Pay mortgage off?

robindunne1

I have a friend who is approaching retirement and has in the past been a successfull business man. I have been trying to explain to him the merits of paying off his mortgage with his savings and putting an equivalent amount into his personal pension.

Can anyone give me any guidance on the extend of the benefit of doing such a thing.

If he put £500 a month into his pension pot, how would the tax relief be treated?

Any help appreciated.

Thanks.

exil

Depends on income. Tax relief is given at the highest rate of tax he pays. Eg if income is over about 40k, it will be 40%.

So - if he puts £6000 in over a year, that will be £2400.

But I think he needs an IFA to advise him.

EdInvestor

You only get tax relief at the higher rate on the part of the income that is charged higher rate, not on all of it.

I assume you are aware that tax relief on pensions is only deferred: you have to pay most of it back when your pension income is taxed in retirement.What's more, you lose control of 75% of the capital forever and can't give it to your heirs when you die.

The advantages of pensions are not perhaps as obvious as you think.

Mr_helpful

EdInvestor wrote: »

You only get tax relief at the higher rate on the part of the income that is charged higher rate, not on all of it.

I assume you are aware that tax relief on pensions is only deferred: you have to pay most of it back when your pension income is taxed in retirement.What's more, you lose control of 75% of the capital forever and can't give it to your heirs when you die.

The advantages of pensions are not perhaps as obvious as you think.

See http://www.direct.gov.uk/en/MoneyTaxAndBenefits/PensionsAndRetirement/PersonalPensions/DG_10014696
for advice on being a high rate taxpayer and pension tax relief. Not as Edinvestor says

wotsthat

See http://www.direct.gov.uk/en/MoneyTax...ns/DG_10014696
for advice on being a high rate taxpayer and pension tax relief. Not as Edinvestor says

You pay tax on pension income (after allowances etc.) so in effect although contributions are tax free the income from them isn't. So give or take the net effect is the same.

As opposed to ISA's where the contributions are paid after tax has been applied but the income isn't subject to income tax.

There's notional benefits to pensions for a HR taxpayer if they will be lower rate in retirement but there are strict controls on what you can do with your own money.

Paying £500 of a mortgage saves a quantifiable amount of money. £500 in a pension may or may not give a good return and the Government will impose controls as to how that £500 may be accessed in the future.

Mr_helpful

missed the point there according to that site its 40% relief on wgole pension contribution if you are a HRT

jamesd

robindunne1, you may have difficulty persuading him to pay off the mortage, since it's probably a bad move. It's particularly bad if the savings are in an ISA, since you can get ISA intrest rates higher than mortgage rates. Even more bad if it's in a stocks and shares ISA, which can substantially outperform a mortgage repayment approach.

Savings and investments in ISAs are particularly valuable in retirement because they don't count for age allowance reduction that starts at around 20,000 in income. If he's close to reaching this in total pension income than it may be better to use ISA investing instead of pension payments.

As a higher rate tax payer he'll get 40% tax relief, 28% initially the rest with a claim on his tax return. That reduces the pain of losing the age allowance.

He will end up with more in the pension pot if he uses a pension and he can both take 25% tax-free lump sum when he starts taking the pension (or part of the pension if he arranges things to be able to do that) and can use "income drawdown" to keep his pension money invested and growing if he likes, until he's 75. That depends on his risk tolerance, he may be more comfortable just buying an annuity.

Best to get him to visit here under a name you don't know so he can post his full circumstances, including mortgage interest rate, how his savings and investments are arranged and state pension forecast details.