Pay off mortgage from pension?

[chimichangaz]

My fixed rate mortgage comes to an end in December. There’s £70k outstanding with 7 years to go (I’m 57 in December). I’ve been quoted an additional £167 a month to keep the same term for a new two year fixed deal (£977 instead of £810). I could go for a tracker which is currently an additional £80 a month, but then obviously if the bank rate goes up so does that. There are penalties for early redemption on the fixed rate but not the tracker.

I have about £300k in a personal pension. I also have an LGPS pension with a CETV of £55k and have been paying into USS for 3 years. Projected LGPS pension of £3800 with £16.8k lump sum when I’m 67, similar for USS although I’m still working and paying into that so that will increase.

I’m considering taking £70k from my personal pension (as 25% tax free) to pay off my mortgage. Work is fairly secure although I’ve just reduced my hours and my pay has gone down by net £264 monthly. I’m single with a young adult DS at home.

I figure I can then use the money I would have been paying to my mortgage to pay into a pension (presumably I can’t pay into the one I’m drawing from so I’d start a new one - don’t want to pay into USS as there are no matched payments over and above what I already receive and it’s much less flexible).

Can anyone see any downside to this plan?

I agree with you as long as you definitely spend the saved mortgage payments on refilling the pot.

you’ll save a fortune in interest if you can pay it off now.

I say this every time (under different usernames!) but you really really need proper pension advice. A mistake in terms of a pension can be calamitous and a pensions advisor is really the only person who can tell you taking into account all your circumstances and the current legislation and tax implications (and they have insurance so if the screw up all is not necessarily lost)

@DeliberatelyObtuse I forgot to mention, I do have a pension advisor who looks after the personal pension so of course I'll talk to him about it. I just wanted some objective views first as I suspect he won't want me to do it - previous conversations have all been about 'look at how much you'll have at 67 if you leave everything where it is' when my goal has always been to be mortgage free. And of course I may not make it to 67 - I do have a long term health condition which although under control at present puts me in the risk category for cancer.

I'm not planning on giving up work when I'm mortgage free (obviously I couldn't afford that anyway!) it's more about home security and taking the pragmatic route. I'm earning less as a % on the pension than I will be paying in interest on the mortgage.

You need to check the implications if you did this though with an expert advisor. Eg starting to take money from a pension can have all sorts off unintended consequences around tax implications and amount you can carry on saving etc

Off = of

The downside I see is that if your pension is performing badly when you take the money out that's lost money (I think). But I don't know how that compares with the interest saved on not having a mortgage.

But it does sound like you should discuss this plan with your pensions adviser.

Another good resource is the meaningfulmoney.tv website which is run by a financial adviser and has podcasts, blogs, YouTube videos and there's a book. He's probably talked about your question multiple times but it would take some digging around to find where. The YouTube channel might be a good place to start as he does 15 minute videos discussing the ins and outs of common questions.

But starting another pension needn't put you off as that is very easy to do with someone like Vanguard.

Thanks @BarbaraofSeville (great name!)

I've listed to the meaningful money podcast before, I'll have a look at YouTube to see if I can find one relating to this.

This is what I'm going to do. I was overpaying my mortgage but my FA suggested I used this money to pay into my personal pension, that way I could claim my lump sum at the same time as my mortgage would have been paid off by overpaying, then use, what would have been the mortgage money to put back into my pension. That way I get all the gov tax advantages etc, pay more into my pension and pay off my mortgage the year I wanted to.

I'd not if at all possible as you will likely regret it at the time of retirement plus most pensions are at a low point now so a poor time to withdraw.

The theory of using funds to pay down the mortgage maybe sound.

You NEED detailed advice as to how it impacts your specific situation, particularly with respect to continuing to make pension contributions in the future.

Sounds fairly sensible to me - the 25% would be tax free and you'll get tax relief added to the pension contributions you're making in place of mortgage payments.

Presume you have checked no penalties for paying off pension early?

Do you have insurance on the mortgage so it would be paid off if you were diagnosed with certain illnesses? May be worth checking if that is linked to mortgage and would still receive as a lump sum even if the mortgage is paid off.

I wouldn't withdraw from a pension now, no. You wouldn't get good value for money.

Alternatively - most pension schemes have a lump sum on retirement built in to the deal. Find out what mortgage term you would need to specify for the monthly payments to be only a little more than you are currently paying - maybe 10% more, whatever is affordable, and then work out what amount will be left on your expected retirement date. I would guess your lump sum could well be more than enough to sort out the remainder then.

When you speak to your advisor, make sure you go through annual allowance implications - from what you’ve said if you only take your tax free lump sum you shouldn’t trigger the Money Purchase Annual Allowance (which would stop you from contributing more than £4K per year going forward effectively) but I am not a tax advisor: www.unbiased.co.uk/life/pensions-retirement/what-is-the-money-purchase-annual-allowance-mpaa#4

I wouldn’t do it. The stock market is down at the moment and you will, in effect, be selling at a loss if you use your pension. If things settle down and the stock market goes up, it could cost you more than the extra interest on your mortgage. You don’t have long to go before retirement in terms of the stock market so this is a big risk to take with your future.

If you take out another pension you will be paying extra fees to the advisor and the pension fund.

Over the 7 years you have on the mortgage that’s £82,068 left to pay including interest (assuming the new rate stays the same, I reckon it must be about 4.6% from the figures you give). So just over £12,000 in interest over 7 years. The £70,000 in your pension could gain the same amount in the same period so you would be no better off. If you drip feed it in again having taken the money out, it can’t earn as much in the same period.

It’s all crystal ball gazing and you can never be sure, but you can downsize a house, take in a lodger etc at retirement age. You can’t magically summon up a bigger pension income once you retire and that’s got to last you 20 or 30 years.

It’s good you have an advisor, make sure they are an IFA (independent financial advisor). Even then, be aware that their job is to sell pensions.

Thanks for contributing to the discussion all. To pick up on a few points:

I'm definitely asking my advisor about the tax and other implications, including whether I can then contribute those 'would have been' mortgage payments to another pension. Email sent.

I'm not sure I will regret it at retirement - I'd still have a pot of money left in my personal pension which could (should) increase over time (10 years until NPA) with compound interest. I've also got two other defined benefit schemes, one of which I'm still paying into and my employer contributes to. So I think I should be ok at 67. And as I said, I may not get to 67!

Pensions being at a low point and therefore 'losing' money - I'm wrapping my head round this. My way of looking at it is I'm not just taking the money out and spending it - I'm putting it into a property. I know we are predicted a market correction on house prices, but since I moved in just under two years ago the value has increased by about £35k anyway, regardless of the improvements I've made which should only increase that. Not that I intend to sell any time soon - and I realise a gain is only realised once you sell. And if markets are down at the moment, it should be a good time to be putting money in to my pension?

If I take out another pension I could, as a pp said, do it with Vanguard where there are minimal fees. I've been thinking about whether to transfer my personal pension over to Vanguard anyway as I pay around £5k per year in fees to the platform and advisor.

When my DS leaves home in 3-4 years, I could take the opportunity to look at downsizing then anyway.

For me, the goal of being mortgage free is a psychological benefit that far outweighs hoarding my pension in the hope that at 67 I will have a great retirement income. If I suck up the additional mortgage payments I will be paying another £4k out over the next two years, when I have the funds now to actually pay off the mortgage completely and use my income in a different way.

But lets see what my FA says - I suspect he won't be keen - as @Whatevergetsyouthroughthenight says, their job is to sell pensions! His % will be reduced if I'm taking out 25% of my pot.