Saving in a SIPP or employers pension ?

Kelvin_Hall

Hi,

I need some advice.

I want to save some extra money, monthly, to pay off an interest only mortgage in about 15yrs time. It was suggested on a thread I opened on the mortgage forum, that a good way to do this would be to pay the extra sum into a pension and take it as a lump sum at, or after, 55 to pay off the IO mortgage (or a part of it).

This sounds a good idea but I'm not sure whether I should pay the money into my current pension (where I might loose track of this amount as it would mix in with the rest) or start a SIPP specifically for this (which would be easier to keep a track of).

I currently have a pension with my employer (large multinational) into which I put 10% of my salary (employer puts in 8%). I am borderline, but usually make enough each year to get into the higher tax band. The IO mortgage is for £29,000.

Any advice would be gratefully received.

Thanks,

Kelvin

xylophone

extra sum into a mortgage

Assuming this is a typo?

Have you borrowed at a particularly low interest rate so that you could make more in a cash ISA?

Could you just save the full cash ISA allowance each year and build up the lump sum that way?

Or does your mortgage product allow you to repay capital every so often - once a year say so that by saving the full cash ISA each year you could pay off close on £6000 a year and be done with the mortgage in about five years?

grey_gym_sock

i'm guessing it's a typo for "into a pension".

it's possible, but you can only use 25% of the pension fund to pay off the mortgage, so you'd have to build up a several times the mortgage debt to do it this way. so it's only really an idea if you also want to invest an extra chunk of money in pensions.

you could instead invest in S&S ISAs, in which case it's all accessible to pay off the mortgage if necessary; or, if there's plenty over, it can sensibly be retained in S&S ISAs well into retirement. this is all supposing that you're not maxing out S&S ISAs already.

or do a bit of both.

cash ISAs are generally lower return, but can be a simple way to gain if you have a low mortgage rate which you can beat with a cash ISA. if you don't, then mortgage overpayments (if you can make them without penalty) are a similarly low-risk alternative.

kidmugsy

If your putting extra into your employer's pension also brings an extra employer's contribution, that's attractive. Failing which, a contribution to a personal pension that let you just avoid higher rate tax would be attractive. If you have more spare income after that, though, in your shoes I'd look at ISAs.

Of course, if you're paying a high interest rate on the mortgage it would presumably be better yet to clear it as quickly as possible.

xylophone

The only other thing to consider is that if you became unemployed, any savings you had (including the ISA marked for repayment of the loan) would be taken into account for means tested benefits.

Would you be better off converting to a capital repayment mortgage?

jamesd

Better to use just one or two than many. One being whatever your employer offers, the second being whatever better deal you can find elsewhere.

If your employer's scheme is salary sacrifice that'll help by saving you some NI, so it'll be even more efficient and a good reason to pay into the employer scheme rather than an independent one. Even if you move the money out later. Better still if they chip in with some of the employer NI which they save.

Since your need is both pension and mortgage clearing you can't really beat doing them with the pension.

Lets look at the higher rate tax case first, assuming it's by salary sacrifice and ignoring all growth. Cost to you is £58 to get £100 in the pension pot. £100 less £40 income tax saving and 2% employee NI saving. Assumes no employer NI being added. Take the 25% lump sum and that's £25 leaving £75 in the pension.

Since you get out 25 at a cost of 58 you need to be paying in 58/25 = 2.32 times as much as if you were using a repayment mortgage, but you're getting the 75% left in the pension pot as well.

Say it's basic rate salary sacrifice. Now the cost to you is £68 to get £100 in the pension. £100 less £20 income tax and £12 employee NI. You need to be paying into pensions 68/25 = 2.72 times the repayment amount.

Now on to basic rate without salary sacrifice. Cost is £80 to get £100 in the pension. You need to be paying in 80/25 = 3.2 times the repayment amount.

A fair number of people will need to be paying in 3.2 times the capital repayment part of their mortgage to meet their pension income goals but that's definitely not true for everyone on basic rate. Particularly not younger people on lower incomes who can see more years of investment growth and are quite unlikely to need high enough pension contributions to reach their mortgage goals.

But since I know from your other thread that you're getting some higher rate tax relief and are almost 50 already, so close to being able to take out the 25%, I know it's much more favourable for you. And while a pension lump sum is available to you at 55, you have 15 years to go on the term, so have plenty of time.

Someone with a bigger mortgage or less time might have to use a mixture of repayment and interest only or pension and ISA to get an affordable monthly cost.

Kelvin_Hall

xylophone wrote: »

Assuming this is a typo?

grey_gym_sock wrote: »

i'm guessing it's a typo for "into a pension".

Yup, it was the typo suggested....now sorted

Kelvin_Hall

James,

Feel like this is getting to be a habit.... Thanks again !

It is a salary sacrifice pension I have with my employer, so it looks from your extensive explanation, like I would definitely be best to put my extra into that (though as I think I can only put it up by a minimum of 1% it may be rather more than I was intending putting in - but that may not be a bad thing in the long run if I can live with it). I have the opportunity to decrease it once a year if it becomes too difficult.


grey gym sock,

I didn't realise that I could only take 25% at 55, that certainly gives me a new perspective on it. However, if it is in my current pension then I will be able to take as much as I want of it out as it is unlikely to make up 25% of my employee pension. Thanks for the clarification.

Everyone else who has replied - thanks for your time and expertise.

Kelvin_Hall

Now I need to go and find a forum somewhere where people need help with engineering issues - then maybe I can be as helpful as everyone on this forum has been to me

dunstonh

However, if it is in my current pension then I will be able to take as much as I want of it out as it is unlikely to make up 25% of my employee pension.

All pensions are restricted to 25% of value unless there is a Lump sum transitional relief (from pre April 2006 cases), a defined benefit scheme where a commutation factor is used instead, an executive pension scheme or a hybrid. a small number of in -house AVCs do allow the lump sum to be taken from them instead of the main scheme.

I suggest you check your paperwork again as your scheme sounds like money purchase (as you mention employer contribution) and these mostly allow up to 25%.

The other thing is why did you only select existing scheme or SIPP? Why not personal pension or S&S ISA?

jamesd

Kelvin_Hall wrote: »

I have the opportunity to decrease it once a year if it becomes too difficult.

Until this summer there was a rule that required a lifestyle change to allow changes in pension salary sacrifice. That was abolished for pensions, so provided your scheme can handle it you can change pension contributions whenever you like.

One trick you can use to smooth things out is 0% for purchases credit card deals. Those are readily available with terms that exceed a year, giving you time to have a bit less income in one year and a bit more in another, without any interest cost.

Kelvin_Hall wrote: »

I didn't realise that I could only take 25% at 55, that certainly gives me a new perspective on it.

Yes, that's why the multipliers are in there - have to leave 75% of the pension pot in there for income. Though from 55 you can take that income using income drawdown (or annuity, but that'd be a bad idea) and recycle the income into more pension contributions to accumulate more tax relief and a second lump sum... That can help to make your money go further than the one time around calculations I used as an illustration.

Kelvin_Hall wrote: »

However, if it is in my current pension then I will be able to take as much as I want of it out as it is unlikely to make up 25% of my employee pension.

I think that you're saying that you already have enough in pensions for 25% to do the clearing. Don't let that stop you from getting the great tax break for at least higher rate income tax.