How does paying large amounts into a pension affect a mortgage application ?

Sheila69

I have unused pension allowances for 3 years including this year and I would be able to put a lot of money, potentially £150k into a pension this tax year using the carry back / forward (never sure which) allowances. I have a pension open to facilitate this (SIPP).

I'm concerned that if my annualised £180k salary has £150k whipped out of it then it will look as though I earn only £30k whereas I want to use the full salary to obtain a large £500k plus mortgage.

I feel as though I've got half the information and hope you can fill in some of the blanks before I go to see and adviser.

Gentoo365

Are you talking about 'salary sacrifice' method of paying a pension (i.e. your salary is reduced and the contributions are made by the 'employer' rather than the 'employee')?

If so then mortgage companies are more interested in your 'actual' salary going forward, not some temporary arrangement you have set up. More specifically, they will want to know your income and your ongoing commitments.

Your income is your actual salary, and your pension payments are only ongoing for as long as you are committed to pay them.

EDIT - Also, I don't think it will look as if you only earn 30k as your payslips (or equivalent) should state your actual pay, and then your deductions. You just need to clarify that the pension payments are not commitments and you can reduce them.

michaels

I asked a similar question a few weeks ago on here and was told they would only look at my net salary post pension sacrifice.

Don't forget your post pension income should qualify you for child benefit, tax credits etc.

Thrugelmir

Sheila69 wrote: »

I'm concerned that if my annualised £180k salary has £150k whipped out of it then it will look as though I earn only £30k whereas I want to use the full salary to obtain a large £500k plus mortgage.

How would you service a £500k plus mortgage on a £30k salary even for just a year.

Suggest you read the sacrifice rules carefully. As possibly you may fall foul of them with your suggestion. Worth taking advice.

If a salary sacrifice arrangement allows an employee to swap between cash earnings and a non-cash benefit whenever they like, then they haven't really sacrificed their entitlement to the cash earnings, as is required. In those circumstances, any expected tax and NICs advantages under the salary sacrifice arrangement will not apply.

Sheila69

Thrugelmir wrote: »

How would you service a £500k plus mortgage on a £30k salary even for just a year.

Suggest you read the sacrifice rules carefully. As possibly you may fall foul of them with your suggestion. Worth taking advice.

I was trying to think through a scenario where during the time up until the mortgage was obtained, straightforward PAYE could be used. Afterwards, a more tax efficient strategy could be utilised which could include using up available pension allowances. Any tax paid through PAYE would be reconciled (and most likely rebated) at the end of the tax year but crucially after the mortgage was obtained.

£500k on repayment over 20 years at 4% comes in at £3030 a month.

rabbit_burrow

A mortgage that large and the utilities to go with it could eat up as much as £60k a year, so obviously once that happens the pension fund contributions are going to drop quite heavily so I can understand why you would want to put away a chunk now.

Your salary is your salary, regardless of the amount you take out for a pension it wouldn't be seen as only £30k, however you would need to prove that it is a one-off and that your full salary is available for the calculation purposes.

michaels

I suspect the OP knows how much they need to live on - when I was contemplating a large salary sacrifice and using previous years unused allowance to add more than 50k to my pension I was effectively moving cash savings from previous years into pension savings, not planning to live for a year off the minimum wage income.