Raid Pension Pot to pay off Mortgage or Equity Release?

Karlos1964 · 20 July 2017 at 9:05PM

Dear Forum,

I know this question has been posed before but my circumstances are a little different and I would appreciate a little advice please.

I have just turned 53 and was recently made redundant. Thankfully I have redundancy insurance which will hopefully enable me to keep my head above water for the next 12 months should I not be able to find work and then I've got just about enough stashed away to keep me going until I'm 55 which is when things get interesting.

In the worst case scenario I will not find work in the next 2 years and have fairly large outgoing each month, including mortgage payments of £800 a month. When I turn 55 I believe I have 2 options. I could either take out an equity release loan and pay the mortgage off with that OR raid my pension pot and pay off the mortgage that way. Either way gives me the security of having paid for my house.

I understand the equity release route is often frowned upon, especailly taking it out so young, as it would inevitably eat up what money i have invested in the house ie when i die there wouldn't be much left but I am single with no dependants so that doesn't bother me. Raiding my pension pot for 25% at 55 to pay off the mortgage appeals a little more as it would leave me with sufficient equity in my house which could be my safety net for the future. My home is worth approximately £300,000 and in 2 years time my outstanding mortgage will be approximately £65,000.

Any thoughts or advice please?

Thank You.

atush · 20 July 2017 at 9:57PM

How much is your redundancy over the 30K tax free limit? I am going to assume any separate redundancy insurance you have will not affect your tax situation?

Pension pot. DB defined benefit/final salary or DC/money purchase or pot of cash type?

jamesd · 21 July 2017 at 12:08AM

You didn't mention the choice which has the best likely outcome: don't pay off the mortgage but instead continue making the payments as usual with the pension money.

The reason this is likely to be the better choice is that investments typically grow by more than the mortgage interest cost. Equity release is not likely to be a good idea initially because interest rates for it are higher than standard mortgages.

Karlos1964 · 21 July 2017 at 7:29AM

Thanks to both for your replies. If I can answer the questions...

My redundancy payoff was below 30k so will thankfully be tax free and no my redundancy insurance payout will not affect my tax situation.

As regards Pensions...simply put I haven't got a clue about them and had to Google the various types so I could reply to Atush below. I believe I have a Defined Contribution Pension, in fact i probably have 2-3 as I've had 2-3 jobs over the last 30 years.

I hadn't really thought of your idea JamesD, but it sounds interesting, how does it work?

Thanks again.

Linton · 21 July 2017 at 8:48AM

At 53 I believe you are too young for equity release if by that you mean having the interest due rolled up into the mortgage. Even at 65 you wouldnt get more than about 30% of the value of the house.

Malthusian · 21 July 2017 at 9:29AM

You would need to wait at least another two years for equity release and even then you wouldn't be able to release much of the value. (This is because of the risk to the provider that the loan swallows up the entire value of the house long before you die - after which, as they have no recourse to your other assets, it is effectively interest-free.) Equity release may well be an option at some point but you want to wait quite a while if possible.

Plus it is not unknown for people over 53 to acquire dependents. Just saying. You can only plan based on your current situation, but equally it makes no sense to rush into a loan that could well swallow up the entire value of your house, of which you will only see a relatively small fraction, before you need to.

How much is your pension fund?

Karlos1964 · 21 July 2017 at 10:16AM

Thanks for the extra replies.
I'm aware that I can't get equity release until I'm 55 (or raid the pension pot until 55 either) and am also aware that the percentage i can release is scaled to age. At 55 it's about 20-21% which would give me about £60,000.

I had thought of taking the entire 60k in one go to pay off the mortgage but it seems it's also possible to take out the 60k bit by bit for example I could look to only take out £800 a month (up to a maximum of 60k) ie just enough to cover each months mortgage payment. Doing it that way presumably means the interest builds up slower as at the end of year one I presume I would only be charged interest on £9,600 (£800 x 12) rather than the whole 60K?

As for what's in my pension pot...haven't a clue although I'm writing to the pension people to find out!

Thanks again.

Ganga · 21 July 2017 at 11:25AM

With luck you might also find employment and not need to raid any of your investments.

steampowered · 21 July 2017 at 12:00PM

Karlos1964 wrote: »

I could either take out an equity release loan and pay the mortgage off with that ... Either way gives me the security of having paid for my house.

An equity release loan would be secured against your house. An equity release loan is effectively a special type of mortgage.

I think this is a bad idea. You would basically be swapping your current mortgage for a much more expensive mortgage.

Even though you wouldn't have to make monthly repayments the rate at which it would eat into your capital would more than make up for that.

Raiding my pension pot for 25% at 55 to pay off the mortgage appeals a little more as it would leave me with sufficient equity in my house

It would probably be better to drip-feed out from your pension as needed rather than paying the mortgage as a lump sum. Investment returns on your pension are likely to exceed whatever you are paying on your mortgage. Also you might find work over the next few years.

atush · 21 July 2017 at 6:31PM

Ganga wrote: »

With luck you might also find employment and not need to raid any of your investments.

This is by far the best outcome.

OP, say who you worked for, and what the pension people have to say about the type and value of the pensions.

Maybe you only have to 'raid' one, or maybe just take the 25% TFLS?

jamesd · 21 July 2017 at 6:39PM

With modern pensions you can use something called income drawdown. This lets you take out any amount whenever you like from age 55, set up regular payments or both.

Raid Pension Pot to pay off Mortgage or Equity Release?

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