Use Pension Lump Sum to Help Pay off Mortgage?

SwitchyChick

OH is able to take part of his pension as a lump sum (roughly £17k). We have o/s mortgage of £130k on FR 5.89% for 2 years.

Does anyone have any advice as to whether this would be an astute thing to do at the moment? OH is 55 and our main priority at the moment is to pay off the mortgage as quickly as possible.

Thanks

Switchy

dunstonh

Does anyone have any advice as to whether this would be an astute thing to do at the moment? OH is 55 and our main priority at the moment is to pay off the mortgage as quickly as possible.

Taking the lump sum early to clear the mortgage is an option but probably not the best one. e.g. you clear the mortgage now and come retirement you have to borrow on the property again because your retirement provision of just £17k isnt enough to live on.

Its also a once only bite of the cherry. If that £17k doubles in the next 10 years he wont be able to get another lump sum.

Mortgage rates are cheap (5.89% you say). Equities are cheap and rising at the moment (more than 5.89% in the last week). Is £4k really going to make much difference to a £130k mortgage.

EdInvestor

I read the OP's post as meaning the 17k is the lump sum not the total pension.

What is the pension fund invested in? It's not sensible to cash in at the bottom of the market as we are now for pretty well all investments.It would be better to wait while markets recover and the value of the fund rises so the lump sum is larger.

SwitchyChick

Ed's right - £17k is the lump sum available from uncrystallised pension (£70k). Crystallised pension = £83k.

Bulk of uncrystallised fund invested in: JPM Cautious Tot Return; Threadneedle Strategic Bond; New Star Sterling Bond; Invesco Perp High Income & Gartmore Cautious Managed.

Trying to weigh up the benefits of reducing the mortgage quickly (which will have an immediate effect on day-to-day living expenses now) as opposed to waiting for pension fund to recover slowly (which will determine our living expenses in 10+ yrs time) ....

jamesd

The plan to use the pension for the mortgage is fine, the timing just isn't right at the moment.

Given the investments it looks like a substantially better idea to wait at least a couple of years. The markets are down now and are likely to be healthier in two to five years.

Pretty cautious investments for retiring in 10+ years. If you've been invested more in equities in the past you might consider gradually switching some money to more equity based funds over the next twelve months to exploit the current low prices (but they could go lower still). Then start switching back gradually five year or so from now.

With the ten year horizon the best time to be doing the mortgage reduction with the pension money is probably during the next stock market high, since there's a fair chance that there won't be a second high in the ten year period.

Inflation is currently quite high and that's doing a nice job of reducing the real value of the mortgage for you. It won't take more than a year or two of inflation pay rises at current inflation rates to get you a fair bit of extra day to day comfort margin.

SwitchyChick

Thanks James. The pension pot has recently (09/08) been switched from all Jupiter-based investments where it was really struggling and we were going to give it 12mths or so & take a view on the 'new' pot re: performance vs. risk. Then "Le Crunch" happened...

Take your point about bailing out while markets are low & will prob leave it for now.