AVCs as mortgage repayment investment vehicle

Who8

I wonder if anyone can advise me whether the following stacks up as a coherent plan.

I have the benefit of membership of the Local Government Pension Scheme and I earn a good wage. I have recently extended my mortgage borrowing for home improvements and would like to begin paying into AVCs as an additional mortgage repayment vehicle. The plan would be to take the whole AVC fund as a lump sum.

The major benefit it seems, is the tax relief on the contributions. As a higher rate taxpayer, the taxman's contribution to my mortgage investment will be £40 out of every £100 a month that I save in this way - which seems too good to miss out on.

Is there a catch which I am failing to spot?

Thanks in advance for any assistance.

Jimbo1976

Whilst I am not a pensions expert I don't think you can take the entire fund. I think you are limited to 25% of the AVC fund. In the past pension mortgages were reasonably common but when equity growth rates dropped from 10% per year down to single figures a lot of people were looking at deficits in their repayment plans.

IMHO pensions are best for funding your retirement, if you want to pay off your extra mortgage make regular lump sum reductions

TrickyDicky101

Probably a good idea to ask this on the Pensions board of MSE, however:

1. Are you in a position whereby, under current rules, you can enter flexible drawdown when you retire? This would permit you to convert the whole of your remaining pension funds to cash
2. Only 25% of your pension funds can be taken Tax Free - assuming you wish to extract a great deal of cash to pay off the mortgage, then any amounts above the 25% will be taxed at your highest marginal rate. Assuming you are taking a lot, this could easily push you into the 40% band (and potentially beyond)
3. If you are reliant on paying off the capital at maturity (ie when you retire) then you will suffer the full impact of interest rates on the original balance for the entire life of the loan. This could well substantially reduce the impact of receiving up-front tax relief on your pension contributions in the first place - especially if your investments perform poorly.

holly_hobby

The very basics are ...

Source a lender still open to interest only business for new borrowers (unless you are already an IO mortgagor)

HMRC limit your max TFC withdrawal at 25% of total funds held.

Mge term has to mirror earliest/chosen vesting age of the pension scheme - which obv may result in extra interest accumulation (that would otherwise be avoided on a c&i method over a lesser term), to be truly advantageous would this additional cost of borrowing be offset by the current tax advantages on pension contributions ?

Pensions and max benefits/contributions (higher rate tax payers are esp vunerable to future changes to tax breadks), are subject to HMRC changes - which may affect the fund and amount of TFC available upon vesting

Times are a changing unfortunately, and final salary schemes are now becoming the subject of change, due to the overbearing and unknown funding costs to the employer, with most if not all schemes now closed to new entrants. And employers largely attempting mitigate the costs by closing FS schemes and transferring to MP provision instead. So to base your mge repayment on a gov funded FS scheme (given the funding issues local gov are having), may be a little precarious.

Whilst all lenders still in the IO market restrict the max LTV to below 75% - lenders such as Halifax also have a min fund requirement upon entry, which for FS schemes demands a scheduled TFC sum in excess of 250k, although capital from FS&AVC funds may be combined.

If you change your job, lose it, have a lower salary, change to a MP scheme, then this obv affects contributions and funding to your scheme, and the value of any future TFC pot.

There are of course other considerations, and whilst a FS scheme would be the safest pension mge method (due to defined benefits basis), I think that the current uncertain future of many of them(due to the funding issues discussed) would make any decision to base repayment of a mge, on future anticipated benefits and continutation of the scheme at and by retirement, speculative to say the least.

Certainly invest into an AVC, but use it to fund you pension.

Hope this helps

Holly

Thrugelmir

Who8 wrote: »

Is there a catch which I am failing to spot?

Besides comments already made.

Your mortgage would have to run until you retire. Not neccessarily the best option. Given the level of funding you would require to generate sufficent cash within your pension pot. So maybe not all your contributions would attract 40% relief.

Better interest rates are available on lower LTV mortgages.

Who8

Thank you to all of you for your input. Much food for thought. I am grateful.

jaybeetoo

The Government could change the rules on taking tax free cash on retirement. They have done so before (at least twice since i started an AVC) and they could do so again.

Thrugelmir

jaybeetoo wrote: »

The Government could change the rules on taking tax free cash on retirement. They have done so before (at least twice since i started an AVC) and they could do so again.

Unlikely that the tax free sum will be attacked. Now that contributions are capped.

jaybeetoo

Thrugelmir wrote: »

Unlikely that the tax free sum will be attacked. Now that contributions are capped.

Unfortunately, unlikely doesn't mean they can't or won't make yet more changes.

Thrugelmir

jaybeetoo wrote: »

Unfortunately, unlikely doesn't mean they can't or won't make yet more changes.

The rules are not retrospective though. Still a good option for high rate taxpayers. Compared to other forms of saving.

holly_hobby

The TFC is obv based on the value of the fund (talking MP schemes here), which is obv a reflection of the level of contributions made.

Continuing/further reduction of the contribution allowances (and of course the performance of the the plan), will obv have a direct effect on the amount of TFC available (if not the actual permitted % of fund which as we know is currently 25%) - the last change to % TFC was in relation to the old s226s (RACs), which under pension simplification regs changed from 3 x remaining annuity, to 25% of the fund.

So yes in an indirect way, the actual monetary benefit of TFC remains at the mercy of HMRC regs - as the tax advantages to be enjoyed mean it will always be liable to tinkering by the Chancellor (as we have recently seen).

Holly