Should I borrow to pay into pension

MoneyDave

Thanks atush, I mentioned endowments purely because they supposedly provided a sum to pay off a mortgage with "a bit left over" and failed me miserably - the pension mortgages reminded me of them. I have not yet addressed the annuity/drawdown options as I plan another 6 years at work. Who knows what the financial landscape will look like after the austerity measures and quantatative easing programs have taken their toll on investments and pension funds! I just want to build a bigger "pot" and putting money into a pension fund with 40% tax relief sounded like the best option - using borrowing to leverage the return.

lvader

It is normal to have some levels of debt thoughout your life and if you pay into a pension while in debt you are effectively borrowing to pay into a pension.

I see it slightly differently, I think you should always look to pay into a pension regardless of short or medium term financial issues. The quicker you start the better.

MoneyDave

Thanks sleepless saver, I hope by some good fortune that I would be affected by that problem but it is highly unlikely. If I had a projected pension over £24k (as I understand is the norm for Government employees who earn enough to pay higher rate tax) I would not be worrying about the future :-)

kidmugsy

I had a spell of borrowing to pay into a pension and avoid 40% tax. It worked out well.

hugheskevi

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.

Pretty close

At £24,000 the personal allowance starts to be reduced from £9,940 by £1 for every additional £2 of income until it is reduced to £7,475.

For income of £28,930 or more, the personal allowance is fully reduced to £7,475 (with different rules for income over £100,000).

The consequence of the taper is that the marginal deduction rate on income between £24,000 and £28,930 is 30% [20% headline rate, plus 10% from the reduction in personal allowance].

Hence if considering a decision that would change income from, say, £25,000 p/a to £27,000 then you effectively pay income tax on the additional income at 30%.

jamesd

I'm not sure why you dislike the concept of a pension mortgage. That's what you're considering doing: paying money into a pension then using the lump sum and possibly income to clear the mortgage.

What you'd considering doing is exactly the sort of thing I'd do myself and it seems like an entirely reasonable idea for someone like you who seems to have sufficient financial resources to provide a good safety margin even if things went less well than they might.

For your daughter's university fund you might consider whether that's really the best use of the money. Student loans are inexpensive even compared to mortgage borrowing and her greater difficulty is likely to be accumulating a mortgage deposit. Better for her to have the student loans and you to fund the deposit. That maximises her gain for the money you're using.