Person of Interest Only

wotsthat

Eellogofusciouhipoppokunu wrote: »

Thanks for this, certainly something to consider. I have often thought about how to shield the 25% lump sum from the tax man, and paying off part of the mortgage seemed to be a decent way of doing it. Recycling the pension in drawdown as you have advised would be another crafty way of avoiding tax, because all of the drawdown would be going into a pension plan and so none of it would be taxable, plus you get the 40% uplift. Combined with the continued contributions from salary, the new pension pot would build up really quickly, giving you a second 'bite of the cherry' with another 25% tax free lump sum.

This is brilliant, thanks so much for the advice.

You're welcome - obviously don't make any plans based on what I say - it's just something I've been looking at recently too.

What you do have to be careful of is significantly increasing your pension contributions just before or just after getting the lump sum because HMRC may consider this a recycling of the lump sum itself and the tax charge is punitive. The recycling rules are straightforward though.

The other issue is that if a pension pot is big enough to generate a lump sum that can pay for a house there comes a point when you'll start to lose the age related tax allowance and start heading towards higher rate tax territory in 'proper' retirement. The ideal is to get higher rate relief on the way in but pay standard rate tax on the resulting income - obviously the lump sum is a tax benefit in itself but at some point other savings mechanisms might prove more beneficial when trying to get the best mix of income and lump sum.

grizzly1911

wotsthat wrote: »

You're welcome - obviously don't make any plans based on what I say - it's just something I've been looking at recently too.

What you do have to be careful of is significantly increasing your pension contributions just before or just after getting the lump sum because HMRC may consider this a recycling of the lump sum itself and the tax charge is punitive. The recycling rules are straightforward though.

The other issue is that if a pension pot is big enough to generate a lump sum that can pay for a house there comes a point when you'll start to lose the age related tax allowance and start heading towards higher rate tax territory in 'proper' retirement. The ideal is to get higher rate relief on the way in but pay standard rate tax on the resulting income - obviously the lump sum is a tax benefit in itself but at some point other savings mechanisms might prove more beneficial when trying to get the best mix of income and lump sum.

I know you and Eeli...... are asstute posters.

For the benefit of otheres you no doubt have the following covered.

You may not actually reach your "retirement" age.

You may lose your earning ability.

Tax regulations may change in relation to pension options.

The underlying investment vehicles may gain or lose value.

A balanced investment approach allows flexibility and ploughing all available income may not be the best option for all.

Whole life insurance cover could be considered prudent to cover your liabilities for the benefit of family and dependents.

wotsthat

grizzly1911 wrote: »

I know you and Eeli...... are asstute posters.

For the benefit of otheres you no doubt have the following covered.

You may not actually reach your "retirement" age.

You may lose your earning ability.

Tax regulations may change in relation to pension options.

The underlying investment vehicles may gain or lose value.

A balanced investment approach allows flexibility and ploughing all available income may not be the best option for all.

Whole life insurance cover could be considered prudent to cover your liabilities for the benefit of family and dependents.

As with most things in life risk should be considered - I didn't include a disclaimer as I assumed no-one would base a drastic change in the way they fund house purchase and retirement on my internet ramblings.

Eellogofusciouhipoppokunu

grizzly1911 wrote: »

I know you and Eeli...... are asstute posters.

Thanks!

grizzly1911 wrote: »

For the benefit of otheres you no doubt have the following covered.

You may not actually reach your "retirement" age.

Statistically, it's MUCH more likely than not that I will reach retirement age. However, if I don't then I'll be dead and won't need the money but I will be leaving a wife and children behind, so let's see what happens to my pension pot:

http://www.thisismoney.co.uk/money/pensions/article-1692795/What-happens-to-my-pension-pot-if-I-die.html

"Assuming you die before you retire, in most cases the entire value of your pension fund can be paid to your beneficiaries free of tax. This is a valuable death benefit that is often overlooked when planning for family financial protection. Because the majority of pension plans are written in trust as default, the value of the fund should be kept outside of your estate for inheritance tax purposes."

My wife would then be able to pay 100% of the pension onto the mortgage, instead of just 25%. That 100% will include the 40% tax relief from the government, so the payment onto the mortgage would be far greater than if we had made overpayments rather than using the pension.

grizzly1911 wrote: »

You may lose your earning ability.

All the more reason to build up a pension pot as fast as you can. I can always downsize to a smaller home if my income goes down and then use all of my pension pot to fund my retirement. Someone who doesn't pay into a pension would have to downsize and not have anything to fund their retirement. Losing your earning ability is far more dangerous to people who put off paying into a pension (i.e. like many on the MFW board) in order to concentrate on other financial goals.

grizzly1911 wrote: »

Tax regulations may change in relation to pension options.

This is the only real risk. If the government remove the tax free status of the 25% withdrawal option (or completely remove the option) then I'm snookered. However, the government is trying to encourage more people to save for their own retirement, rather than rely on the state, so I can't see them making pensions less attractive to investors. However, I can mitigate the risk by taking the first pension pot at age 55 (in 10 years). If the government change the rules before this date, then I stop paying into a pension and overpay my mortgage, with at least 10 years to rectify the situation. If the government change the rules after I am 55 then I will have benefitted from the tax advantage and have paid a chunk off my mortgage and will then make overpayments onto the mortgage.

The benefit of managing your own finances so closely is that if things change you can react and change your plans.

grizzly1911 wrote: »

The underlying investment vehicles may gain or lose value.

This is true of all investments, including cash (especially cash now that we have such derisory interest rates and comparably high inflation). Regular monitoring of a investment helps to improve its performance, plus you can invest in less volatile assets than just shares.

grizzly1911 wrote: »

A balanced investment approach allows flexibility and ploughing all available income may not be the best option for all.

No investment strategy is a 'best fit' and everyone should do their own research. However, it is helpful for people to research their options by reading the sort of discussion that we're having on here. I often read people's financial strategies on here and other forums, I look into the ones that fit my circumstances and disregard the rest. As with all things, DYOR.

Using a pension to fund mortgage repayment doesn't prevent you from having emergency savings or the usual insurances. The investments within a pension pot can be diversified into a balanced portfolio of shares, bonds, gilts, property across industrial sectors and countries. Much more diversified than putting money into a single property.

grizzly1911 wrote: »

Whole life insurance cover could be considered prudent to cover your liabilities for the benefit of family and dependents.

Having a pension doesn't preclude this, so I don't understand your point. Indeed having a pension helps in this regard, as I pointed out in my first response.

Out of interest, do you contribute into a pension pot?