Should I pay off my mortgage with my pension?
Using a pension lump sum to clear the mortgage is a large decision, and it cannot be undone. What to weigh up before doing it.
Using a pension lump sum to clear the mortgage is a large decision, and it cannot be undone. What to weigh up before doing it.
Retiring without a mortgage feels secure, and a pension can often provide a tax-free lump sum large enough to clear what is left. It may be the plan you have had for years.
It can be the right decision. It is also irreversible, and it uses money that would otherwise have been providing an income for the rest of your life.
no more mortgage payments, and certainty about your largest monthly cost.
the income that money would have produced in retirement, and any growth it might have earned.
flexibility. Money in a pension can often be passed on in a tax-efficient way; money in bricks and mortar cannot be drawn gradually.
Most pensions allow part of the fund to be taken tax-free, usually up to a quarter, subject to an overall limit. Anything taken above that is added to your income for the year and taxed.
Taking a large amount in a single tax year to clear a mortgage can push much of it into a higher tax band. Spreading it, or using only the tax-free part, can reduce the tax.
Pension tax rules, limits and the minimum pension age change over time. Check the current position before acting on anything here.
Not always. It depends on how much income you will have left and how much the mortgage costs.
Often, yes, depending on the type of pension.
For some people, keeping a small mortgage and the pension income is the better balance. Compare both.
It can. Unused pension funds come within the estate for inheritance tax from 6 April 2027, which changes the arithmetic for some families.
Your mortgage broker can tell you what it costs to clear the mortgage now and what the alternatives on the lending side look like.
Whether to use your pension to do it is a regulated advice decision. Ask your broker to introduce you to a qualified financial planner before you take anything out.
This article explains how things work. It does not take your circumstances into account. Your mortgage broker can introduce you to a regulated financial planner at Equity & General where the question needs one.
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