Method or Madness? Paying off Mortgage in full with Workplace Pension
davestewart68
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I'm in a slightly unique situation. Later this year I turn 55 and my workplace pension pot becomes accessible. I already have a Forces Pension and I'm still working full time in a good job, I have no intention of retiring anytime soon. I have a mortgage still. I am thinking of drawing my workplace pension in full when I turn 55 to clear my mortgage outright. There are two 'stings' in my plan. I'll pay a large tax penalty on 75% of the pension pot. I'll also pay a sizable early redemption charge for the pleasure of clearing the mortgage early.
My thought process is that I'd pay the pension tax anyway if I draw it out over a longer period of time, Seeing the tax in one hit is scary but really I'd pay it anyway however I draw it. The ERC for clearing the mortgage seems steep, but I'd pay a lot more in interest if I paid it off over a longer period of time.
Am I completely mad?
My thought process is that I'd pay the pension tax anyway if I draw it out over a longer period of time, Seeing the tax in one hit is scary but really I'd pay it anyway however I draw it. The ERC for clearing the mortgage seems steep, but I'd pay a lot more in interest if I paid it off over a longer period of time.
Am I completely mad?
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Also by taking all your pension in a lump like that you may end up putting yourself in a higher tax bracket for the tax year in question (depending on how much is involved).
But at 55 you've got a good length of working life left. How much of the mortgage term remains? Is it on a repayment basis?
What happened to me was a relative died and left me enough money to pay off my mortgage. I thought that was a sensible thing to do with the lump sum. I hadn't planned for or expected that.
And can you overpay mean-time without penalty?
But in the short-term, I'd leave the pension as is.
You can draw from your pension at any time, it really makes little sense to do it while an ERC is payable... you could wait a couple of months/years and save yourself thousands. While I don't mean this as a serious action a suggest you take (this is just a thought experiment) - a lot of people are able to access savings products with similar interest rates to their mortgage. If you were worried about wasting money 'paying interest' while you wait, you could just put the withdrawn money in a savings product to counteract this until the ERC is no longer payable - not that I'm suggesting this route... just pointing out there's not really any reason to pay ERC in your circumstances.
Secondly, while you will pay tax whenever you withdraw it, depending on the sums, it's possible (and quite likely) you'll inadvertently end up paying a higher rate of tax by taking it all in one tax year - meaning you would end up paying more tax overall compared to withdrawing it in smaller chunks. Again I go back to your comments about wasting money 'paying interest' - is your pension invested or in cash? You'd hope that returns on your investments would counter-balance any interest payable on your mortgage, and if it's in cash, some pension providers pay interest on cash (perhaps ask the providers if they do).
FWIW I don't' think you should do this. It will be hugely disadvantageous tax wise and paying an ERC doesn't seem a good idea. If you are still working and don't intend retiring soon why do you need the mortgage to be gone now? You will miss out on 10 years at least of growth on the pension and the markets are pretty low now so cashing out at this point is not something I would consider.
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I strongly suspect that if you worked through the maths of all the available options, what you are proposing will leave you worse off in the long run.
It may also be that your money in your pension is growing on average faster than your mortgage interest rate, depending how it’s invested and what mortgage you have.
Even without early repayment penalties, what you propose is often not the rational best choice.
Therefore if the main motivator for this is that you want to have the psychological feeling of being “mortgage free”, you might want to think again before acting.
If you post some detailed specific figures and information you will probably get some good feedback from various posters as similar questions come up quite often on this board.