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Taking lump sum early to pay off mortgage

I am 55. My wife is non working. I have a personal pension pot worth about £250,000. I am also employed by the NHS and so will get a final salary pension of about half my current earnings when I retire as I intend to do at 60. The combined value of the two pension "pots" won't begin to approach the A day maximum of £1.6 m or whatever.

We have a £95,000 offset repayment mortgage and no other significant debt.

As I am over 50, I am entitled to take 25% of the pot as a tax free lump sum. I would like to do that to pay down the mortgage. However, I don't at this stage want to take an income as I propose to keep working for the next 5 - 7 years.

My pension provider tells me that I can't simply take the tax free cash and leave the balance invested. However, if I understand this correctly, I could take the cash and put the remainder into drawdown, with a drawdown value of nought for the next 5 - 7 years.

1. Is this correct?
2. Would it be a reasonable thing to do?

Comments

  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    It is correct and it would be a reasonable thing to do. If the fund has no protected rights money in it, you can perform this manoeuvre very cost effectively by moving your fund to a low-cost online SIPP , taking the tax free cash and then putting the rest into drawdown.There is no need to take an income (until you reach 75).

    What would you like to invest the drawdown money in?Investment strategy will tend to dictate which is the most cost effective provider to use.
    Trying to keep it simple...;)
  • Andy_L
    Andy_L Posts: 12,961 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    What return are you getting on your pension investments? Is that higher or lower than your mortgage interest rate?
  • Acromion
    Acromion Posts: 29 Forumite
    Part of the Furniture 10 Posts
    Andy_L wrote: »
    What return are you getting on your pension investments? Is that higher or lower than your mortgage interest rate?

    I suppose that's the $64,000 question. I am embarrassed, in this astute on line company, to say that I don't know the answer. Taking the offset out of the equation, I am a higher rate tax payer with a variable rate mortgage which means paying off the mortgage "returns" about 10% pa to me. I doubt if I can reliably match that return by pension investment. It's the bird in the hand argument.

    Incidentally thanks to Ed for his rapid response.
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    I would still suggest you extract the tax free cash now even if you don't use it to pay off the mortgage, as it would be very sensible to start building up you and your wife's stocks and shares ISAs ( 7.2k a year X2).This is so as you can obtain tax free income later. One problem with having all this money in pensions is that you risk getting hit badly for tax in retirement.

    The idea of pensions is to pay higher rate going in and basic rate (or nil) coming out.Sounds like you could easily end up paying higher rate coming out and/or have your age allowance clawed back, which would defeat the purpose entirely. :(

    Does your wife have pensions in her own right? If not her tax allowances ( which will be 10k a year by the time you retire) will also be wasted.

    It's really unfortunate that so many people get so close to retirement without having received any help with post retirement tax planning - all the advice seems to be concentrated on tax relief going in, ignoring the tax you pay coming out.
    Trying to keep it simple...;)
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