Should I use pension to pay off mortgage?

atush

Ok so here's the thing, you dont seem to be good with money with all the debt you have (or had in t he past). You have basically used your mtg money to pay debt, and now want to use your pension.

but doing it the first time didn't work, you are still in debt. So you need to get debt free, and beyond taking the 25% TFLS (which I dont suggest) i would not do it that way.

You need the debt free forum, where you post an SOA. The folks there will go over it and suggest cuts. Slam the most exp debt first using snowballing. Then attack the next etc.

Dont mention to them about your pension, as they will say to cash it in.

The reason I say not to, is if you do you will still be back in debt with no pension. And you may have to keep working indefinitely as you wont be able to afford to retire?

unphased

I am looking in to a better way of paying off the mortgage using monthly withdrawals from my pension. This may be a better way of doing it than taking large lump sums and paying heavily on income tax. This will allow me to substantially reduce my monthly outgoings and let the pension shoulder the mortgage payments. Redemption is December 2019 so doing this I will be mortgage free in 4 yrs 8 mths and still have a pension pot as I will continue paying in to it.

kidmugsy

unphased wrote: »

I am looking in to a better way of paying off the mortgage using monthly withdrawals from my pension. This may be a better way of doing it than taking large lump sums and paying heavily on income tax. This will allow me to substantially reduce my monthly outgoings and let the pension shoulder the mortgage payments. Redemption is December 2019 so doing this I will be mortgage free in 4 yrs 8 mths and still have a pension pot as I will continue paying in to it.

Ho hum. I think that taking tax-free money out while you are still a taxpayer is the way to use a pension, if you must. So I suggest that you look at the HMRC rules on recycling, in case my remarks have been too gloomy.

jamesd

unphased wrote: »

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%

The historic increase for the UK stock market has been about 5% plus inflation. If you haven't picked investments in the pension you're probably in a balanced managed fund that would do around 4% before charges, around 3-3.5% after, plus inflation.

Because this growth is higher than most mortgage rates it's usually the case that using pension money to pay off a mortgage makes a person poorer in the future than they could be.

Some people just want their mortgage gone but unless that describes you it'll probably be better to leave the money alone.

Given your debt situation some use of pension money may make sense. What I suggest you consider is the flexi-access drawdown option. That lets you take the 25% tax free lump sum but leave the remaining 75% invested for later. You don't have to take the whole pot this way, if 25% of £50,000 is enough you could just switch £50,000 to flexi-access drawdown. But don't do this for any more than it takes to get rid of the high cost debts, leave the mortgage alone.

One thing to be aware of is that if you take even a penny more than a 25% tax free lump sum you will have your annual allowance for pension contributions reduced from £40k to £10k. If offered a lump sum where 25% is tax free and 75% is taxable, called a UFPLS, this always triggers the reduction. So go with flexi-access drawdown and just the tax free lump sum instead.

unphased

Thank you James.


I am concerned about the comments made by kidmugsy with respect to 'recycling' pension funds. I don't really understand this. If I continue to pay my regular monthly contributions how is this seen as recycling? I am not changing anything, just continuing to pay in, and in all other respects would be following the new rules. Can you explain this please? It's a minefield isn't it.


Cynical me, isn't this a backdoor way of getting tax in to the coffers? I mean, loads of people are going to just pull out all their money in one wack and then get clobbered for tax.

jamesd

You probably don't need to be concerned about the recycling rules because:

1. If the tax free lump sum taken is no more than £7,500 it can't be caught by them. Can do the same every 12 months, not every tax year.
2. If the increase in pension contributions is no more than 30% of the lump sum it's fine, measured as the total increase in contributions over the two tax years before taking the lump sum, that year, and the two following years.

So if you just carry on making the same contributions you'd be fine because there would be no increase in contributions.

Given the card borrowing it doesn't seem as though it would be a problem for you to take £7500 of tax free lump sum at first, then more at least 12 months and one day later to stay within that safe harbour.

Of course 0% cards even with fees are costing you less than the long term average gains from the UK market and likely other investments in your pension, so you're actually better off with the borrowing than repaying it, aside from the cash flow issues that make it desirable to reduce the ongoing monthly bill.

What you could do is take some tax free lump sum with the rest going into flexi-acces drawdown. then take money from that lump sum to pay the card bills until the first deal ends, clearing that card at that time. repeat as desired until all the card borrowing is gone, if you want it gone.

Personally I'm looking to increase my 0% deal card borrowing to invest more but that's me and investment stoozing.

atush

It doesn't matter if you take the money out monthly or annually, you will still pay the same amount of tax on it (other than the 25% TFLS). I dont think this is the govt trying to raise tax revenue, as it is the choice of those who have pensions to take them highly taxed when still working or not.

Pensions are meant to be used when you are no longer working, and you have a PA to use. Those who take a pension while still working are making a rod for their own backs.

How will you stop yourself getting in further debt?

dunstonh

Cynical me, isn't this a backdoor way of getting tax in to the coffers?

Not a single person needs to pay a penny more tax than they did under the old rules. Plus, the taxation on death has been reduced. With careful financial planning, people could pay less tax than they did on the old rules too.

The only people who will pay more tax will be those that dont understand what they are doing.

geoff2

I want to draw my tax-free lump sum but I don't want to draw an income from the remainder because I'm still working. However, upon taking the TFLS, I am then obliged to put the rest into a "flexi-access drawdown" account - I can't just leave it where it is. So - is this "Drawdown" a specific type of product or just a particular option within some other product? Surely if I've had the TFLS I can't then put the 75% remaining into another pension because isn't that "recycling"? Help appreciated.

[I've just spotted the other thread about drawdown, so sorry, will now read that]

[Read it. Still completely confused]

dunstonh

I want to draw my tax-free lump sum but I don't want to draw an income from the remainder because I'm still working. However, upon taking the TFLS, I am then obliged to put the rest into a "flexi-access drawdown" account - I can't just leave it where it is. So - is this "Drawdown" a specific type of product or just a particular option within some other product?

What you want to do is drawdown. This is a specific transaction that is only available on more modern personal pensions, SIPPs and drawdown plans. It is not typically available on older legacy plans.

Surely if I've had the TFLS I can't then put the 75% remaining into another pension because isn't that "recycling"?

its not recycling as you are not taking it out of the pension. You are choosing the drawdown method with zero income.