Should I take a lump sum early from my pension to pay off my mortgage balance?

MisterT

Hi all, I have a question I'd like to run by you and would be interested in your thoughts.

Our fixed term mortgage at 2.09% is about to come to and on August 31st this year. At that point we can move to another product or on to our providers SVR at 6.99% or see what's out there from someone else but with the LTV I think we're a bit limited when taking fees into account.

The outstanding amount come August will be around 30k on a property value of 500k, we're paying around £830 per month just now and this will go up to £900 if we go on the SVR.

I'm looking to retire mid to late 2024 and my original plan was to use part of the lump sum I'll get to pay off the mortgage balance at that time and start our new life debt free.

I have 3 pensions, one deferred DB scheme and one active with my current job and one stand alone pot with currently worth around 325k.

Would it make sense to take some of the cash in my stand-alone pot as a tax-free lump sum and use this to pay off the mortgage in August?

I'm thinking I could use the cash we'd save on the mortgage payments to add to my AVCs each month and get that back when I start taking that pension, perhaps only 10 months increased AVCs but the more I can put in them the better.

Does that make sense? Are there any implications re tax or suchlike I'm not aware of if I take a lump sum out?

Pat38493

There has been a couple of other threads about this recently.

Probably your plan does make sense, especially if you are a higher rate taxpayer, as long as you use your additional disposable income wisely i.e. use it to put into AVC or some other pension asset.  If you are just going to spend the cash that you were previously paying to the mortgage, it maybe doesn't make sense depending what your pension is invested in.

There was some discussion about whether this might theoretically fall foul of the pension recycling rules which are supposed to prevent you from taking out tax free cash and then just paying it right back in to another pension to get more tax free cash on it.  You can find the HMRC guidelines about this by googling it.  The rules are mainly there to prevent large scale abuse and probably not for situations like this.

However if you are already maxing out your pension contributions as much as you can in preparation for retirement, the consensus is that this would not be an issue in reality, since one of the rules is that HMRC would have to prove that you engineered the entire situation purely for the purpose of recycling and no other reason, and if it was you would be the first person ever known to have actually been penalized under this rule.  I am actually planning to do the same thing next year so I guess we might find out together.

MX5huggy

Reading between the lines is your current scheme LGPS with Salary Sacrifice AVC’s? 

Do you pay 40% tax? 

MisterT

My current DB scheme is with Natwest. I'm just in the 40% bracket and have managed to avoid it for the last few years using my AVC payments but the combination of a pay "rise" (an increase but less than inflation) and a cost of living bung they gave us has pushed me into the 40% this year. I expect next might be the same

MallyGirl

In this scenario I would probably, on the basis of info given, crystallise just enough from the DC pot (with £325k in) to get what you need in a tax free lump sum.

MisterT

MallyGirl said:

In this scenario I would probably, on the basis of info given, crystallise just enough from the DC pot (with £325k in) to get what you need in a tax free lump sum.

Sounds reassuringly simple, thanks.

If I did that would it trigger the MPAA? If it does does that just apply to that pension pot and I could still contribute more than the limit to my DB/AVC fund?

LHW99

MisterT said:

MallyGirl said:

In this scenario I would probably, on the basis of info given, crystallise just enough from the DC pot (with £325k in) to get what you need in a tax free lump sum.

Sounds reassuringly simple, thanks.

If I did that would it trigger the MPAA? If it does does that just apply to that pension pot and I could still contribute more than the limit to my DB/AVC fund?

AFAIK you won't trigger the MPAA if you only take tax-free cash, but you do if you take £1 of taxable withdrawal.