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Using flexi access drawdown to repay your mortgage ?

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Drawdown allows you to take your tax-free cash many years before you need to take the income - does this give you a financial advantage ?

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

Nothing in this article should be taken as personal advice and recommendation. UK tax rates and legislation are liable to change. Products, concepts, rates, legislation and rules referred to in the article above may not be current at the time you read the article.
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Before you make any decision, it is imperative that you are fully aware of flexible drawdown pensions and the vaious ways it can be used. It is also impportant that you understand how your money is invested and any potential tax issues. At Best Pension Annuity, we have been assisting shoppers to make use of their pension funds in all manner of ways. We are exceptionally proud of the feedback our customers give us. If you have any question about flexible drawdown pensions or how we can help, please don’t hesitate to contact us. You can call us on 020 33 55 4827 Now !!
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Please Note : The new Pension Freedoms place a great deal of responsibility on the customer to make the right long term decision about their pension fund and how it is used. While Government Ministers say they "trust" people to make the right decisions, they will not have to deal with the financial consequences of a customer making the wrong decision. Your pension fund was intended to provide you with a long term income in retirement, if you take it all as one lump sum you may find yourself with little or no income during the later years of your life. This website does not give personal financial advice, you should think very carefully before making an irreversible decision. If you are in any doubt please request our independent financial advice service or speak to the Govenment's free guidance service Pension Wise.
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