Truely Independant Financial Advice

I have recently been made aware of a pension that I didn’t know I had (so essentially free money, right…) and for possibly the first time in my life I want to do something sensible with it.

It’s currently valued at £64k and I have a rather large mortgage that I will still be paying long after I reach retirement age. I’m trying to work out when would be the best time to cash some of it in and reduce the term of my mortgage. I’m got about 4.5 years left on a fix so am limited to how much I can repay.

If I withdraw 25% of the fund it will reduce the term by 2 years 4 months and save £19K in interest.

If I withdraw enough to cover the max allowed repayment it will reduce the term by 5 years 3 months and save £40k in interest.

My IFA’s advice is to move the pension fund (which I will have to do regardless of final decision as the current fund only allows me to withdraw the full amount, putting me firmly into the 40% tax bracket) but wait until the fixed rate period is up before making any payments off the mortgage. WWSTD?

Could you wang it in another pension pot and the draw down 25% of the combined badger tax free?

And then, I found sixty four thousand pounds. Down the back of the sofa….

What interest rate are you paying on the mortgage, how has the pension performed historically (no guarantee of future obvs), how is the pension invested and what are the ongoing fees? That’s all going to influence what you do with it.

Yes, but my pension pot is pitiful and I’m going to paying into a pension of some sort for another 12 years at least. As I understand it, taking the tax free sum essentially closes the pot to new investment.

Sounds complicated – coke and hookers it is then!

How old are you? You can’t take any money out of the pension until at least 55,or possibly later depending on when you hit 55.

Also if you still plan to contribute to your other pensions for a few more years you need to ensure that you don’t trigger the mpaa limit by taking money out of thelis pension

I’m 55.

I’m 55.

Result! Just the mpaa to avoid then, assuming you still plan to make significant pension contribs for a few more years yet

Significant is a relative term…

You can take the 25% and leave the rest invested – if that saves you 2 years mortgage and £19k interest then it’s a no-brainer. You move the pot into a drawdown pension, but leave the 75% invested.

I hit 55 in two months, and I’m fortunate I have four schemes, two of which aren’t ‘needed’ for retirement. I’m looking at taking the 25% and leaving the rest invested. We don’t have a mortgage (paid off), so my choice is to access a decent lump sum to be able to change our lifestyle and travel more whilst I can still pay into my main pension. Seen too many folk (family and friends) get to mid 60’s and their plans have gone to poop. Mine is an ‘active’ plan.

Most of us will never get to the MPAA limits unless you are loaded. I’m in a final salary scheme, and the ones I am accessing are old ones that I paid into when much younger.  My official retirement is in 12 years, I suspect it will be earlier, if my adult kids are financially independent before then (hah hah hah) – I was married by 25, own house etc etc. My son is 24 and not any chance he’s moving out. Daughter 21.

I would make a decision based on known facts now, ie, 25% tax free and mortgage term reduction, the rest is unknown, mortgage rates seem to have nudged up post budget, illness, stressed out, you never know whats coming.

I have a pension paying out next year, not really needed…humble brag, but it dies with me and i know the mortality rates of previous pensioners, 30% died within 12 months.

Read up on pension wise.

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

It sounds like you’ll be entitled to a free hour (*but you only get one), I’d suggest you do lots of homework first so you’ve got all your facts and figures etc sorted out.

*edit
What are the annual returns and charges on the pension over the last few years, what are the annual returns and charges on the recommended pension over the last few years

Assuming I’m correct and I doesn’t affect your MPAA I’d take the 25% and pay off part of the mortgage and leave the rest invested.
OR…if your mortgage is affordable right now why not just leave it all invested (transfer it if the performance isn’t great) and then just wait for now, keep it invested and pay off part of your mortgage later if you need to?
A decently performing pension fund should grow faster than the interest on your mortgage. Last 2 years my mortgage cost me 6%ish interest per year and my pension grew by 44%. Obviously this won’t happen every year but over time investments should make more than what your mortgage costs you in interest.

my pension grew by 44%

Wow. I moved mine last year and it has grown by 17% which I thought was great (pity it is a small pot though), but 44% :O

johndoh nothing particularly clever – just self-invested in a range of Global Funds and index trackers. In financial advisor terms high risk I guess since it’s all in equities and trackers and no bonds / cash etc but I figure if and when markets crash it will still overall be better than a ‘safer’ mix. I may be wrong though! That figure was in 2 years not per year btw! (well 1 year and 11 mths to be specific).

One of my pension pots grew about 20% last year, but it’s gone back up to the value it was about 4 years ago, as pots didn’t grow a few years back.

Put it in a self invested fund, or change the balance on the funds it’s in if you can. I have a DB pension to live on and two DC pensions. One closed.  I moved the open DC into 1/2 US, 1/4 Global and 1/4 UK trackers. I thinks it’s gone up by more than my mortgage in the past week! Remember you get tax relief at source on contributions, and nothing on mortgage payments, so any growth of a pension plus tax relief will easily offset mortgage rates.

Pension fund management t has to address risk as you near retirement. That moves funds from medium to low and no risk. If it’s “extra” funds, you can afford to retain higher risks.

Much as he is a bellend, Donald Trump getting elected did move us all a little closer to retirement…

How long after retirement will you be paying your mortgage?

And is downsizing an option before you reach retirement to massively reduce or pay off the mortgage?

If I withdraw 25% of the fund it will reduce the term by 2 years 4 months and save £19K in interest.

£790/month in interest! Jeepers.

Extremely glad I’m out of all that!

Do not take anything other than tax free cash to cover the mortgage – You’re not retired yet and if you dip into the taxable drawdown of your pension you are restricted from paying more than £10000 a year into any pension.  This is a loss of flexibility that doesn’t make sense.  The £10000 is after tax relief, so actually it is only contributions of £8000 on basic rate tax.

So you clear the mortgage.  You now have a monthly excess in your budget.  The right thing to do is to put that back into your pension and keep your lifestyle on the level.  This will reward you with tax relief (and more 25% TFC) and won’t be seen as recycling.  Those extra contributions in addition to your work pension may stack up.

Even better is to sacrifice your salary a bit more and get tax relief and NI relief, if you’re salaried and in a salary sacrifice scheme.

So you clear the mortgage.  You now have a monthly excess in your budget.  The right thing to do is to put that back into your pension and keep your lifestyle on the level.  This will reward you with tax relief (and more 25% TFC) and won’t be seen as recycling.  Those extra contributions in addition to your work pension may stack up.

Even better is to sacrifice your salary a bit more and get tax relief and NI relief, if you’re salaried and in a salary sacrifice scheme.

This, I did the same.

IFAs not unreasonably get a bit of stick on here but it might be worth bearing in mind that in this case it has recommended no action for now, which suggests to me the fix rate could be quite low and there may be penalties for early repayment.  I am all in favour of “reduce the mortgage and use the interest savings to boost the pension “ solution, but it seems as though it won’t be without some cost on the mortgage side of the equation