Consider all possible options before using a pension for mortgage

Q I need to raise a lump sum of £60,000 to cover a mortgage shortfall and am wondering what options are available to me.

I am 52 and have a reasonable pension fund and was considering withdrawing the funds from there. Would you advise that or am I better to consider other options?

AE, Dundee

A The ability to draw up to 25 per cent of your personal pension fund as a tax-free cash lump sum is obviously appealing, and depending on your overall financial position, it could be a viable option.

Once you have decided to draw pension benefits the decision cannot be reversed, so you must give serious thought to all of the alternative options before deciding how best to proceed.

I would certainly speak to your mortgage lender or an independent mortgage broker to establish repayment options, especially if you are still working and have the ability to continue payments.

You could also consider using other assets you have to reduce or pay off your mortgage capital. Much depends of course on your current financial position.

If you did decide to draw from your personal pension, you need to be aware that the minimum age for drawing benefits will rise from 50 to 55 on 6 April 2010. This would leave you with little over a month to draw benefits, or else you must wait until age 55 at earliest.

Drawing pension benefits now would obviously have an impact in later life. For instance, the optimum point to take private pension benefits could be when you retire from work and start to receive state pension benefits. Assuming this is at age 65, if you drew benefits now you would be foregoing the possibility of 13 years of growth within your pension fund. In addition, you should also consider that any pension income you draw takes into account your age and therefore life expectancy. The rates used to convert pension fund into pension income for someone your age are much lower than for a 65-year-old, and the pension fund itself is likely to be lower, compounding the issue. It is possible, however, to take tax-free cash but defer drawing income until a later date.

Ultimately, mortgage shortfall situations are never ideal and the best way forward in your circumstances will also not be ideal. Taking benefits from your pension now could solve your mortgage problem, but it would have a detrimental impact on your retirement income.

If you have to choose this route, I would suggest that you save the value of the mortgage payments, and other income you can spare for your eventual retirement. It would be possible to make further pension contributions or use your Individual Savings Account (Isa) allowance, but how best to proceed depends on your circumstances and you should take independent advice.

• Stephen Hall is a financial adviser within the private client and financial services department of HBJ Gateley Wareing

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.