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

gm0

If working and pension contributing. MPAA may stop this in its tracks. 40k to 4k annual allowance

If that doesn't then the income tax difference between income sequencing these pensions optimally for payment in early retirement through Forces and SP - possibly with deferrals - vs highest rates for all in one year will swamp the interest saving.  Up to 30% of the 75% or even more unnecessary tax.  Very likely very bad value.

All that is before the question of whether levering up or down - pay debt vs keep invested assets is a good idea.  Strong opinions both ways on that one.  Spoiler: The stay invested gang are right very long term - but crucially not for everyone as circumstances shift and not all the time along the journey.  I levered down pre Global Financial Crisis via no ERC allowed mortgage overpayment - and I am certainly poorer for it 20 years later given UK property and the bull global market since GFC. With hindsight about those markets of course. But I didn't have to try to sell my house or seek mortgage forebearance in the middle of the GFC when I lost my job. Essential income lower. Redundancy lasts longer until new desirable work appears. So no regrets.

Work on the sequencing 3 pensions in payment and tax rates. Or get an adviser to sort you out.

greatkingrat

Potentially you could just take the 25% tax-free from the pension and use that to pay off some of the mortgage, while leaving the other 75% invested in the pension.

davestewart68

greatkingrat said:

Potentially you could just take the 25% tax-free from the pension and use that to pay off some of the mortgage, while leaving the other 75% invested in the pension.

This is looking like my preferred option at the moment. I will be running the plan by an IFA before I commit to anything.  It's swings and roundabouts between the 3 key factors: tax exposure, interest charges and time.  Worst case would be to draw the full pension and kill the mortgage stone dead, cheapest from an interest rate, quickest in terms of time, but would incur a huge tax bill.  Best option would be as you suggest, take 25% tax free, but only pay off 10% of the mortgage balance.  That method doesn't increase tax exposure, minimises interest payments but will take 5 years to complete - and I need to not spend the £25k during that time, saving it for annual 10% over payments. There are other options in between which raise and lower the key factors but I think I've found the optimum solution - subject of course to a check over from an IFA.

davestewart68

TheAble said:

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).

Yes, for that reason, having built some lovely excel model calculators, taking the full amount is my least preferred method.

Qyburn

What's your mortgage interest rate?  And how much are you allowed to overpay before you're hit with ERCs?

Merlin139

Are you on the AFPS 75? If so have you factored into your calculations the increase you will get in your Forces Pension at 55?

davestewart68

Merlin139 said:

Are you on the AFPS 75? If so have you factored into your calculations the increase you will get in your Forces Pension at 55?

Yes, I'm on AFP75. I left on 31 Dec 2009 so I'm assessing the accumulated CPI increase between Jan 10 and Aug 23 to be in the region of 40% +. I've also ascertained that the CPI increase is the pension value pre-commutation, which is a figure I'm unsighted to, but as I took maximum commutation, that can only work in my favour. For the 23-24FY, the increase will only be in effect from Aug-Mar, so the net tax exposure increase actually remains at about the existing level.

davestewart68

Qyburn said:

What's your mortgage interest rate?  And how much are you allowed to overpay before you're hit with ERCs?

The mortgage is broken into 3 sub-accounts - I'm sure they do this just to make it more confusing.  2 accounts are at 2.73% and one is at 3.23%. I'm allowed to overpay by 10% of the balance of each account within each calendar year.

Qyburn

So you could earn more from savings account interest, than you'd save by overpaying. Do you have unused ISA allowance? 

JReacher1

You don’t have to take the tax free sum at 55. The later you leave it the bigger your 25% lump sum would be. If you get generous workplace contributions from your employer I would be tempted to leave it as late as possible to withdraw the 25%.