Using Pension Pot to pay off mortgage?

jerrysimon · 15 November 2017 at 10:36AM

Its strange how we feel about mortgages as we get older. I retired early this year in March aged 56, took my 40 year PS pension early with reduction for 3.5 years.

A few years ago I paid off a 80K mortgage using inheritance from my father. Looking back it would probably have been wiser to have paid that into a SIPP for my wife as she does not pay tax and earns less than 2.5K/year. Of course back then I didn't know about SIPPs as I only came to this forum about 2 years ago. We did set up a small SIPP as a result.

So I now have a 54K lump sum sitting in the bank/BS earning next to nothing (planning some DIY/small extension). However I still like knowing I have no mortgage and of course don't have to find another £250+ in payments each month to account for.

If I had put it in a SIPP I guess I would have gained about 20-25K but then of course over and above the 25% you can draw out tax free, we would still be limited by the ammount we could draw out each year for my wife. I would also have to invest the SIPP given we could not draw it all out for five or six years without incurring tax.

Anonymous101 · 15 November 2017 at 10:43AM

Easysilence wrote: »

Yeah that does make sense, I suppose it's me not wanting to look ahead that far but liking the idea of having a few mortgage free years before I retire. It's a fixed rate mortgage which I'm stuck in for nearly 2 more years, I will shop around when it's finished though.

Think of it a little differently. You're not stuck. You would need to pay a fee to exit your current mortgage but if rates are substantially cheaper you could save much more than the fee by switching.

Also as others have said the likelihood is that your mortgage (even on a higher than average rate) is costing you much less than your pension pot is earning you. So even without factoring in fee's for accessing your pension, tax and early repayment charges on the mortgage it isn't worth paying it off.

In fact there is an argument that you should be investing your over payment amounts rather than paying them off the mortgage but that's another discussion.

Anonymous101 · 15 November 2017 at 10:52AM

jerrysimon wrote: »

Its strange how we feel about mortgages as we get older. I retired early this year in March aged 56, took my 40 year PS pension early with reduction for 3.5 years.

A few years ago I paid off a 80K mortgage using inheritance from my father. Looking back it would probably have been wiser to have paid that into a SIPP for my wife as she does not pay tax and earns less than 2.5K/year. Of course back then I didn't know about SIPPs as I only came to this forum about 2 years ago. We did set up a small SIPP as a result.

So I now have a 54K lump sum sitting in the bank/BS earning next to nothing (planning some DIY/small extension). However I still like knowing I have no mortgage and of course don't have to find another £250+ in payments each month to account for.

If I had put it in a SIPP I guess I would have gained about 20-25K but then of course over and above the 25% you can draw out tax free, we would still be limited by the ammount we could draw out each year for my wife. I would also have to invest the SIPP given we could not draw it all out for five or six years without incurring tax.

You could of course have invested the money in exactly the same funds through an ISA rather than a pension and still maintained the possibility of access should you have needed it.

People find mortgages very emotive and often choose to make poorer financial decisions for the emotional benefit of not having a mortgage. Its perfectly understandable but we should understand the costs before we make the decision.

bostonerimus · 15 November 2017 at 2:21PM

We still don't know the terms and interest rate of your mortgage, but I agree that going into retirement without a mortgage can greatly decreased cash flow worries. There's nothing wrong in making extra monthly mortgage payments (if you can) and also saving to a pension and an ISA. Investing and finances does not need to be just one thing or the other, but I would probably prioritize the pension savings because of the tax advantage and possibility of greater return than your mortgage interest rate.

AnotherJoe · 15 November 2017 at 3:11PM

Anonymous101 wrote: »

People find mortgages very emotive and often choose to make poorer financial decisions for the emotional benefit of not having a mortgage. Its perfectly understandable but we should understand the costs before we make the decision.

Yep the MFW forum is full of people doing exactly that, proudly paying off their mortgages as fast as possible at all costs and losing money long term due to them skimping on pensions and in some cases missing out on very serious money via missing out on higher rate tax relief

Anonymous101 · 15 November 2017 at 3:24PM

AnotherJoe wrote: »

Yep the MFW forum is full of people doing exactly that, proudly paying off their mortgages as fast as possible at all costs and losing money long term due to them skimping on pensions and in some cases missing out on very serious money via missing out on higher rate tax relief

It certainly is. I've been slowly increasing my pension contributions over the last couple of years to take me as close to being out of that bracket as I can.

We've made the decision that any surplus that we would have paid off the mortgage gets split between our S&S ISA's. It goes against my Mrs. intuition to not make the overpayment, as I'm sure it does with many people, but it seems very logical to me.

Alexland · 15 November 2017 at 3:33PM

Suggest you ensure you are on a good mortgage deal that meets your needs and will be repaid when you are likely to stop work.

Unless you are on the border of getting access to a better interest rate or there is a realistic probability that your income will dry up early then there usually isn't much point in overpaying any more. After keeping a cash rainy day pot any spare money is usually best invested in S&S ISAs or pensions. The long term return is highly likely to give a better result than the interest saved on overpaying.

bluenose1 · 15 November 2017 at 4:32PM

I am 51 and we have decided to put in as much as possible into my pension scheme rather than our original plan of overpaying the mortgage. This is because we will get tax relief of 20% on our pension contributions. When I retire (hopefully at 57) will use the 25% tax free lump sum against the mortgage capital. The rest I will draw down to the same as the personal allowance threshold.
I suppose you have to factor in what you are likely to withdraw tax free from your pension fund or there may be any benefit if you end up paying tax on a considerable amount of it.
We will owe £48k when I retire and if we use 25% tax free we will have a pension pot lump sum to pay off it of approx £24k. I reckon I will need approx £60k to take me up to the 11.5k personal allowance per annum until 67. So I may end up paying tax on the balance (Or retire a year earlier than planned.)

Alexland · 15 November 2017 at 8:16PM

Using the TFLS to make the final mortgage payment can be a bit risky (similar to buying annuity, the market might slump when you need to cash in a lump sum) so you will need to think carefully about your investment risk profile when taking this approach. Probably more cautious funds than if you were just using the whole pot to go into drawdown.

Easysilence · 15 November 2017 at 9:36PM

Thanks guys for all your replies. You convinced me, I'll leave my pension pot alone.

Being in my early fifties now I'm at the point where I shoud be at the point where I've either paid off or am close to paying off with next to nothing monthly payments a mortgage taken out in my twenties. At this point in my life I would have hoped to have some spare cash to pay for nice holidays and the like but with my whopping mortgage payments set to go on for another 14 years sadly no such luck for me.

. The overpayments I've been making are minimal, but the way I see it every chunk I pay off is a tiny bit less interest I pay.

Someone suggested putting money in an ISA rather than paying off my mortgage but I'm not getting this ... the most I can earn on an ISA is 0.75% and I'm paying 3.59% on the mortgage .. is this something else I'm not understanding?

Using Pension Pot to pay off mortgage?

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