Plan a pension lump sum to pay off mortgage?

[PensionAndMortgage]

I can’t work out whether this is a genius or dumb thing to do. Or possibly what lots of people already do as standard. And I realise the figures are involved are big, so apologies in advance if it’s insensitive.

I am 50. There is no way I can keep working at current pace much past 57. I am very lucky to earn about £230k including bonus. Sole wage earner for extended family.

Mortgage is £400k. Paying £3k per month but need to overpay massively to pay off by 57.

Pension pot (for 2 of us) is currently just over £500k.

Rather than overpaying the mortgage, wouldn’t I be better to pay the maximum into my pension? I could pay £500k into it over the next 7 years, which (with interest) put the pot at about £1.2m which means I could take 25% out tax free at 57 and pay off the mortgage at that point.

My thinking is I could then, at 57, take an easier job and build up savings in an ISA, because I think I would have reached the “lifetime cap” at that point? But we would still have a pot of 900k.

i know the answer if that I need to speak to an IFA, but I just wanted to know if my thinking was sensible or mad, or if I have missed something really obvious.

When you’re paying extra into your pension pot, and you were to die before claiming pension doesn’t all additional payments, die with you? I was told that only the pension that comes out of your salary gets passed onto family. Have I got that right or am I getting confused?. I saving extra each month and getting the benefit of the 40% tax and then paying off the mortgage with the 25% tax free sounds a very good idea to me. Just wouldn’t want to make all those additional payments and then to lose them if I died. My pension is LGPS.

LGPS is a DB scheme unlike the majority of other schemes which are DC, including the one OP is talking about.

DC is a physical pot of money vs DB which is a promise to pay based on salary/length of service etc. As DC exists as a pot of money, on death your dependents get the whole pot (Inc employer and employee contributions and after tax relief) free of inheritance tax. This is unless it's already been used to purchase an annuity in which case there may be no payments forthcoming.

DB pensions have different rules. There will be a lump sum if you die in service. Dependents will often get a spousal / dependent pension payment but this is specified in the scheme rules. Googling suggests that the LGPS may have a "death grant" if you die under 75 years old. If you need more details this will be in your specific scheme rules.

The best inheritance planning would be to put as much money as possible in a DC pension, don't spend it and die before 75. That way your beneficiaries get it tax free. Not the best plan in other ways though...!

As the PP says, you should check your LGPS rules as it's a DB scheme so a bit difference.

This is quite helpful on the general rules (but not the specifics for LGPS):
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems/pensions-after-death

@Loubilou23 I didn't find a simple calculator but some sites had examples - here are a few:

https://www.ajbell.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf

https://techzone.abrdn.com/public/pensions/calc-tapered-annual-allowance

My DH was a high earner and we did your plan OP. We used some of the tax free amount to pay off the mortgage.

OP you pension pot does seem quite low considering your age and income.

@PensionAndMortgage honestly I would chuck everything I could at the mortgage, obviously subject to any limits e.g. 10%. This calculator from MSE shows the interest saving if you overpay the mortgage.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Thanks for all the help 🙂

I don’t really feel that the pension pot is low. It is what it is. Salary increases with age, and period out for childcare have an impact unfortunately.

What a pointless comment… you have no idea of the OP’s past earning capacity, her situation, time at work, contributions of her employer etc.

The pension is what it is as of today, commenting on the size of it is totally unnecessary.

Bizarre

This strategy is exactly what I'm doing OP. I don't earn as much as you and have 11 years until I'm 57. Current mortgage is £260k. If I can continue to hammer my pension then it looks likely my 25% tax free lump sum will repay the mortgage. Sadly I'll need to continue working for around 5 years after that but will be then focusing on ISAs until we can build a pot big enough to bridge the gap before accessing the pots.

Consider carefully and seek advice from an IFA. It may be more beneficial to carry on paying into your pension for the additional five years and then paying off the mortgage rather than paying it at the exact moment when you can. If your pension is generating more net return than the interest on your mortgage then it might be worth keeping it there. Also there is still the tax relief element that you will benefit from keeping it in pension for longer.

@Loubilou23 I'll definitely assess again closer to the time. Not having a mortgage will allow me to build up the ISAs which we would want to use as a bridge before drawing down. But then again we could draw down earlier and not fund ISAs. Just want to get the balance right between them.