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Paid Off Your Mortgage. Now What?

13th September 2017 Justin Urquhart Stewart, Co-Founder 7IM

As a nation, we appear to be obsessed with the thought of paying off our mortgage.  But what are the implications?

It’s almost seen as a disgrace if you haven’t managed to do so before you retire. Setting aside whether this is actually the right thing to do, I began to wondering what people would actually do next if they had paid off that mortgage.

The first thing you’ll notice would be the extra cash in your pocket. That sum that disappeared off to the bank every month over the last 25 years stays with you. You could say that you’ve effectively been given a substantial pay rise. But I’m guessing that putting that extra money – indeed any of it – into a pension might not be so high up the list. But perhaps I could persuade you why you should at least think about it.

A 65 year old man in England is now expected according to the Office for National Statistics, to live until he’s 84. A woman of the same age can probably expect to reach her 86th birthday. And these are just average lifespans. Many of us may live to be much older than that. 

You also need to consider inflation. If you retired back in 1997 with an annual income of £15,000, it would now need to be £25,839 to be able to buy the same stuff as it did 20 years ago. That’s because inflation’s averaged out at 2.8% a year over that period.

These two factors (as well as a few others) leave me as a firm believer in staying invested for as long as you can – preferably in a pension account or a Self Invested Personal Pension (SIPP). While it may not be for everyone, and you may need to speak to a professional adviser before you make a decision, putting money into your pension could yield dividends in the future. Here’s a summary of how it works, just in case you need a reminder:

  1. You can pay into your pension up to your 75th birthday.

  2. To benefit from the tax breaks, you are able pay in between £10,000 and £40,000 a year into a pension or SIPP depending on your level of income. You can save up to £1 million over the course of your lifetime. If you have already started to take advantage of your pension, you can still pay in, but only up to £4,000 a year.

  3. As you contribute to your pension, the government contributes 20% too. So paying in £2,000 each month really only costs you £1,600. If you’re in the higher tax rate brackets, you can claim an additional 20% back through your annual tax return and so are really only contributing £1,200 a month.

  4. From the age of 55, you can withdraw up to 25% of your pension pot tax free and, because of the 2015 pension freedoms, you can invest your pension how you want (or not).

  5. When you do shuffle off this mortal coil, any money left over from your pension will pass to your beneficiaries. This would be free of inheritance tax and if you die before you’re 75, any money they withdraw would be tax free. Of course if you make it past the age of 75, the money withdrawn would be taxed at their rate of income tax.

These benefits show how much sense it makes to use a pension as a way to invest for the future, even if you’ve actually already retired. Of course, I would also want to encourage you to keep your money invested for as long as possible, especially given today’s paltry cash savings rate. 

If you’re worried about the cost of investing, remember that times have changed. Some investment managers, such as 7IM, offer fair and transparent charging structures that allow you to keep more of your money.

Despite their slightly chequered past, pensions are still a really efficient and effectual way to funding your later life. And, while I may come across as a bit of a kill-joy as a lavish holiday with the same cash would be far more fun, diverting those mortgage payments into your pension may make a lot of sense.

P.S. Please remember that the tax rules we’ve included here will change over time, and that any taxation you pay and decisions you make depend very much on your own circumstances. It’s up to you what you want to achieve – It’s your money after all. 

Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.

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