Taking funds at 55 from a define contribution pension

cjbessex

Hi everyone. I'm new to the site and couldn't find this specific question although I know it must have been many times before, so apologies for the duplicate.
I am 53 and have some smaller defined contribution pensions from previous employers, plus a current Scottish Widows defined contribution scheme pension that currently has around £370k in it. 
When I am 55 I would ideally like to pay off my mortgage which will be around £100k. 
My Scottish Widows pension pot will be around £400k by then and according to the terms, I am able to to access this at 55. However, I don't wish to 'activate' general income from the pension as I hope to continue working - and contributing to my pension with tax relief - until my 60s.

My question is, would I be able to access £100k from that pension when I'm 55, without harming my ability to continue to build it with maximum threshold tax-relief?

tacpot12

Yes, providing you don't draw on the pension after having taken the lump sum (which is called a Pension Commencement Lump Sum or PCLS). The moment you draw on the remaining money, you will trigger a lowering of your Money Purchase Annual Allowance and this will limit your ability to pay into your pension to £4000 a year. It also means that any further withdrawal of the remaining money is taxable. My understanding is that payments you make into your SIPP after having taken the lump sum, are uncrystallised funds, and you could take a further PCLS from those funds providing you don't recycle them back into your pension. So in theory you could take many PCLS.

Albermarle

My question is, would I be able to access £100k from that pension when I'm 55, without harming my ability to continue to build it with maximum threshold tax-relief?

To be accurate you can take 25% of the value of the pot when you crystallise it , which could be £100K +/- a few grand depending on the exact value of the pot at that time.

dunstonh

When I am 55 I would ideally like to pay off my mortgage which will be around £100k. 

Why do you think that is a good idea?  In most cases it is not.

My Scottish Widows pension pot will be around £400k by then and according to the terms, I am able to to access this at 55. However, I don't wish to 'activate' general income from the pension as I hope to continue working - and contributing to my pension with tax relief - until my 60s.

It wont trigger the reduction to £4000 but you will lose, effectively, the ability to use phased flexi-access drawdown in the future.   

cjbessex

Thank you all for your comments.
In the situation above, rounding up to £100k for ease, is the entire £100k tax free, or only the first £25k of it?
@dunstonh - your question, "why do I think it's a good idea"?
My view was that I'm able to pay off my mortgage, then pay the equivalent mortgage payments back in to my pension pot, with tax relief (but it was based on all the £100k released being tax free).
Is that a naïve view? 

Albermarle

If you have a £400K pension pot you can take £100K entirely tax free ( if you want to) 
Although it is also possible to take less now and the rest later or in stages .

pensionpawn

cjbessex said:

Thank you all for your comments.
In the situation above, rounding up to £100k for ease, is the entire £100k tax free, or only the first £25k of it?
@dunstonh - your question, "why do I think it's a good idea"?
My view was that I'm able to pay off my mortgage, then pay the equivalent mortgage payments back in to my pension pot, with tax relief (but it was based on all the £100k released being tax free).
Is that a naïve view? 

Mortgage rates are at their lowest ever and the growth on the £100k in your pension will vastly outstrip the interest payments on your mortgage. Of course the peace of mind that comes with being mortgage free is not to be underestimated, however its worth knowing that if £100k grew at 8% for 5 years then you'd have £147k. Some investments are growing at double that. Food for thought if you can afford the mortgage payments....
The £100k is entirely tax free!

ratechaser

pensionpawn said:

cjbessex said:

Thank you all for your comments.
In the situation above, rounding up to £100k for ease, is the entire £100k tax free, or only the first £25k of it?
@dunstonh - your question, "why do I think it's a good idea"?
My view was that I'm able to pay off my mortgage, then pay the equivalent mortgage payments back in to my pension pot, with tax relief (but it was based on all the £100k released being tax free).
Is that a naïve view? 

Mortgage rates are at their lowest ever and the growth on the £100k in your pension will vastly outstrip the interest payments on your mortgage. Of course the peace of mind that comes with being mortgage free is not to be underestimated, however its worth knowing that if £100k grew at 8% for 5 years then you'd have £147k. Some investments are growing at double that. Food for thought if you can afford the mortgage payments....
The £100k is entirely tax free!

This x100! Mrs RC and I took the decision some years ago to prioritise paying off the mortgage on our house over investing money elsewhere. I'm fully aware that it may not have been the best option when taking all emotion out of it, but I love the fact that I totally own** every brick in my house. That sort of security is priceless to me...

**by which I mean Mrs RC totally owns every brick and allows me to stay rent free as long as I behave myself 

Steve182

cjbessex said:

Thank you all for your comments.
In the situation above, rounding up to £100k for ease, is the entire £100k tax free, or only the first £25k of it?
@dunstonh - your question, "why do I think it's a good idea"?
My view was that I'm able to pay off my mortgage, then pay the equivalent mortgage payments back in to my pension pot, with tax relief (but it was based on all the £100k released being tax free).
Is that a naïve view? 

Unless your pension is performing very badly, investments held in it should achieve a higher long term growth than your mortgage interest rate.

I actually did the opposite to what you are contemplating a year ago. I increased my mortgage to invest it in stocks and shares. 

I have a flexible mortgage with a very low interest rate (base + 0.5% or 0.75%, I forget the exact rate but it's peanuts). I had £75K available to borrow, with just a letter to my bank required to access the money, so I took £50K of it and added it to my portfolio. 

Not suggesting you can or should do that, just explaining that there are sometimes better options than paying off your mortgage. 

barnstar2077

Steve182 said:

cjbessex said:

Thank you all for your comments.
In the situation above, rounding up to £100k for ease, is the entire £100k tax free, or only the first £25k of it?
@dunstonh - your question, "why do I think it's a good idea"?
My view was that I'm able to pay off my mortgage, then pay the equivalent mortgage payments back in to my pension pot, with tax relief (but it was based on all the £100k released being tax free).
Is that a naïve view? 

Unless your pension is performing very badly, investments held in it should achieve a higher long term growth than your mortgage interest rate.

I actually did the opposite to what you are contemplating a year ago. I increased my mortgage to invest it in stocks and shares. 

I have a flexible mortgage with a very low interest rate (base + 0.5% or 0.75%, I forget the exact rate but it's peanuts). I had £75K available to borrow, with just a letter to my bank required to access the money, so I took £50K of it and added it to my portfolio. 

Not suggesting you can or should do that, just explaining that there are sometimes better options than paying off your mortgage. 

I extended my mortgage term a couple of years ago, from eight to twenty five years.  It reduced my payments to less than a quarter of what they used to be.  Now I pay the difference into my pension for the free 25% uplift, and because the rate is so low on the mortgage it will hardly cost anything extra in interest.  If rates start to rise sharply (not likely ) then I will just pay it off early. 

I got the idea from someone else on this forum.  I wish I had done it sooner!