Freedom Isn’t Free UK Personal Finance
FIRE
25% Pension Lump Sum to Pay Off Mortgage: Worth It?
Your mortgage is at 5.5%. Your pension probably will not match that net of tax. Using the 25% tax-free lump sum this way might be the most efficient move in UK finance.
Using the 25% lump sum to clear a mortgage
Pension pot£200,000
Maximum 25% tax-free cash£50,000
Mortgage cleared£40,000
Cash buffer retained£10,000
Annual interest saved at 5%£2,000
Lump sum allowance capped at £268,275 for 2026/27.
Key takeaways
1
You can use up to 25% of your pension as a tax-free lump sum to pay off your mortgage.
2
Using the tax-free lump sum can save you money on mortgage interest, which is often higher than typical investment returns.
3
If you are near the minimum age to access your pension (currently 55, rising to 57), consider using your lump sum to pay down your mortgage before the rules change.
4
Check your pension rules, as some older schemes may still allow you to access your pension at 55.