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Don’t use pension to repay mortgage

Sarah Davidson

June 29, 2015

The adviser firm said it has seen many people considering using their cash lump sum to repay the mortgage because their lender has warned them that their existing mortgage cannot be extended beyond their state retirement age.

Kay Ingram, divisional director at LEBC, warned borrowers to consider how using their pension fund to pay off the mortgage would affect their long-term income.

She said: “If you take more than the 25% tax free lump sum from your pension to do this, your future pension funding will be restricted to contributions of no more than £10,000 per annum, including any employer contributions, so your ability to build your pension fund up with tax relief will be limited.

“If you have a defined benefit pension you cannot take funds out of it flexibly and would have to transfer it to a drawdown plan to do so. This could mean giving up valuable guaranteed income for life.

“If this means that all your pension income will then depend on investment returns and future interest rates, can you afford to bear the risk of having a less stable income later?

“Some pensions offer other guarantees such as a guaranteed level of income or fund value but usually only if you take the funds from the pension at a set retirement date. Accessing the fund early could lose these guarantees.”

She said if lenders are pushing for early repayments there could be other options such as seeking a new lender or renegotiation of your existing loan.

She said: “While many lenders are writing to borrowers asking how they can repay the loan, they may be willing to extend it or change the basis of the loan, especially if you can show you can afford it.

“While some lenders have fixed policies such as no mortgages beyond age 70, others are more flexible and an independent mortgage adviser will be able to shop around the whole market for you.”


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