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Using Pension Funds to Pay off Mortgage?
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# 1
acrickie
Old 06-07-2009, 7:35 PM
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Default Using Pension Funds to Pay off Mortgage?

I am currently re-rganising my pension with the help of an IFA and had a random thoguht the other day that it would be nice if I could use my pension fund to pay off my mortgage. I was told that I could actually use the lump some part (25%?) to pay off part of my mortgage but not all, which I imagine is correct!
The question arises though as to whether this would be a sensible idea or not. My initial thoughts are that this depends on current and future mortgage rates as opposed to likely returns on the investment!
Any thought or comments would be appreciated!

thanks
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# 2
dunstonh
Old 07-07-2009, 9:16 AM
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Quote:
My initial thoughts are that this depends on current and future mortgage rates as opposed to likely returns on the investment!
It depends on mortgage rates and the potential of the investment. If your mortgage rate is 3% and the investments have the potential within your risk profile to return 7% then it would be daft to pay off mortgage.

Also, you only get one bite of the cherry with the 25% on those funds. If you take 25% now and the remaining 75% in pension fund doubles in the next 10 years you are not able to take another 25% (apart from on new contributions). Also, you reduce the death benefits of the pension.

With mortgage rates typically very low and investment prices back at around 2005 levels, it wouldnt seem like a good idea unless you feel that the years until you retire are not going to be good for your investments.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 3
DiggerUK
Old 07-07-2009, 9:26 AM
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Acrickie,
You don't say if you are in a position to take the lump sum now. Are you 50+ and considering doing so.

It's not clear if your lump sum is insufficient to clear the mortgage, or there are restrictions on what you do with it. Normally the lump sum is yours to do with as you please.

If you can make payment on your mortgage I would urge you to consider that option.
Interest rates are not going down, how high they will go is anybodies guess. Don't forget what the rates got to in the 80's and how long they stayed there.

Have you found that the warning when you took out your pension "that the value of your investments can go down as well as up" was not a meaningless phrase ?

Best of fortune.
I am not now, nor have I ever been, a Financial Adviser.
Forward, to the 'British Spring'
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# 4
jamesd
Old 11-07-2009, 10:29 PM
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acrickie, it can be a good idea to make extra pension contribitions instead of overpaying on, or using, a repayment mortgage. The tax gain from relief on contributions and no tax on the lump sum plus investment returns that are usually higher on average than mortgage interest rates are both advantageous. Then you can use a lump sum from the extra contributions against the mortgage.

However, if you were to make a lump sum payment now your timing is atrocious and would probably eliminate all of the potential gain and more.

We are currently near a low point in the stock market cycle. That gets you low values when selling the investments to take the lump sum. Now is the time to be increasing money going into investments, not taking money out of them. The next stock market boom is when you should be considering shifting money into fixed interest investments like government or corporate bonds or taking some of the capital as a lump sum to reduce the mortgage balance.

We are currently in a time of historic and near historic mortgage interest payment levels. This minimises the gain from paying off additional capital.

We are currently in a time when inflation is anticipated in a year or three and this will reduce the real (after inflation) value of the mortgage debt. This favours waiting until inflation has reduced the value before overpaying.

Your timing is horrible and you're picking close to the worst possible timing to be doing this.

What you should be looking to do, if you want to get the benefits, is commit any overpayment on the mortgage money to pension or stocks and shares ISA investing. Wait three plus years for the next market boom cycle and for inflation to do its work and then consider paying off a lump sum, selling some of the investments at a high value to do it. That way you'd gain on the tax breaks, gain on the stock market movements and gain from inflation.

Last edited by jamesd; 12-07-2009 at 12:38 PM.
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# 5
tawl
Old 12-07-2009, 10:49 AM
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acrickie: is your pension a final salary or money purchase scheme?

if it is a final salary, in my opinion, it's actually a good time to take the lump sum. reason why as stated above the market seems 'good value' now but on top of that, conversion terms for lump sum in a final salary salary are usually not good so therefore taking the lump sum in return for better investment outside the scheme seems a good idea. Of course, if you retire early you get a reduced pension but commuting your pension for a lump sum doesn't usually affect your spouse death benefit pension.

If you are in a money purchase scheme, seems like it's a good idea to hang in there and see if market bounces back. perhaps contribute more as stocks are cheaper now.

hope this helps.
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