Should I use my Mortgage Pension Pot to pay off my mortgage now or later

wroughtironron

I'm 62, working part time and am in receipt of pensions totalling £14k pa from previous employment.My wife works part-time too.
I have very limited savings of around £6k.
My outstanding interest only mortgage is around £42k, (at just above base rate) and I took out a private pension plan thirty years ago to which I'm still paying £70 per month gross.
The pension pot for this (with Old Mutual)has reached £54k and the plan was to use it to pay off my mortgage.
I will get state pension in 4 years when I'm 66.
Should I look at withdrawing some of this now to pay part or all of it or should I wait and hope the pension pot continues to rise?
I know I'll have to pay tax on 75% if I withdraw the full amount, but will the tax go up to the next band ( I earn around £15k as well as my pensions) ?
Many thanks

Dazed_and_confused

Yes, your taxable income would be in the region of £70k (14+15+40.5) so well into 40% tax.

If you split the pension withdrawl across two years you'd still be into some 40% tax as the normal threshold this year is 43k (or 45k outside Scotland). 14+15+20.25 = 49.25

Your Old Mutual contribution might increase the amount you can pay 20% tax on but they won't make much of a difference on the figures quoted.

kidmugsy

The sensible thing to do is to leave the mortgage alone (are you really paying just over 0.25% p.a.?) but to draw down from your pension over the course of three or four years so that you never pay more than 20% income tax on it. Use the pension money to boost your emergency cash savings, and eventually you can pay off the mortgage when you have no choice in the matter. If Old Mutual can't allow drawdown just transfer to a provider that will. Hargreaves Lansdown would be one possibility.

Do your best to earn high interest on your cash savings e.g. using high interest current accounts and regular savers, so that they are a bit bigger when the time arrives to pay off the mortgage.

On a separate point: how well off is your wife for pension provision?

wroughtironron

kidmugsy wrote: »

The sensible thing to do is to leave the mortgage alone (are you really paying just over 0.25% p.a.?) but to draw down from your pension over the course of three or four years so that you never pay more than 20% income tax on it. Use the pension money to boost your emergency cash savings, and eventually you can pay off the mortgage when you have no choice in the matter. If Old Mutual can't allow drawdown just transfer to a provider that will. Hargreaves Lansdown would be one possibility.

Do your best to earn high interest on your cash savings e.g. using high interest current accounts and regular savers, so that they are a bit bigger when the time arrives to pay off the mortgage.

On a separate point: how well off is your wife for pension provision?

Many Thanks - obviously I can take 25% tax free which would give me £13.5k currently - I don't mind continuing to pay into the pot so that in 4 years time it could be considerably more than now (or considerably less....)


Are you suggesting I take the 25% plus a sum to take me just under the higher tax rate for this year, then draw down annually for 3-4 years?


My wife has state pension plus £200 per month from a previous employer. She also works part time earning around £4k pa

kidmugsy

wroughtironron wrote: »

Are you suggesting I take the 25% plus a sum to take me just under the higher tax rate for this year, then draw down annually for 3-4 years?

Yes. I also suggest that you keep the money in your pension in a cash fund not an investment fund. Investments are too risky for money that you will need fairly soon for clearing debt.

wroughtironron wrote: »

My wife has state pension plus £200 per month from a previous employer. She also works part time earning around £4k pa

Once your wife has stopped work what will her annual income be? It sounds as if it will be below her personal allowance against income tax (currently £11,500 p.a.). If so, you should be contributing to her pension rather than your own because eventually she'll be able to draw the money out tax-free whereas you won't be able to.

Triumph13

There is no way to avoid paying at least basic rate tax on 75% of your pot so there is no real downside in getting that money out of your pension as quickly as possible whilst avoiding higher rate tax - I don't think many people think that the basic rate of tax is going to come down in the future, but it is entirely possible that it might increase.
As kidmugsy says, it's a waste to continue to pay any pension contributions in your name (except for those attracting employer contributions) when you could be putting them in your wife's name instead to use up her personal allowance.
Have you got a state pension forecast each? Your wife's current earnings are too low to count as qualifying years and if she has a patchy working record or spent much time contracted out it may still be worth her paying voluntary NICs.

sevenhills

Triumph13 wrote: »

There is way to avoid paying at least basic rate tax on 75% of your pot so there is no real downside in getting that money out of your pension as quickly as possible whilst avoiding higher rate tax - I don't think many people think that the basic rate of tax is going to come down in the future, but it is entirely possible that it might increase.

The Government could also change/lower the tax free amount, you never know.

agarnett

Triumph13 wrote: »

There is {no} way to avoid paying at least basic rate tax on 75% of your pot ...

This policy is 30 years old ... how about Transitional Tax Free Cash as at A Day 2006? Any chance that the tax free element may actually be greater than 25% ?

I have a 28 year old policy where I've been advised that TTFC is 42%.

I have no idea how it was calculated.

wroughtironron

I've contacted Old Mutual to ask about drawdown, and they say
[FONT=&quot]"To go into drawdown; the full value of your pension would have to be transferred to another pension product with either Old Mutual Wealth (such as a Collective Retirement Account) or another Pension Provider with a drawdown facility."
I've looked at their collective retirement account, and before I can transfer into it, Old Mutual say that I need to use an IFA. Any thoughts?
[/FONT]

GunJack

wroughtironron wrote: »

I've contacted Old Mutual to ask about drawdown, and they say
[FONT=&quot]"To go into drawdown; the full value of your pension would have to be transferred to another pension product with either Old Mutual Wealth (such as a Collective Retirement Account) or another Pension Provider with a drawdown facility."
I've looked at their collective retirement account, and before I can transfer into it, Old Mutual say that I need to use an IFA. Any thoughts?
[/FONT]

That might imply there are guaranteed benefits attached to your existing policy, like Guaranteed Annuity Rate or similar...ask them

dunstonh

I've looked at their collective retirement account, and before I can transfer into it, Old Mutual say that I need to use an IFA. Any thoughts?

Its who I have my pension with. However, that means absolutely nothing as there is no one-size-fits-all best option. Old Mutual retail their products through intermediaries. That is why they are telling you that you need an IFA. You don't need one to to the actual transaction. You can use a DIY provider. However, if you select an advised provider then you need an adviser.

I took out a private pension plan thirty years ago to which I'm still paying £70 per month gross.

That is sad. 30 years ago, £70pm gross would have been a good contribution. Today, its a pittance. If that had been increased in real terms every few years, that could have been a very good pension pot. A good start thrown away. Too many people do that.