Updated: Oct 26, 2022
Faced with the possibility of taking a tax free lump sum from your pension fund, you are presented with many temptations. We're not necessarily talking about buying a sports car or taking a round-the-world cruise, it might be something seemingly prudent, such as using the lump sum to pay off a mortgage to reduce outgoings. But, is that such a good idea?
Always remember that the considerable tax benefits of a pension fund are only preserved while the money is retained within it. The fund continues to grow, free of income tax and capital gains tax and, on death, the whole fund is payable to your chosen beneficiaries free of income tax, and attract no inheritance tax (until you're 75).
We encourage our clients to optimise the tax efficiency of their pension funds during their life time. This means using personal income tax allowances in the most efficient way and drip feeding the tax free lump sum- via phased drawdown- to provide tax free income over several years. To return to the question of using part of the pension pot to pay off a mortgage, the answer will, to some extent, depend on the risk profile of the individual. You must balance the opportunity and risk inherent in investment, against the certainty of outcome involved in paying off a mortgage. For example, the savings made in no longer paying a 2% mortgage interest rate, may not equal the tax free return from a balanced portfolio of investments over the longer term. It should always be remembered that a pension fund is a highly valuable asset with great tax advantages and at Reeves we always encourage our clients to use all other assets before they start accessing their pension.
__________________________________________________________________ The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action. Names have been changed to protect identity. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.