before we make the decision.
    Originally posted by Anonymous101
    Yep the MFW forum is full of people doing exactly that, proudly paying off their mortgages as fast as possible at all costs and losing money long term due to them skimping on pensions and in some cases missing out on very serious money via missing out on higher rate tax relief
    • Anonymous101
    • By Anonymous101 15th Nov 17, 2:24 PM
    • 1,012 Posts
    • 370 Thanks
    Anonymous101
    Yep the MFW forum is full of people doing exactly that, proudly paying off their mortgages as fast as possible at all costs and losing money long term due to them skimping on pensions and in some cases missing out on very serious money via missing out on higher rate tax relief
    Originally posted by AnotherJoe
    It certainly is. I've been slowly increasing my pension contributions over the last couple of years to take me as close to being out of that bracket as I can.

    We've made the decision that any surplus that we would have paid off the mortgage gets split between our S&S ISA's. It goes against my Mrs. intuition to not make the overpayment, as I'm sure it does with many people, but it seems very logical to me.
    • Alexland
    • By Alexland 15th Nov 17, 2:33 PM
    • 690 Posts
    • 430 Thanks
    Alexland
    Suggest you ensure you are on a good mortgage deal that meets your needs and will be repaid when you are likely to stop work.

    Unless you are on the border of getting access to a better interest rate or there is a realistic probability that your income will dry up early then there usually isn't much point in overpaying any more. After keeping a cash rainy day pot any spare money is usually best invested in S&S ISAs or pensions. The long term return is highly likely to give a better result than the interest saved on overpaying.
    Last edited by Alexland; 15-11-2017 at 2:36 PM.
    • bluenose1
    • By bluenose1 15th Nov 17, 3:32 PM
    • 1,922 Posts
    • 3,101 Thanks
    bluenose1
    I am 51 and we have decided to put in as much as possible into my pension scheme rather than our original plan of overpaying the mortgage. This is because we will get tax relief of 20% on our pension contributions. When I retire (hopefully at 57) will use the 25% tax free lump sum against the mortgage capital. The rest I will draw down to the same as the personal allowance threshold.
    I suppose you have to factor in what you are likely to withdraw tax free from your pension fund or there may be any benefit if you end up paying tax on a considerable amount of it.
    We will owe £48k when I retire and if we use 25% tax free we will have a pension pot lump sum to pay off it of approx £24k. I reckon I will need approx £60k to take me up to the 11.5k personal allowance per annum until 67. So I may end up paying tax on the balance (Or retire a year earlier than planned.)
    Money SPENDING Expert

    • Alexland
    • By Alexland 15th Nov 17, 7:16 PM
    • 690 Posts
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    Alexland
    Using the TFLS to make the final mortgage payment can be a bit risky (similar to buying annuity, the market might slump when you need to cash in a lump sum) so you will need to think carefully about your investment risk profile when taking this approach. Probably more cautious funds than if you were just using the whole pot to go into drawdown.
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