Method or Madness? Paying off Mortgage in full with Workplace Pension

davestewart68

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?

kimwp

Hiya, better to ask this on the mortgage free wannabe or pension boards, this board is for people with debt (other than mortgages)

TheAble

For the reasons you describe it does feel like a rather sub-optimal proposition.

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).

fatbelly

I think I would leave it as 'it's always an option.' You know your house is secure because you can always access enough pension to repay the mortgage if you needed to.

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.

RAS

When does the early redemption penalty cease?

And can you overpay mean-time without penalty?

But in the short-term, I'd leave the pension as is.

Exodi

I mean to break it into it's two parts:

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).

Exodi

Also - this definitely belongs on the pensions board.

enthusiasticsaver

I have requested this be moved to the pensions board.  

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. 

MSE_ForumTeam5

kimwp said:

Hiya, better to ask this on the mortgage free wannabe or pension boards, this board is for people with debt (other than mortgages)

We've moved the thread - if you see something in the wrong place, please use the 'report' button to alert us and we can move it. This is preferable to ending up with replies spread between two threads.

Pat38493

The key question here is - why do you want/need to pay off your mortgage right now?

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.

Getting_greyer

"...I'd pay the same pension tax if I draw it over a longer period..."

"I'd pay it anyway however I draw it..."

I'm not sure that's correct as i think would depend upon both your current earnings, pension income, and the size of this pot you have.