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Should I borrow to pay into pension
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MoneyDave
Posts: 7 Forumite
I am a higher rate taxpayer with 6 years left at work and I have a company pension defined contribution scheme. I understand that any pension contributions I make will get 40% relief. I am thinking of borrowing £12k per year on my mortgage for 5 years to pay into my pension fund which will give me £20k increase in the fund annually after tax relief. Then taking a cash element when I retire to pay off the mortgage borrowing (total £60k). The only drawbacks I can see are the risk associated with pension funds in general and the loss of the flexibility of the cash sum because it will not be available for other spending upon retirement. It will cost me £60k (+ interest of approx £8k) for a £100k increase in my pension fund. I am nowhere near the £50k annual pension contribution limit of which I have heard and I am sufficiently far into the 40% tax band that all of the extra contributions would receive relief at the higher rate. Is this too good to be true?
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Putting mroe into your pension is a good idea, but I would not borrow to invest. Better to move some cash investments into the pension, or cash in other investments.
If you have no cash or investments then you should as a HRTpayer try to rectify this first.0 -
Also consider what happens should you become ill/be made redundant, etc - would you need access to capital, or do you have alternative funding you could get?
What are the terms of the mortgage, especially around interest-only status and term. Remember to build in mortgage repayments into cashflow projections, with a short term to maturity, repayments in the later years could ramp up.
You might want to google 'Pension mortgage' and read about the various articles that will come up - many of the pros and cons will be relevant to you.
Depending on mortgage terms, etc, there may well not be any harm in still having a relatively small mortgage after retirement (in fact, it could be very efficient) if necessary, so you aren't necessarily constrained into use of the cash lump sum.0 -
Thanks atush, I should have mentioned that my investments and cash were all used 3 years ago to pay my very large mortgage down to its current very low level in anticipation of an early retirement which has proved impractical due to poorly performing endowment policies and the weak economy. I now need to try and build my pension fund to offset the much weaker annuity rates. Consequently, my only sources of funding the additional pension contributions would be through increasing the size of my mortgage.0
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If you don't have 6 months in cash for emergencies, then that is where you should start. In ISAs.
Then see abt pension contribs and mtg.0 -
Thanks hugheskevi, I took your advice and googled pension mortgages. They look way to close to the endowment policies I took out in the early 80's which performed so badly (55% of the projected values) that I was left in my current situation - cashless. I have a very flexible off-set mortgage facility and do not wish to re-mortgage now. Illness and redundancy are key issues I have not considered but I can do some cash-flow analysis - obviously I could stop making the additional pension contributions at any time so I can do some projections. I like the idea of maintaing the mortgage facility after retirement and I will discuss that with my bank - previously they have baulked at any mortgage completion date which is past my planned retirement date - though I now realise that retirement date is actually just my plan and not fixed of course....
What I really need to know is whether I am missing something with my basic premise that it will cost me about £68k to increase my pension fund by £100k.0 -
What I really need to know is whether I am missing something with my basic premise that it will cost me about £68k to increase my pension fund by £100k.
Nope, the basic premise is absolutely fine.
You just need to be aware of the different risks you expose yourself to, and the liquidity issues/access that can be created.
You might also want to give a bit of thought to the point at which you start to pay 30% tax as a pensioner (c£24K) as that might sour the deal a little, but that is so far off that it probably isn't a big issue.
With re. to pension mortgages, I was more thinking about the issues described by the various webpages describing them, rather than suggesting you took a packaged product. You are basically proposing a DIY Pension mortgage, which is fine (I have such an arrangement myself) so the issues/caveats are all the same.0 -
Atush, don't worry, I have cash accounts for all sorts of things like car maintenance, emergency cash, university fund for daughter, holidays, etc. I'm not broke, just don't have any investments and can't afford an extra £1,000 a month contribution to my pension - but it sounds like that is what I should be doing to take advantage of the tax relief. Don't know anyone else who is doing it so I thought I might be missing something obvious about the calculation or about the tax/pension laws. Seems a no-brainer from the simple £68k in and £100k increase in pension fund. Maybe I am in a tiny minority to be paying higher rate tax but only have a small pension fund (employment breaks for kids/late starter/many changes of jobs).0
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Thanks hugheskevi, points taken, and you can tell I am concerned about the liquidity issues. I had no idea they charge 30% tax for pensions over £24k. However, even if I enact my scheme there is very little chance that I will be mustering over £24k based on the current annuity rates - and if they were to improve to the point that I was, I would be delighted! I'll do some more background reading on the Pension mortgage stuff as you suggest.0
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You do realise that you do not have to save onto endowments?
And you don't have to buy an annuity at all, instead you could use drawdown?0 -
I had no idea they charge 30% tax for pensions over £24k.
They don't.
What happens is that if you're 65-74 your personal allowance before you pay tax is £9940 rather than the £7475 it is for under 65s. But if your income is over £24000, then you don't get the higher personal allowance. You just get the £7475 you got when you were only 64. So the annual maximum you lose as a basic rate taxpayer would be the tax on £9940-£7475, which is just under £500.
Hope I've got this right.0
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