One of the significant advantages of drawdown is that there are no limits on how much money you can drawdown or how often. Equally this can also present a significant risk. You may use the money intended to last throughout your retirement to quickly and have nothing to support you in your old age. This should be remembered if you plan to use drawdown.
However, one of the major benefits of drawdown being used by many customers is the ability to take just the tax-free cash element of the pension (25% of the fund value) whilst leaving the income until you are older. This approach can allow people to use the tax-free cash to take advantage of a significant financial benefit many years before they are due to retire. In many cases people take and use their tax-free cash whilst they are still fully working.
The ability to repay a mortgage and therefore secure your home for your retirement and free yourself from the monthly mortgage payments is a very attractive idea. The monthly mortgage payments can be diverted into pension savings thereby giving you more money in retirement. Obviously, you should carefully consider your options before taking this action and we would be able to help you with this. But it is likely that using drawdown to take your tax-free cash to repay your mortgage would have a significant financial benefit.
Ideally you would hope to have sufficient tax-free cash to cover all of your mortgage debt, but what if the tax-free cash in the pension isn’t sufficient – should you take a further lump sum from the taxable part of your pension ? In our view this is likely to be a very poor financial decision and not a wise move.
The income you take from the residual part of your pension (the remaining 75%) is subject to tax. If you are still working this means that you are likely to pay a minimum of 20% tax on the withdrawal and possibly 40% or even 45% on all or part of it. This would make it a very expensive way of repaying your mortgage. As a minimum to pay £10,000 off your mortgage you may need to drawdown £12,500 income from your pension, or more.
There are of course alternative ways of repaying a mortgage. Evidence suggests that the majority of equity release contracts are taken out for the specific purpose of repaying an interest only mortgage. Equity release presents its own challenges and is not necessarily suitable for everyone. It is however a way of securing your home for life without the need to make any monthly payments whatsoever.
Our sister website www.best-uk-equity-release.co.uk is packed full of information on Equity Release, how it works, the guarantees you can expect and its cost. Please visit the site to learn more or call us on 020 33 55 4837.
Article writtten April 2020
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