Are you currently paying an interest only mortgage? Does it look like you will still be owing money on your mortgage as you enter retirement? Or are you one of the many people planning to use the new pension freedoms to pay off all or part of your mortage debt?
If one of these sounds like you, experts in the field have recently sounded a warning on the longer term implications of making a short term decision.
In an excellent article on the Your Money website, it is reported that 1.8 million homeowners currently have an interest-only mortgage – and that around 300,000 of these, aged between 51 and 65, are contemplating using their pension savings as part of their repayment strategy. The average shortfall they face is £56,000, but many homeowners will be taking much larger debts into retirement.
The new pension flexibility is encouraging many to make use of their pension pot to clear this debt rather than take it into retirement – not least because of the very low interest that can currently be achieved through many savings accounts. Anyone aged 55 and over is entitled to access as much of their pension savings as they wish – but only the first 25% can be taken out in one go tax-free. Savers can take further 25% slices in later years.
However, there is a likelihood that HMRC will charge emergency tax when cash is taken out of a scheme. And while this can be reclaimed, it may mean you have a much lower sum available to you initially that you had anticipated.
There is also always the chance that a future Budget will alter the rules surrounding tax-free withdrawals, leaving you unable to take out future slices.
And those looking at this as a future strategy need to look very carefully at just how much they will need to have in their pot to clear their mortgage: to clear the average outstanding amount of £56,000 would require a pot of £224,000. A £100,000 debt would require a pot of £400,000 unless you planned to pay it off over several years.
The other danger for many is using up a large amount of savings required to fund their retirement – which could last 20 or 30 years.
Taking out money from your pension pot in the hope that you can rebuild it down the line may also be an overoptimistic projection: once you have taken taxable cash out of your pension you are then only allowed to contribute up to £4,000 a year into a defined contribution pension.
The expert advice for anyone considering any of these scenarios is to take expert advice as early as possible in order to give yourself more flexibility; and there may well be merit in looking at other options – including adjusting the terms of your current loan, and lifetime mortgage in some circumstances.
It may also mean you delaying retirement in order to provide additional funds. Selling up and moving into rented accommodation is a further possibility in some circumstances.
And while downsizing to a smaller property may be one option being considered, the amount of money that can be released from such a move is often overestimated, once costs have been taken out – not least because of the relative dearth of smaller properties that are suitable for older people.
How RetireEasy could help those in this situation…
Working through the possibilities available can be hugely time consuming as well as fiendishly complicated – but using the RetireEasy LifePlan allows you to test out a whole range of scenarios to see in detail how different options will affect your retirement finances.
Not least, it will tell you just how much each year each option will allow you to take out of your savings without you running out of funds further down the line. And the Classic LifePlan and Premium LifePlan versions allow you to see what effect a Lifetime Mortgage would have on your finances in retirement as well as providing a host of additional features and options.
