Pay off mortgage using tax free pension

DrAPC

I’ve been looking on line for information relating to using my tax free lump sum to pay off an outstanding mortgage balance. 

For example, I turn 55 in a few years and have over £1.2M in my person pot but I’ll also have a £100,000 mortgage. My fixed mortgage period also comes to an end in a few years. So, what I’m trying to work out is whether I should take £100,000 from my pension pot (at 55) as it will be tax free and completely pay off my mortgage balance as I could take advantage of having a mortgage standard rate for a few weeks and therefore won’t be limited to the 10% overpayment restriction. I’ll take a hit on my pension but I’ll have £1,600 pm free cash that I can then invest in an ISA. 

Any additional information you can provide would be very much appreciated. 

Cobbler_tone

Horses for courses but you have a healthy pension pot and already past the maximum tax free cash available. Otherwise I would have probably paid it off and hammered your pension to maximise contributions...and upgraded my holidays. 

Paying off a mortgage is usually a lot more than a straight forward financial decision. The majority of people feel a sense of relief and achievement to be mortgage free...without the bundles of accessible disposable cash it releases. 

Not straight forward as depends on whether you are on salary sacrifice, can avoid higher tax bands on your salary and how you view having a mortgage. 
Now I am past 55 (and mortgage free) my overriding motivation is to avoid paying 40% for the rest of my life. I've just upped my pension contribution rate to 40% and just have to live to fully enjoy it starting in a couple of years.

Don't underestimate the freedom and options of having another £1,600 to play with each month. Remember to maximise your tax allowance on savings in higher rate accounts before going into a lower rate ISA.

crv1963

We paid off the mortgage with part of my TFLS from a DB pension and are now hammering into my wife's DC pension, I also pay into my current DB pension and have bought additional pension to avoid/ reduce 40% tax. £1600 pm is not to be sniffed at and is certainly worth considering as long as you can still contribute to pensions saving why not?

BTW being mortgage free does feel like a weight has been lifted off of your shoulders even if it is just the psychological feel good factor!

QrizB

In general (but not always) investment growth beats mortgage interest. So you're likely (but not guaranteed) to be better off keeping the mortgage and leaving the £100k invested.

But the savings from paying off the mortgage are guaranteed, and I can see the attraction of being mortgage free - I made a similar choice despite knowing that it was probably the less lucrative one! (In my case the overpayments came from taxed income, not from a TFLS.)

waveneygnome

DrAPC:  we are in a similar position and are planning to do just that - take £100k TFLS to clear the mortgage.

So long as you feel you have enough in the pension pot to support your retirement; and taking a lump sum out doesn't effect you ability to contribute back into the pot (i.e. not trigger MMPA).

We also viewed it as a form of de-risking.  Depending upon what your pension funds are invested in, (our equities have had a good run), we are taking some money off the gambling table to buy mortgage certainty.

One thing for you to check:  you mentioned you are 'a few years from 55'.........the access age for pensions is increasing to 57.........just check you are OK age wise to access it at 55. 

Albermarle

Regarding paying the £1600 pm into a pension after paying off the mortgage.
1) You would still need to be earning to do that, and get tax relief ( on most of it anyway)
2) As you are already over the max TFLS level, you will not benefit from any tax free cash from new contributions.
3) If you are a 40% taxpayer in employment it could still be worthwhile if you will be a 20% taxpayer in retirement.
4) As suggested filling up a Spouse's pension could be more beneficial ( if you have one and they are earning)

HitchFlip

Exactly what I did. Paid mortgage off using the TFLS from a SIPP. If you have +£1m you can afford to pay off the £100k mortgage & leave the remainder of the 25% there for future, if you crystalize the SIPP but don't enter drawdown, you can open a new SIPP & get tax rebates on investments into that from relevant earnings. However there is a limit on the 25% tax free sum you can take, from any & all pensions. ~£268k? You are probably near that so maybe pensions aren't the best option anymore?

Paying off mortgage is a trade off - you don't pay interest, today 4% or more, & you can invest the payments (ISA etc) also the house will in all probability increase in value, & likely by more than an ISA, & currently but for stamp duty & fees, you can down size tax free & liberate equity later. 

ali_bear

My take on this is based on the assumption you are still working. You already have a whopping DC fund that will continue to grow tax-free until you retire (possibly beating your mortgage rate, even though your TFLS will be capped). Seems that with hindsight you have been paying in too much over the years possibly? 

I would keep the mortgage going, but divert all surplus funds into paying it down quickly. You refer to a 10% overpayment limit, is that a restriction on how much you can overpay? Consider moving the mortgage to one with more flexible terms, but check the fees and rates. If it is really restrictive you could save into an ISA etc and then use that money to pay it off partially when your fixed rate period comes to an end. 

Once you are mortgage free you can start building up non-pension savings in ISA's etc. Having these funds when you retire will buy you flexibility. 

Only caveat to all of this is if you are currently a higher rate tax payer. You can still avoid paying that higher rate tax by hosing the excess income into your DC pension fund. But then again it seems possible you will end up paying at least some higher rate tax on pension income anyway. 

DRS1

Given that you are already over the £268k LSA with your pension (and no-one really expects that £268K to be increased any time soon) there must be an argument for extracting the £100k tax free lump sum as soon as you can and putting it to good use.  Paying off the mortgage when it goes to a variable rate (presumably higher than the fix) sounds like a good use to me but then I was brought up to avoid debt in any form so its more a gut instinct than a number crunching decision.
The £268k (£168K after the withdrawal) is going to form a hopefully ever decreasing percentage of your pension pot.

Triumph13

DRS1 said:

Given that you are already over the £268k LSA with your pension (and no-one really expects that £268K to be increased any time soon) there must be an argument for extracting the £100k tax free lump sum as soon as you can and putting it to good use.  Paying off the mortgage when it goes to a variable rate (presumably higher than the fix) sounds like a good use to me but then I was brought up to avoid debt in any form so its more a gut instinct than a number crunching decision.
The £268k (£168K after the withdrawal) is going to form a hopefully ever decreasing percentage of your pension pot.

For these reasons, in a perfect world you would want to get the TFLS out of the pension and into other shelters (ISAs, etc.) as soon as possible.  I would probably look on paying off the mortgage as being a tax sheltered place to park £100k of the TFLS.

ali_bear

The cap on TFLS could increase in the future. Has anyone said it will definitely be frozen?