Using 25% Allowance to Pay off Mortgage

mifty12

I am currently investigating the advantages (or pitfalls) of using some of my 25% allowance to pay off my mortgage.

By the time i reach 55 in a couple of years i will have around £25k balance to pay off my mortgage. I am on a fixed rate until that point and will be switching to a new rate in around 2 years time. I obviously have my state pension along with my work place pension along with a further easily accessible pension pot which i am planning to drawn down on the tax free allowance to pay off the mortgage and then repay that sum back into the pension pot instead of having to make mortgage payments plus interest back to my mortgage lender. Is this a sensible option as it will only be a two to three year period end then the drawn down funds will be back in the pot.

Thanks.

MK62

It depends......😉

Joking aside, it does depend on the rate you are paying, the rate you could get on deposit, and the terms of the mortgage (specifically around early repayment). That said, many feel that its a weight off.....and if it makes you feel better then who can say that's wrong?

PS, if you decide on that course of action, make sure you don't fall foul of the pension recycling rules......

leosayer

The way I see it is that having a mortgage and a pension is effectively borrowing money to invest. That's fine when you're in your 30s and 40s because a pension is locked away until your mid 50s.

Once you start to approach retirement it can be harder to justify unless you are on a particularly good mortgage rate that you know you can beat with investment returns. 

Having said that, there are certain circumstances where retaining debt might help you be more tax efficient with regards to tax relief, inheritance tax, ISA allowances etc.

cloud_dog

mifty12 said:

I am currently investigating the advantages (or pitfalls) of using some of my 25% allowance to pay off my mortgage.

By the time i reach 55 in a couple of years i will have around £25k balance to pay off my mortgage. I am on a fixed rate until that point and will be switching to a new rate in around 2 years time. I obviously have my state pension along with my work place pension along with a further easily accessible pension pot which i am planning to drawn down on the tax free allowance to pay off the mortgage and then repay that sum back into the pension pot instead of having to make mortgage payments plus interest back to my mortgage lender. Is this a sensible option as it will only be a two to three year period end then the drawn down funds will be back in the pot.

Thanks.

Has it always been your intent to utilise the pension TFLS to pay off the mortgage?

If it hasn't, what has changed to make you consider this, and why do you feel you need / should pay it off at age 55?

We have been using pensions as our investment vehicle to repay the mortgage and I am very content with the growth / return on that money / decisions, but the one downside is that you will be crystallising X% / amount (£75k) of your pension and therefore that will be liable for tax, irrespective of how much it grows by in the future.

Albermarle

You will only be able to feed that money back into a pension ( and get tax relief) if you are still working, and have enough earned income to cover the increased contributions. 

LHW99

You don't know what interest rates will be in 2 years time. They could be down - there is pressure at the moment for the BoE to start making cuts, in which case you might be able to get a fairly cheap new mortgage rate, likey to be less than keeping that 25% invested could earn.

On the other hand, if the new Government does something the market doesn't like, rates could be heading up again.

Maybe a decision to make in 18 months or more, as paying the SVR for a couple of months may be less of a problem than jumping too soon and making the wrong decision.