To withdraw 25% of pension to pay part of the mortgage?

[Greentreeflowering]

Total funds 300k, 59 years. Will you withdraw 25% of your pension to reduce interest? What are the implications?

Absolutely not. You'd pay tax on it for one thing.

Thought you can withdraw 25% without paying interest?

Nope

I mean obviously you will get less money each month in the long term. I have to admit it is my plan too. I overpay my pension so I don’t end up in higher rate tax bracket. Then I will take the 25% which I’ve earmarked for Kids uni support fund as my mortgage will be paid off by then.

Yes you can take 25% as tax free cash but then the remaining 75% will be taxable.
I guess it depends if reducing your mortgage will make a big difference to your life? If your on a low interest rate and repayments are affordable then no I wouldn’t. If you have very little disposable income currently and it would free up some money to enjoy life more then yes I would.

I stand corrected - up to 25% is tax free. My apologies for talking nonsense!

I still wouldn't but that's because a good pension in retirement is really important.

depends on your personal circumstances, everyone’s are different. Funds in a pension sit outside your estate for IHT , a property sits inside your estate. Are you retiring now ? Or continuing to work but drawing your pension alongside salary ? How big is your mortgage and how long remains outstanding ? What interest rate is your mortgage at ? If it’s sub 4% you could earn more by investing the cash at the moment, It is a fixed term if so there could be a penalty if you made a lump sum reduction, do you have any carer responsibilities for family members which require income to cover etc. so many variables which MN can’t answer. You should take proper financial advice who can look at your individual circumstances and help you make an informed decision as a mistake could be costly.

Up to 25% taken out is cash free. Would this fully pay off the mortgage? You need to do the sums. If you want to retire fairly soon though, I’m not sure you can afford it.You cannot easily replace pension value and it’s not a massive pension pot. Could you work for longer and keep paying the mortgage?

But surely you’re chucking away interest you don’t need to be paying and you could always save what you’re then saving on mortgage interest so it would be win win?

We’re thinking of doing this.

This is (a) impossible to answer on the limited information you have given and (b) one of those situations where it really is worth dropping a few hundred in the lap of a very good independent financial adviser.

If you are a 59 year old woman then you, actuarially, have something like 25 years to live. You probably wouldn't want to run out of pension towards the end. But it's all sorts of questions like are you still working, when do you intend to retire, what do you currently earn, are there any reasons to think your life expectancy might be shorter or longer than average etc.

Personally, with interest payments what they are, I think this could be a good move. As long as you were then able to invest the money you would’ve been spending on the mortgage into something like a stocks a shared isa?

Have you worked out what your required income needs will be in requirement? If 75% of you pot will give you that income, go for it!

I plan to do this, i sacrifice a lot into my pension so will be able to pay off my mortgage tax free when the time comes

Are you referring to the total withdrawal of the 25% tax free element as a lump sum?
I think this would need careful consideration and would depend on whether you have an income at present, your current and future income and tax liabilities.

For instance, suppose you don't have an income now, or are on a low income below the basic tax rate threshold - perhaps your spouse works and you do not.
You withdraw the 25% tax free as a lump sum. The tax-free element of the remaining pension is now lost.
But, as I understand it, up to £12,500 could have been withdrawn from the taxable part of the pension, without any tax liability, plus an extra 25% tax free on top.
This would preserve the 25% tax free status of the remaining pension. A valuable tax free boost when you start to withdraw the state pension.

I'm not a pension expert, but if this is a SIPP, you can book a free consultation from PensionWise - an independent service backed by the government.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

This video also gives some useful advice about tax efficiencies to consider in accessing the tax free lump sum.

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We’ve done this. We had an interest only mortgage so have had low rates for many years. This year we’ve withdrawn about 20% of the total of our pensions and almost paid off all the mortgage. It’s been a great way to pay it off.

Depends on the interest rate your mortgage is being charged at ? If you have an older fixed rate it may well be sub 4% - i know several people in this position and currently by putting the cash in a savings account they could earn more than 4% . It really is an individual case by case basis as to what is best thing to do and needs proper advice based on personal circumstances

Should add we had a lifetime, interest only mortgage rate of .19% above base, we’ve been very lucky (until Liz truss came along).

We're planning on doing this from DHs pension BUT he will still have a very good pension remaining and is in a sector where he'll have the option to pick up consultancy work into retirement. Also, I'm 10 years younger with an equally good (if not better) pension which will provide for us when I retire.

I guess it depends on your circumstances.

@lolipopstick

But, as I understand it, up to £12,500 could have been withdrawn from the taxable part of the pension, without any tax liability, plus an extra 25% tax free on top.
This would preserve the 25% tax free status of the remaining pension. A valuable tax free boost when you start to withdraw the state pension.

Yes, there's much more to it than just being able to take a 25% lump sum tax free, you're right. You can instead use drawdown, as you're suggesting, with 25% of whatever you withdraw always being tax free.

Given that you'd expect the pot to continue to grow, that means you could end up withdrawing very considerably more than just £75k tax free over time.

OP also need to bear in mind that the pension should continue to grow, even in drawdown, and would very likely grow at a higher rate than the mortgage interest.

I did at 58 , took the 25% tax free and paid off the mortgage , nothing like properly owning your house

You haven't given enough detail to be able to comment. Will the 25% pay off the mortgage? Can you downsize? Will you be able to make up the funds? Do you have any other investments? When do you plan on retiring? Is there a joint income or are you single? What lifestyle do you wish to have in retirement? etc etc etc. More detail is needed.

Alternatively you could have left the money in the pension(s) and benefited from it continuing to grow while withdrawing smaller amounts to gradually pay off the mortgages.

Doesn't mean your way is wrong, of course, but just that there are many, many options to achieve the same ends other than taking lumps from a growing pension. Some of which are considerably more lucrative than others...

I did it when I could and paid of my mortgage. It's worked out very well for me. There is no sweeter joy in home ownership than paying off your mortgage and knowing you will never be homeless.

Will continue to work for at least 5 years making 60k contributions per year. It will save us £500 per month in interest which can be saved

It will pay nearly half of the mortgage

I’m doing this atm. 25% of one pension pot to reduce my mortgage.

Together with moving to a slightly smaller house it will save me £600 a month which is a lot to save as a sole earner.

I’ve earmarked this particular pension pot for ‘life’ costs but not until I earn less/under the higher rate tax threshold. I really can’t see myself slogging it out full time in a stressful job til I’m 68. As I reduce my hours/income in years to come I’ll draw on this pot if I need to. I’ve got other pensions.