Close your eyes and imagine receiving a large amount of money.
What do you see? What does it buy?
The exact amount will dictate what is possible, of course. But, many would pay their mortgage off before dreaming of shiny new cars, skiing holidays, or for the more frugal, maybe a new… toaster?
Whatever the money will be spent on, repaying your mortgage is often the first thing on people’s minds. And for good reason; those monthly mortgage payments are often the main reason people can’t give up work early (or at all, in some cases).
When Pension Freedoms were introduced in 2015, it meant that over-55s had more access to their pension pots. While this sparked fears of pensioner-driven Lamborghinis clogging up the roads, the first thing on the mind of many people was paying off the mortgage.
But, is using your pension to pay off your mortgage a good idea, or could it be a huge mistake?
How many people pay off the mortgage with their pension?
Research from retirement product provider, Just, revealed that 320,000 homeowners, currently aged 51 to 65 plans to take money from their pension to repay their mortgage.
Shockingly, 23% of people in the same age group, equivalent to around a million people, expect to still have a mortgage past the age of 65. 25% of those people will still have a mortgage past the age of 70.
Should I pay my mortgage off with my pension?
Most of us spend the majority of our working lives saving into a pension; deciding how you spend it isn’t a decision which should be taken lightly. There are several factors to consider, and what is right for one person, may be wrong for the next.
With that said, there are a number of key things to consider, such as:
The taxman: Unfortunately, when you stop working, it doesn’t mean you stop paying tax. You can take up to 25% of your pension pot tax-free, but any additional withdrawals are added to your other income and may be subject to income tax.
Paying your mortgage off in one go probably means withdrawing a large lump sum from your pension, which may be extremely inefficient from a taxation perspective. It may make sense, if repaying your mortgage with money from your pension is the right thing to do, to time the withdrawals carefully.
Your retirement income: Paying the mortgage off early will only stop one of one your monthly bills coming through your letterbox. Utility bills, council tax, food and lifestyle expenses will still need to be paid for. Running out of money in retirement is no-one’s idea of fun, so ensure that your basic needs are met before deciding to part with a significant portion (or all) of your pension pot.
Interest Rates: With interest rates at an all-time low, the rate you pay on your mortgage could be so low it’s actually better to leave the money invested than pay off the debt.
Tom Selby, Senior Policy Analyst at AJ Bell, commented: “For many people using some of their pension to pay off outstanding loans will make financial sense, particularly if those loans come with sky high interest rates. However, savers also need to be conscious that making large withdrawals could also result in them paying extra tax and this also needs to be factored in. More fundamentally, the main purpose of a pension is to provide an income throughout retirement, so anyone making large withdrawals to pay off debts also needs to consider whether they need to top up their savings afterwards. Their ability to do this will be limited if they withdraw any taxable income as a result of the Government’s decision to slash the Money Purchase Annual Allowance to £4,000. It is the complexity involved in taking decisions of this nature, and the potentially heavy consequences of getting it wrong, that make regulated financial advice so valuable.”
Who can advise me?
Having access to your pension pot can be a double-edged sword.
On one hand, you may have a substantial sum of money that can be spent on whatever you want. On the other, it must provide an income and last until you, and perhaps your spouse or partner, dies.
It’s a fine line to walk, but you don’t have to do it alone. Professional advice will not only make you aware of the options before you, it will allow you to make the most of your pension, ensuring it goes as far as it is needed.
We’re here to help. For high quality, independent, financial advice in the run up to retirement, or past it, don’t hesitate to get in touch with Bev and Sarah by calling 0115 933 8433.