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    • Sanxxx
    • By Sanxxx 1st Dec 17, 11:16 AM
    • 2Posts
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    Sanxxx
    Borrow back mortgage overpayment to fund pension?
    • #1
    • 1st Dec 17, 11:16 AM
    Borrow back mortgage overpayment to fund pension? 1st Dec 17 at 11:16 AM
    Currently I have £47k overpayment on a mortgage that will end next May, I have an option to extend the mortgage for a variable period from one month up to State Retirement Age, which in my case is 6 1/2 years.

    The rate of the mortage is variable , currently 2.25% (soon 2.5%).

    I'm about to start a new job where my earnings will be c£87k, so over £40k will be liable to the 40% tax rate.

    The new company will make an employer contribution of 10% month (DC scheme) and I can 'afford' to contribute c15% of salary, so that means c£22k/year going into pension. My 'living' amount includes the current c£480/month mortgage payment.

    With a £40k/max pension allowance I have room to contribute c£18k/year more.

    The question is does it make any sense to borrow back all or some of the overpayment in order to fund my pension up to the £40k max for 2+ years and minimise my higher rate tax liability? This would be done via further salary sacrifice. I have no other debts that need paying.

    (To me it does, but I have a nagging feeling I'm missing something obvious, such as other opportunities for using £47k@ 2.25% outside of Bitcoin/Casino/3.30 at Newmarket)

    Thanks in advance.
Page 1
    • Keep pedalling
    • By Keep pedalling 1st Dec 17, 11:39 AM
    • 4,103 Posts
    • 4,466 Thanks
    Keep pedalling
    • #2
    • 1st Dec 17, 11:39 AM
    • #2
    • 1st Dec 17, 11:39 AM
    From the info you have given it seems hard to believe you can’t afford those payments from that sort of salary, what the hell do you spend it all on?
    • ermine
    • By ermine 1st Dec 17, 12:04 PM
    • 624 Posts
    • 925 Thanks
    ermine
    • #3
    • 1st Dec 17, 12:04 PM
    • #3
    • 1st Dec 17, 12:04 PM
    The question is does it make any sense to borrow back all or some of the overpayment in order to fund my pension up to the £40k max for 2+ years and minimise my higher rate tax liability? This would be done via further salary sacrifice. I have no other debts that need paying.
    Originally posted by Sanxxx
    Yes. Go for it. I assume your pension will be such that you are a 20% taxpayer in retirement, but your gain on running this through your pension will be 66% (every £100 save costs you £60 foregone) into your pension. You will pay tax on the pension of 20%, but since you get 25% of the pension as a tax-free lump sum you only pay that 20% on 3/4 of it, so at 15% on the total. Losing 15% beats losing 40%.

    In the 6.5 years until you reach SPA you will pay more on the mortgage, but not as much more on the mortgage as you would have paid in tax. If mortgage rates skyrocket to 10% in those 6.5 years then since you are over 55 you draw down some of your pension so your total income is less than whatever the additional rate tax bracket is and suck up paying the 40% tax you would have paid anyway. Less the 25% lump sum. I would say if mortgage rates go up such that using the pension is sub-optimal then Britain has much greater problems like rioting on the streets to contend with...
    Last edited by ermine; 01-12-2017 at 12:13 PM.
    • cloud_dog
    • By cloud_dog 1st Dec 17, 12:07 PM
    • 3,309 Posts
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    cloud_dog
    • #4
    • 1st Dec 17, 12:07 PM
    • #4
    • 1st Dec 17, 12:07 PM
    From the info you have given it seems hard to believe you canít afford those payments from that sort of salary, what the hell do you spend it all on?
    Originally posted by Keep pedalling
    I'm not sure the OP is implying that.

    I read it that they have access to some capital (mortgage overpayment), and by extending their existing mortgage period (payments) would it be beneficial to use the capital as additional payments in to a pension and then when they retire (I assume) use the enlarged PCLS to pay off the mortgage.

    For the OP - I suppose it is a question of certainty over increased financial benefit (larger pension/lump sum). You mention 6.5 years to extend the mortgage, will you draw your pension in 6.5 years, will 6.5 years be sufficiently long enough to ensure healthy growth in the pension investment?
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • AlanP
    • By AlanP 1st Dec 17, 12:43 PM
    • 999 Posts
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    AlanP
    • #5
    • 1st Dec 17, 12:43 PM
    • #5
    • 1st Dec 17, 12:43 PM

    For the OP - I suppose it is a question of certainty over increased financial benefit (larger pension/lump sum). You mention 6.5 years to extend the mortgage, will you draw your pension in 6.5 years, will 6.5 years be sufficiently long enough to ensure healthy growth in the pension investment?
    Originally posted by cloud_dog

    At a 40% saving which equals a 66.66% gain the OP doesn't need any growth over 6.5 years to be better off just to not lose more than ~30%.

    With 6.5 years to go I would go for fairly low risk / low volatility assets to reduce that possibility. Even break even with inflation is a fantastic deal.
    • cloud_dog
    • By cloud_dog 1st Dec 17, 1:02 PM
    • 3,309 Posts
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    cloud_dog
    • #6
    • 1st Dec 17, 1:02 PM
    • #6
    • 1st Dec 17, 1:02 PM
    Yes but, that is a question only they can answer.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • kidmugsy
    • By kidmugsy 1st Dec 17, 1:12 PM
    • 9,899 Posts
    • 6,675 Thanks
    kidmugsy
    • #7
    • 1st Dec 17, 1:12 PM
    • #7
    • 1st Dec 17, 1:12 PM
    With a £40k/max pension allowance I have room to contribute c£18k/year more.
    Originally posted by Sanxxx
    Do you have no unused annual allowance from earlier years to carry forward? I'd use those to the max because 40% tax relief may not last forever and anyway you are presumably over 55 so the money won't be inaccessible to you in an emergency.

    Fill yer boots.
    Free the dunston one next time too.
    • Triumph13
    • By Triumph13 1st Dec 17, 2:20 PM
    • 1,117 Posts
    • 1,373 Thanks
    Triumph13
    • #8
    • 1st Dec 17, 2:20 PM
    • #8
    • 1st Dec 17, 2:20 PM
    From the info you have given it seems hard to believe you can’t afford those payments from that sort of salary, what the hell do you spend it all on?
    Originally posted by Keep pedalling
    I wouldn't have been quite as brutal as that, but that did set alarm bells ringing for me too.
    With an £87k salary and only being able to 'afford' 15% pension contributions that means the OP is burning through over £50k pa post tax of which less than £6k is mortgage. Three possible scenarios spring to mind:
    1. OP has hellishly high work-related costs which will cease on retirement eg lives in the country, but rents a flat in London for in the week. In this case all may be well as they won't need anything like the same amount in retirement;
    2. OP already has substantial pension provision so as to be able to maintain his lifestyle in retirement - in which case he must be looking at Lifetime Allowance issues and at being a 40% tax payer in retirement - in which case putting more into the pension could be a very bad move indeed;
    3. OP is in for a nasty shock when they retire and should really be looking at reducing their expenditure now to something closer to what they will have in retirement - thus largely negating the need to take back the mortgage overpayments.
    • ex-pat scot
    • By ex-pat scot 1st Dec 17, 2:38 PM
    • 224 Posts
    • 257 Thanks
    ex-pat scot
    • #9
    • 1st Dec 17, 2:38 PM
    • #9
    • 1st Dec 17, 2:38 PM
    I wouldn't have been quite as brutal as that, but that did set alarm bells ringing for me too.
    With an £87k salary and only being able to 'afford' 15% pension contributions that means the OP is burning through over £50k pa post tax of which less than £6k is mortgage. Three possible scenarios spring to mind:
    1. OP has hellishly high work-related costs which will cease on retirement eg lives in the country, but rents a flat in London for in the week. In this case all may be well as they won't need anything like the same amount in retirement;
    2. OP already has substantial pension provision so as to be able to maintain his lifestyle in retirement - in which case he must be looking at Lifetime Allowance issues and at being a 40% tax payer in retirement - in which case putting more into the pension could be a very bad move indeed;
    3. OP is in for a nasty shock when they retire and should really be looking at reducing their expenditure now to something closer to what they will have in retirement - thus largely negating the need to take back the mortgage overpayments.
    Originally posted by Triumph13

    4. Children.
    5. Lots of children.


    Mine hoover up industrial quantities of cash.
    At his (?) level of income, if he has any children at univ, then he's looking at £6,000 student loan contribution per child.
    Extra curricular activities in total can be eyewatering.
    School fees...


    However, in retirement the little darlings should hopefully be off the books, or largely on their way towards, and costs should (I dearly hope) be dropping down to a 2-person level.
    • MallyGirl
    • By MallyGirl 1st Dec 17, 2:39 PM
    • 2,098 Posts
    • 6,974 Thanks
    MallyGirl

    The question is does it make any sense to borrow back all or some of the overpayment in order to fund my pension up to the £40k max for 2+ years and minimise my higher rate tax liability? This would be done via further salary sacrifice. I have no other debts that need paying.

    (To me it does, but I have a nagging feeling I'm missing something obvious, such as other opportunities for using £47k@ 2.25% outside of Bitcoin/Casino/3.30 at Newmarket)

    Thanks in advance.
    Originally posted by Sanxxx
    I am doing something similar except that I have an offset mortgage so I am just letting the balance rise rather than fall at the moment. I have 10 years left on the mortgage and want to retire early in 10 years (@60). DD is likely to finish uni in 8 years so we will definitely work to see her through that. The balance is less than £100k at 10% LTV so it is a pretty safe move. I haven't gone quite as far as the full £40k but I will exceed £30k this year and may still add some more big AVCs via sal sac. Given the musings about future budgets limiting this benefit in some way it makes sense to act now and get at least 10 years growth on the extra.
    • somethingcorporate
    • By somethingcorporate 1st Dec 17, 8:16 PM
    • 8,842 Posts
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    somethingcorporate
    4. Children.
    5. Lots of children.


    Mine hoover up industrial quantities of cash.
    Originally posted by ex-pat scot
    Thinking critically since 1996....
    • Kynthia
    • By Kynthia 2nd Dec 17, 9:51 AM
    • 5,043 Posts
    • 7,023 Thanks
    Kynthia
    4. Children.
    5. Lots of children.


    Mine hoover up industrial quantities of cash.
    At his (?) level of income, if he has any children at univ, then he's looking at £6,000 student loan contribution per child.
    Extra curricular activities in total can be eyewatering.
    School fees...


    However, in retirement the little darlings should hopefully be off the books, or largely on their way towards, and costs should (I dearly hope) be dropping down to a 2-person level.
    Originally posted by ex-pat scot
    Yup. If my children go to university then I'm sure I will be burning through money for at least 6 years in my late 50s. Thankfully those costs won't last throughout retirement. Then in my 60s I'll need to consider whether I want additional capital to assist with wedding costs and house deposits. At least I can save for the latter in a pension in order to benefit from the tax relief.
    Don't listen to me, I'm no expert!
    • MallyGirl
    • By MallyGirl 2nd Dec 17, 12:53 PM
    • 2,098 Posts
    • 6,974 Thanks
    MallyGirl
    Another yep here - DD is about to take GCSEs, then she might go to an Indie for 6th form and then has chosen a 5 (or possibly 6) year degree. We will be 58 when she graduates if she manages to avoid having to do a gap year. Hence the plan to retire at 60 once she is an independent adult. Glad I only have one
    • ex-pat scot
    • By ex-pat scot 2nd Dec 17, 5:07 PM
    • 224 Posts
    • 257 Thanks
    ex-pat scot
    Another yep here - DD is about to take GCSEs, then she might go to an Indie for 6th form and then has chosen a 5 (or possibly 6) year degree. We will be 58 when she graduates if she manages to avoid having to do a gap year. Hence the plan to retire at 60 once she is an independent adult. Glad I only have one
    Originally posted by MallyGirl


    This. Precisely this.




    Times 4.
    • Sanxxx
    • By Sanxxx 2nd Dec 17, 10:26 PM
    • 2 Posts
    • 0 Thanks
    Sanxxx
    Thanks for the reply’s, my takeaways are..

    It probably makes sense.
    Consider back filling earlier years.
    Avoid riskier investments.

    I do intend to retire at SRA and purely saw this as a tax saving opportunity with growth as a side benefit.

    As to what my earnings get spent on.. two kids who I am looking to help with savings for marriage and homes, plus my partner earns and has very little....and personally I like the occasional gadget ;j

    Thanks all.
    • enthusiasticsaver
    • By enthusiasticsaver 3rd Dec 17, 12:08 PM
    • 4,856 Posts
    • 9,176 Thanks
    enthusiasticsaver
    Certainly overpaying your pension makes sense from a tax point of view and at the moment would certainly be more than 2.25% per annum although with investing there is no guarantee.

    Make sure the funds are well diversified .

    Presumably you will be looking to just withdraw up to the personal allowance or are you going to be looking for a much higher annual income in retirement? Going from £87k gross to a pension will be a big drop even allowing for no mortgage, no NI and no pension contributions.

    Are you maximising your partners allowances too? She can transfer 10% of her tax allowance to you as well. Not a huge amount but better than nothing.
    1 week to go until early retirement. Debt free and mortgage free.

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • kidmugsy
    • By kidmugsy 3rd Dec 17, 12:23 PM
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    kidmugsy
    However, in retirement the little darlings should hopefully be off the books, or largely on their way towards, and costs should (I dearly hope) be dropping down to a 2-person level.
    Originally posted by ex-pat scot
    The Bank of Mum and Dad is expected to trade for many years. If "trade" is quite the verb for a bank that sees only outflows.
    Free the dunston one next time too.
    • atush
    • By atush 4th Dec 17, 10:24 AM
    • 16,386 Posts
    • 10,141 Thanks
    atush
    I am thinking of shutting the doors of th bank of mum and dad.

    Uni finished, and sprogs all gainfully employed in good jobs with good pay and pensions. They dont need me.

    They are even talking about moving out of the house! That will be sticker shock over the pittance I charge them lol
    • kidmugsy
    • By kidmugsy 4th Dec 17, 4:02 PM
    • 9,899 Posts
    • 6,675 Thanks
    kidmugsy
    "Uni finished, and sprogs all gainfully employed in good jobs with good pay and pensions. They dont need me."

    Buying a house in London? "Aw, mum, I can't afford the deposit." And then there's weddings.
    Free the dunston one next time too.
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