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?

I agree every situation is different. We have other income as well as pensions, so it was the correct thing for us to do.
Plus you have to factor in that the stock market could have another crash, in which case you’d may have lost a lot money.

25% of personal pensions are tax free.

It depends on the rate of your mortgage and any penalties for overpayments.

You need to watch out for the money purchase annual allowance, which would reduce how much you can pay into a pension to £10k a year. I think (?) you can take the tax-free cash but if you use flexible drawdown then the MPAA will kick in.

No taking tax fee cash does not reduce the allowance.

It's only taking income.

As below

I think the amount you can pay into pension drops when you start wothdrawong

Please see my posts below! Taking the tax free cash does not reduce the allowance!

The money in your pension may well be earning more in interest than the rate on your mortgage. You might save £500 a month interest but you could be losing more than that in interest on your pension fund.

Yes, we are in the same position, what was supposed to pay off our mortgage won’t now (I assume Liz had a hand in that!) so we are investigating using one of our pensions to cover the shortfall.
The main problem at the moment is the cost of financial advisers who have to sign something to allow you to withdraw the money. We have been quoted £2k which is a huge amount and we don’t have that up front.

What?! Our FA didn’t charge anything for doing that. Hopefully someone can give you advice here as that just doesn’t seem right.

@LizzieSiddal well no idea why your FA didn't charge you anything! Arraigning PCLS is a highly regulated area. I'd double check that.

How do FA earn money otherwise?

I'd hazard a guess he's taken a payment t from your pot and not sent you a suitability report or illustration to confirm this.

If this is the case, you need to make an official complaint.

My DH and I did this, it worked out really well. Rather than overpaying the mortgage when the DC were younger we cleared it when my DH turned 55. Sometimes we switched to interest only for a few years at a time to free up money for holidays and enjoying life.

But OP is then proposing to put £60k pa back in…I think there is some rule that will prohibit that after taking 25% of £300k because you can’t put back in in excess of 30% of the lump sum (not sure if I’ve understood the original figures correctly, it could be that £300k is 25% of the fund in which case the maths is quite different).

Once youve taken a 25% lump sum you lose the opportunity so if the pension pot is going to grow considerably it may not be prudent. Are there other funds that could be put towards the mortgage e.g. from isas which cannot be passed on to next generation free of IHT.

Of course. This is how we're planning to repay our mortgage at 57. Hammer the pension and get higher tax payer benefits plus investment gains then take the 25% tax free lump sum to repay the mortgage.

You can book a free Pensionwise session once you are 60. I’m 59 too, and will be booking one once my birthday comes round.

If OP has been paying £60k in contributions for a few years, pension recycling isn’t an issue as she isn’t deliberately taking the tfls to get a ‘double dip’ on the tax relief.

If she is able to put another £375k gross in then I’m sure she’ll be fine with a £600k pension.
That’s also another £93k tax free bite of the cherry.

The fact that OP is 59 and the pot is £300k made me assume she hadn’t been contributing either £60 or £40k as a regular thing! But there’s not really enough info to tell - the pot could be from the last 5 years only!

OP, everyone’s circumstances are different but in your circumstances I personally wouldn’t hesitate to do this.

If you were 40 or younger I would likely have advised against it as you would get better returns from that 25% being invested for 20 years, but at 59 you could see it as a way to de-risk your overall portfolio on approach to retirement.

Save 5% mortgage interest and put extra in your pension that gets tax relief!
Instead of paying £500 mortgage interest you put that £500 in your pension and get £100 tax relief on top (and you also get £100 back if you are higher rate tax-payer which it sounds like you are). So £600 in your pension for £400.

Just make sure you don’t go over 25% and thereby trigger the MPAA.

I’m assuming this is all money in a SIPP, if not then you need proper financial advice, from a regulated Financial Advisor. For example don’t give up generous safeguarded benefits from work-place pensions without getting proper advice!

How does paying £75k off your mortgage reduce the interest by £500 a month?

The £500 saving must include the capital part too?’

@lolipopstick thank you so much for the video you shared. I’ve been unconvinced for a while that taking the 25% tax free when I retire early is the right thing to do when it means I then lose the 25% tax free benefit for the remainder of my life and this video illustrated things in such a helpful way. Proceed with caution, OP!

Isn’t the max pension contribution £48,000 tax free? Tax would be payable on pension contributions above this I believe. I’m mystified as to how the op has all this money available for the next 5 years but has only £300k to date. You get a better return on investments by saving early.

Some mortgages only let you pay down 10% pa. So op could drop feed money towards paying down the mortgage and get tax relief on £48,000 pension contributions.

Thank you, i didn’t know that either

Correct