Cashing in 25% of pension to discharge a mortgage

Nsar2

Hi, sense checking a situation here.
We have a £271k interest only mortgage that we took out on our home to buy a rental property about 9 years ago. The rental property has no mortgage and it produces an annual income of c.£18k after all costs but before tax. Our mortgage was on a fixed rate of (1.34%) so our monthly payments are c. £320 and will go to somewhere over £1k at the end of January.
The idea was always to sell the rental property at some point to discharge the mortgage or downsize our home but neither of those appeal, so we are contemplating taking a combined £171k out of our pensions (which is just below the 25% tax threshold) and cashing in either £50k of savings (in fairly vanilla things like Premium Bonds and bank savings accounts) and switching to a £50k repayment mortgage over 5 years or cashing in £100k of savings and discharging the mortgage completely.
We are both higher rate tax payers
Thoughts/bear traps to avoid?

silvercar

First thought is that you do realise that the mortgage interest is an allowable expense against the rental income, even though it is secured on a different property. It is the purpose of the loan that counts, not where or if it is secured. Though being a higher rate tax payer, the benefit isn't as great as it once was.

I would also be looking what better mortgage rate you could get, just because your current fix ends, doesn't mean you have to go on the standard variable rate.

Then look to your pension and what you need? Can you afford the lifestyle in retirement if you take so much out of your pension?

As higher rate taxpayers, the advantage of premium bonds is they are tax free, so they don't eat into your savings allowance or incur tax.

I would think you should see an IFA to look at your total income and retirement plans.

Nsar2

Thanks Silvercar, yes already claiming interest relief and our LTV is already very low so at £50k I'd expect to get some way below SVR but I think the days of 1.34% are long gone! We are fairly well covered for income outside of our pension pots and my feeling is that the annual income from the property is gong to be greater than the annual draw down from the £175k (+ the after tax income). Without looking at the minute detail I don't think our Premium Bond prize winning have been greater than inflation over the last few years

saajan_12

Any reason you're not putting the £1500 a month income towards the £320 mortgage payment and continuing to pay in monthly? As long as the rates aren't much worse than what you're earning. 

Nsar2

saajan_12 said:

Any reason you're not putting the £1500 a month income towards the £320 mortgage payment and continuing to pay in monthly? As long as the rates aren't much worse than what you're earning. 

Taking the income