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Concerns over plans to repay mortgages with pension funds

More than half a million people in England plan to use all or part of their pension to repay their mortgage, new research from Partnership suggests.

A poll of 1,541 people aged 40 to 70 shows one in ten plan to use their tax-free lump sum to repay the outstanding balance on their mortgage, while a further 5 per cent plan to use their pension pot to pay off mortgage debt.

From April next year people aged 55 and over will be able to take their entire pension fund as cash, although withdrawals will be taxed at the saver’s marginal rate.

If Partnership’s findings are mapped across the population of England, almost 600,000 people will use some or all of their pension to repay their mortgage.

Partnership head of product development Mark Stopard says: “It is worrying that over half a million people in England plan to use all or part of their pension to repay their mortgage. This suggests that the number of people who actually need to do this is likely to be far higher as unexpected events such as redundancy, illness or family financial emergencies cause issues.”

The research found that the majority of people, 58 per cent, will keep making monthly repayments until their mortgage is paid.

Around 7 per cent of respondents say they have savings or investments set aside to repay their outstanding mortgage balance.

Stopard adds: “While it is natural for people to want to retire debt-free, the purpose of these savings is ideally to provide an income for their retirement – which can last up to 30 years or more. Although the state pension will provide a very basic safety net, it is unlikely to be sufficient for people to have as comfortable a retirement as they might wish.

“This research clearly highlights that people need to focus on repaying their mortgage as early as possible and avoid traps such as remortgaging for the full period each time they take out a new deal. Even those who are currently retiring have options such as working longer, downsizing or taking out an equity release plan – all options that will help to keep their pension funds intact.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Lots of people already use their TFLS to repay the outstanding balance on their mortgage (or they spend it on home improvements). If (when) given access to the rest of their pension funds, how can we be at all surprised that they’ll use some or maybe even all of that to do likewise? Reaching retirement with an outstanding mortgage is in many cases, a result of poor long term planning but, by the time you reach that state of affairs, it’s a bit late to do anything much about it. Your choices are either to retain the debt or use whatever other funds are available to clear it.

    For advisers, it’ll be a tricky balancing act between clearing debt and using whatever funds are available to provide a sustainable income. How much of your retirement income will the cost of servicing your mortgage consume? How will this situation deteriorate if the cost of your mortgage goes up? How will you manage with a possibly severely reduced income-generating pension fund if you pay off your mortgage?

    It looks like we’re set for interesting times.

  2. There used to such a thing as a pension mortgage.

    Taken from the Independent Website: Article written during 1996.

    By far the biggest advantage of a pension mortgage is its generous tax treatment. The Government is so keen to encourage people to save towards their own retirement that it gives tax relief at the investor’s highest rate of contributions. Those paying 40 per cent will find that, for every 60p they pay into their pension, the Government effectively chips in another 40p. For standard rate taxpayers, the Government contributes 24p in every pounds 1.

    Okay that article was from 1996 but there has to be clients whose original intention when taking out their pension at the same time as their mortgage was to use the tax free cash to redeem their mortgage with the balance providing an income. Prudent financial planning some would call it…….

  3. Yes @jinker, how quickly the industry forgets. Pension mortgages were touted strongly 20 yrs ago, by both advisers and lenders as ‘sophisticated’ financial planning.

    Earlier this year, the Daily Telegraph quoted estimates of between 2.5 and 4m people had current interest-only mortgages, with an average capital shortfall of over £70k. Many would have to sell up to pay that off. In fact, the Telegraph touted the new pension rules as “rescuing” these mortgage holders.

    Where lenders asked interest-only borrowers to demonstrate an ability to pay off the mortgage, the pension fund was their only substantial asset. Their only alternative may be to extend the loan – and use their pension to pay the ongoing interest? If you had the cash (say 70K), rationally you pay it off from wherever you have the money.

    For most, it’s in their pension…

  4. Aurangzeb Paracha 29th October 2014 at 2:58 pm

    i suspect quite a significant number will be looking to become landlords using their pension funds as deposits.

  5. Quote: “Even those who are currently retiring have options such as working longer, downsizing or taking out an *equity release plan* – all options that will help to keep their pension funds intact” (my emphasis)

    Borrowing to invest. Via an equity release scheme. Words fail me.

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