I get asked this question a lot. In fact, its possibly the most asked question from new clients that I get. The answer, as always, is: it depends.
In most people’s circumstances it makes a lot more sense to hold on to your tax free cash and not take it yet. If you think about your working life compared to your retired life;
While you’re working you have a lot more spare money, the chances are you’ll be earning more next year if you get a yearly pay rise. There is always the chance you might get promoted and earn even more money in the future. Your bills, including your mortgage, are affordable as you wouldn’t have taken on any debt that you couldn’t afford on purpose. You’re pretty much in the best financial position you will ever be in.
Contrast that to when you are retired. The chances are your income is significantly less than it was while you were working. If all has gone to plan you won’t have a mortgage or any debt now that you’re retired so that part is good. If you are in Drawdown then your income isn’t guaranteed and if the market goes down you might even have to take a lower income until the markets go up again. Unless you have a Defined Benefit (Final Salary) pension then your income is unlikely to go up with inflation, meaning that as time goes on your income will be able to buy you less and less.
Inflation might not seem like a big thing year to year, but you might be retired for 25-30 years and over that length of time inflation is going to have a massive effect on the spending power of your income.
So you’ve gone from working and having spare money, being in your mid 50’s where most people are at their peak earning potential, to being retired, potentially on a fixed income significantly less than you had in your 50’s, with no prospect of an increase in your income in the future. Why on earth would you take money meant for your retirement to pay off a mortgage, which is perfectly affordable while you are working? Especially if you still have a fixed rate mortgage on a low rate.
There are exceptions to this rule. I’ve had clients who want to retire early and they are simply not able to until their mortgage is paid off, in which case taking the tax free cash, paying off the mortgage and then retiring is perfectly sensible.
I’ve had clients that, as interest rates have risen so much, could not afford the monthly repayments when their most recent fixed rate mortgage was up for renewal. In which case being worse off in retirement but still keeping a roof over your head is obviously the better result, but certainly not the ideal situation.
So there are some circumstances where taking your tax free cash at 55 might be a good idea, but with careful planning you should never have to put yourself in that situation. The tax free cash ideally should be used for things in your retirement over and above what you income can provide, such as holidays (what else are you going to do now you are retired?) and a newer car every few years.
So in conclusion, there are some specific circumstances where it absolutely makes sense to pay off your mortgage with your tax free cash. However, if mortgage affordability isn’t an issue (that doesn’t include not liking paying your mortgage, only not being able to afford to pay your mortgage) and remembering that you are going to have significantly more income while you are working than you will in retirement, ask yourself which you would rather: have access to more cash and therefore be more comfortable in your retirement, or potentially be better off every month while you are working and having significantly less cash and/or income your retirement. For most people that’s the simple choice, and the answer should be fairly simple too.