Ask the Expert: Should I cash in my pension instead of taking out another mortgage?
- Credit: Archant
Is it better to use some of your pension savings to do work on the house – or put it on the mortgage? Carl Lamb of Almary Green responds.
I'm aged 58 and have been putting a little money each month into a pension scheme for about 40 years so it's worth about £300,000 now.
I really need to have some work done on my house but I don't have enough savings to pay for it – it's going to cost about £50,000 – and I've been talking to a mortgage adviser about taking out a mortgage to pay for it (my previous mortgage is all paid up now). She's suggested I might be better to use some of my pension savings rather than taking out a loan. Can I do that and if so, is it a good idea?
Response from Carl Lamb of Almary Green:
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As you are over the minimum retirement age you are indeed able to access your pension savings under the pension flexibility rules that came into force in April 2015. They allow you to take out as much of your pension savings as you like, when you like but – and it's a big but – tax may be payable on what you take out so you must plan withdrawals carefully.
In most cases, you can take out 25% of your fund free of any tax, so you could certainly use some of this entitlement to pay for the building work. Any withdrawals you make after you've used your 25% tax-free entitlement will be taxed as income. The pitfall here to watch out for is that large withdrawals might tip you into a higher tax bracket for the year and you could end up paying 40% tax on it.
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Your fund of £300,000 is a significant one but is not a bottomless pit for providing for your retirement years. I recommend that you get advice.
The question of whether it is more beneficial to use your pension funding rather than taking out a mortgage is more complicated. The answer will depend on many factors such as your personal circumstances, the rate of interest on the mortgage and how successfully your pension savings are invested – and how well they perform in the future.
It is worth having a meeting with an independent financial adviser to talk through your options. The adviser may well charge a fee (although many offer a free initial discussion). You can use up to £1,500 of your pension savings to pay for pension advice. The Pensions Advice Allowance lets you withdraw up to £500 at a time to pay for advice, on up to three occasions. The allowance can be used at any age, but only one £500 portion can be used in any one tax year.