Using a pension to pay off your mortgage?
It’s not a new idea, but it could be one of the options for some of the 1.3 million householders that the Financial Conduct Authority (FCA) estimate will not have the savings or other funds to pay off their interest only mortgage (BBC News 2nd May 2013).
If you have an interest only mortgage, your monthly payments will only be paying off the interest on the amount borrowed. At the end of the agreed term you need to pay back the capital that you used buy the house. In the past householders have used endowment policies, ISAs or some other form of funding plan, however recently interest only mortgages have become much more popular.
A more tax efficient way of paying off your mortgage might be to include retirement planning as quite often the end of the mortgage is quite closely linked to retirement. Most will appreciate that a pension fund can provide a tax free lump sum of 25% the total fund value, the remainder can then generate an income or you could delay taking income depending on your circumstances.
Another benefit of saving in a pension fund is that you get tax relief up to your highest rate within certain parameters. This means that a contribution of £800 actually invests £1,000, so that’s a pretty good increase in fund size straight away, add to that investment performance potential and the total retirement pot starts to take shape.
Without going into too much detail, there are also schemes like Salary Sacrifice and requesting your employer to make payments on your behalf that can make contributions even more tax efficient. So whether you expect to have a mortgage liability to settle before you retire or not you may find a meeting with me time well spent.
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