Should I use pension to pay off mortgage?

unphased

I have a modest pension pot of £100k and I am self-employed. I pay in £120 a month and get the tax top up added on. I am 56 years old and still have a mortgage costing me £700 a month. The redemption date is December 2019 but one element of the mortgage is £23k interest only that will still exist in December 2019 and my endowment was cashed in a coupe of years ago.


So, with the new pension rules I can access enough of my funds to pay off the mortgage in full, approx. £59k.


Should I do this and continue to pay in to my pension and possibly even increase monthly payments?


Should I use £23k to pay off the interest only element and by December 2019 it will all be paid off, reducing my monthly outgoings considerably?


Should I wait another couple of years or so and see how things go?


Do nothing?


Edit: I have just requested my lender to advise me how much the monthly repayments would reduce by if I were to remove the £23k interest only

mgdavid

a. what interest rate(s) are you paying on the mortgage(s)?
b. what investment return % is the pension fund achieving?

In the current environment one expects a to be less than b so the answer would be 'no'.

saver861

unphased wrote: »

Do nothing?

No - never do nothing! Your question will no doubt be repeated many times over the coming months.

Obviously it is only because this pension option has become available that it is an issue. Had it not, people would have carried on paying their pension and mortgage regardless as they have been doing for years!

What you can do is review your situation and assess all the options. Its likely your pension is best staying where it is, that's if you could access it in any case.

The idea of paying off the mortgage and upping the pension payments later is good in theory but probably not so in practice, especially when you get the unexpected hole in the roof.

There may be other ways of having a better more efficient mortgage - which is the route I would be looking at first for sure.

dunstonh

You are self employed. So, currently, you get a lower state pension. You will have a period of qualification under the new state pension which should see that improve. However, your personal pension is going to be important to you in retirement (unless you have other assets).


Chances are your pension investments have been growing better than the interest you pay on the mortgage. So, from that point of view it doesnt make sense. Then add in the tax you will pay and how it will reduce your retirement income, it really doesnt seem likely to be a good idea.

You havent mentioned any personal savings you may have. Could they not be used for the interest only element?

redux

I agree with the sentiment that if investments tend to be going up faster than the mortgage rate don't hurry to pay it off.

And this was after all the hypothesis behind interest only mortgages with accompanying investments. Yes, endowments had some bad press for a while, but maybe some of those people could have increased their investment amounts while falling interest rates were saving them money on the mortgage.

It may seem heresy compared to your current thinking, and I'm no expert, but experiment with some numbers. What if you actually increase the proportion of the mortgage that is interest only, thus cutting your monthly outgoings that way, and put more in the pension?

With a modest average rate of pension fund increase, and adding a new say £4 or 5000 a year, you might reach £150 or 200,000 in the pension fund sooner than you think, and maybe somewhere around the moment of retirement could be the time to use a by then larger tax free lump sum on the mortgage.

But I'm sure the professionals can come up with better balanced advice about risks and other factors than me.

unphased

hi mg
It's the Nationwide mortgage, which is currently 2.5% pa. I am not sure what the investment growth is on the pension. but I feel sure it would be better than 2.5%
Regards

kidmugsy

unphased wrote: »

I have a modest pension pot of £100k and I am self-employed. ...

So, with the new pension rules I can access enough of my funds to pay off the mortgage in full, approx. £59k.

Only the first £25k would be tax-free. The next chunk would be taxed as income. At 20% tax, to get £34k after tax would need you to withdraw £42,500 - which would make you a 40% taxpayer, so you'd need to withdraw even more. Since it can't make sense to volunteer to pay 40% tax needlessly, it would be mad to try to pay off all your mortgage in one tax year.

In fact, volunteering to pay even 20% tax might not make sense, depending on your retirement plans. There may be a spell, e.g. before you start your state pension, when you could draw some income tax-free.

In short, drawing your tax-free lump sum might make sense: drawing a bit more perhaps not; drawing a lot more makes no sense at all (based on the little you've told us).

And, of course, if the mortgage is dead cheap, there's no hurry to pay it off. If it's not dead cheap, why not remortgage to a cheaper deal, perhaps using your TFLS to reduce your LTV in hopes of a yet cheaper rate?

kidmugsy

The other way to look at it is that if you withdraw the TFLS, that can limit your new pension contributions by virtue of the law that constrains "lump sum recycling". In other words, carrying on with your usual rate of pension contributions presents no problem, but too big an increase would be penalised. The penalty can apply in the tax year you draw the TFLS and for the next two tax years. You might need to read up on this: there have been various recent threads discussing it.

There will be no problem if your TFLS is £7500 or less; that means you could draw down £7500 TFLS over each of the next three years - which happens to give you enough to pay off the interest-free bit. Meantime you could increase your monthly pension contributions to restore your position without penalty. I have a memory that the thing to do is leave a gap of at least a year and a day between the successive TFLS withdrawals.

atush

what did you do with the endowment when you cashed it in? That was supposed to pay for the mtg?

I would not use anything other than the 25% TFLS if you must raid your pension.

But if you aren't retiring now, id do nothing except keep paying in, and use any spare cash each monht to repay the interest free part of your mtg or use it to boost your pension.

unphased

There is much sensible advice and I thank you all for it. However, I think you would all agree there is no easy right or wrong. I am in a quandry tbqh. I wasn't aware of the penalty of increasing payments clause as highlighted by kidmugsy. That has made me reconsider. Also, I have long 0% credit card transfers in place that will need paying off at some point, too. I have got confused over which to deal with.


Let's put some cards on the table.


I Pay £120 (plus govt tax free contribution) every month in to my pension which has accumulated £100k.
I have another pension that is the old LG superannuation that I cannot use until my 60th birthday. that is fairly small as I left LG in 1984 and it was effectively frozen at that point and has just grown with inflation.
I have a third small pension that is worth around £3k.
I have two 0% credit card transfer debts because I have been a long standing card tart. One is Santander 1 2 3 card for £6,579 until 26 December 2016 and I opted for the paid £24 a year to get the longest deal. The other is for £2,300 which I have been (foolishly it seems) paying down with spare funds. It started at £8670 in December 2013 when I tarted it to pay off MBNA and Barclaycards both ending their interest free periods. The 0% term was to end of December 2015 so I have since paid off MBNA again and a lump sum off my Bank of Scotland card effectively extending that portion I paid off to end of 2016. So the balnce is £2300 now to end of this year.


I have been using a very expensive overdraft of up to £5,950 with Halifax Ultimate Reward Account that charges £15 a month fee anyway plus £3 a day for each day over £3k so that's £100 a month. To take this burden off me I have used the MBNA card to transfer £6k in to my Halifax bank account to clear the overdraft but it has cost me £240 (4%) to do so. It would have cost the same amount anyway on my overdraft if I had left it another two months and a few days, so that's how I looked at it. The new MBNA 0% will end on 22 April 2016 (16 month deal).
So that's it really. I understand I should not have paid down the interest free cards and should have focused on my o/d. My mistake. But there are too many balls in the air really for me to know what to do. Any advice would be welcome.


Regards

unphased

atush wrote: »

what did you do with the endowment when you cashed it in? That was supposed to pay for the mtg?

I would not use anything other than the 25% TFLS if you must raid your pension.

But if you aren't retiring now, id do nothing except keep paying in, and use any spare cash each monht to repay the interest free part of your mtg or use it to boost your pension.

I cashed in the endowment in July 2009 and paid off debts with it, paid off my company van loan and had a new kitchen.