Pension Contribution or Offsett Mortgage Repayment?

spartacus173500

I have a £40k Offsett Mortgage with FD "on a lifetime tracker of 2.49% plus the Bank of Englands base rate currently at 0.5%, giving a total rate of 2.99%"

The Mortgage is against a Holiday Home which is let through an Agent giving small profit per year.

I'm in the fortunate position than I have inheritance/savings that can now pay off the Mortgage or make a Pension Contribution.

I am over 55 (58), full time employed (NHS), now wanting to retire at 60, and earn in excess of £50k so wonder what the most tax efficient method of using the money was:

1 Pay off Mortgage (Loose mortgage interest offset against holiday home income/profits)
2 Pay money into AVC - NHS or Personal Stakeholder
3 Pay money from salary into AVC and use money to live off
4 When would I be in position to draw 25% off in cash
5 Other?

Gleaned above options from other threads but might have misinterpreted and looking for others thoughts/ideas.

kidmugsy

spartacus173500 wrote: »

I am over 55 (58), full time employed (NHS), now wanting to retire at 60, and earn in excess of £50k so wonder what the most tax efficient method of using the money was:
2 Pay money into AVC - NHS or Personal Stakeholder

Can you do the AVC by salary sacrifice?

spartacus173500

Thx for suggestion.

Don't know - NHS Scheme Guide says:
"Additional Pension - you can pay either as a lump sum or as a regualr payment from £250 to £5,000 max.
AVC - you can pay lump sum or regular amounts into a fund chosen by you

This help?

atush

Or you could split between AVC and a PP. The tax relief alone would make a pension of some kind over mtg repayment key for at least a large proportion of this wondfall.

How to decide btwn PP and AVC might be determined if you want to retire before your Scheme age or not.

jamesd

So far as efficiency goes, forget clearing the mortgage. It's wasteful and you'd do better by using the money for pension contributions. That is one of the most efficient ways there is to use your money, including the money in the mortgage offset account.

At age 58 you're over 55 so you can get a 25% tax free lump sum from personal pensions at any time. You can then take pension income via capped income drawdown and recycle it into more pension contributions, to build up another tax free lump sum. Or to get out the rest of your net cost. It's quite an efficient way to save tax, getting the tax freed money out in the form of the lump sum.

Here's how the numbers work out for various tax rates:

tax	pay in	basic rate	tax	25% lump net	balance		income	after   years to get
		relief added	refund	sum	cost	in pension	at 6%	tax	rest out
45% 	8000	10000		2500	2500	3000	7500		450	247.5	12.12
40% 	8000	10000		2000	2500	3500	7500		450	270	12.96
20% 	8000	10000		0	2500	5500	7500		450	360	15.28

The net cost column is the net cost of the £7,500 that's left in the pension pot, after deducting the tax refund and lump sum from the initial amount paid in. Years to get the rest out is how long it takes to get the rest of that out after allowing for income tax. After that many years you're in pure profit for the rest of your life, with no remaining net cost to you. This years to get the rest out calculation uses the same tax rate as when putting the money in, in practice you might well be basic rate so the net will be higher and the number of years lower.

So if you want to do some mortgage clearing, run the money through a pension first, then do the clearing with the tax free lump sum. Though you'd do even better to recycle the lump sum into more pension contributions and gain another 25% tax free lump sum, adding that to the one you accumulate by recycling the pension income into pension contributions. There are potential limits on recycling of pension lump sums, ask for details if doing that interest you. There are no limits on recycling income, other than the annual pension contribution limit.

If you will have guaranteed income from work defined benefit pensions, the state pensions and annuities that totals £20,000 or more you can switch from the usual Capped Drawdown to Flexible Drawdown for personal pension pots. Flexible Drawdown lets you take out as much as you like from the pension pot. After the 25% tax free lump sum, the rest is taxed as normal taxable income in the years in which you take it. You can't make or have made for you any pension contributions after you start Flexible Drawdown, so don't do it until you're ready to accept that - which means not until you actually retire. Use Capped Drawdown until then.

So, your most tax efficient method using pensions is to pay in as much as is not already used of your taxable income each year until you've used the whole amount available. Use Capped Drawdown whenever the costs make that sensible, which depends on how much you pay in, probably every year or three, then recycle the income and lump sum. Do any mortgage clearing later, using the ongoing income from the pensions after you've retired when the tax rate is probably going to be lower for you.

spartacus173500

Wow - think I understand.

Instead of having the £40k in savings offset against mortgage can I contribute all of this into pension pot - and then draw out 25%?
By contributing £40k to pension my taxable earnings will go down to £55k - £6k (existing company pension contribution) - £40k private pension = £9k.

Tax to pay almost nothing?

atush

Exactly.
but do realise you cant take all of the pension out, you can take 25% plus an income from the rest.

Unless you have a secured income of 20K elsewhere.

kidmugsy

spartacus173500 wrote: »

NHS Scheme Guide says:
"Additional Pension - you can pay either as a lump sum or as a regualr payment from £250 to £5,000 max.
AVC - you can pay lump sum or regular amounts into a fund chosen by you

This help?

No, it's inconclusive. Perhaps you should ask whatever your Personnel department is called.

spartacus173500

"Unless you have a secured income of 20K elsewhere?"

What does this mean please?

jamesd

A person who has £20,000 of annual income from work defined benefit pensions, like final salary, the state pensions and annuities combined is able to use something called Flexible Income Drawdown. Those forms of income are called secured. The alternative is unsecured, from Income Drawdown or non-pension investments.

The standard Capped Income Drawdown allows a 25% tax free lump sum then an amount of income each year that's currently around 6% of the remaining value of the pension pot at common retirement ages. That amounts to about 32% that can be taken at the start, ignoring the income tax on the 6% portion.

Flexible Income Drawdown allows an unlimited amount to be taken out of the pension pot at any time. After the first tax free 25% lump sum the amount taken is added to normal taxable income for the years in which it is taken and taxed as usual for income. Once Flexible Drawdown is started, no more pension contributions in the name of the person are permitted, either by themselves or employers or anyone else.

Assuming all of your contributions are from higher rate income, your £40,000 of pension contributions would work out as:

Pay in: 40000 * 0.8 = £32000.
Pension provider adds 25% of 32000 for basic rate relief = £40000 in pension pot.
HMRC gives you another 8000 tax relief, net cost now 32000-8000 = £24000.
You take 25% tax free lump sum from the £40000 = £10,000.
Remaining net cost is £24000 - £10000 = £14000, pension pot still has £30000 in it.
Take 6% capped drawdown income, taxed at 40% and keep it, 32000 * 0.06 * 0.60 = 1,080.
Net after first payment now 14000 - 1080 = £12900 with £28920 in the pension pot.

So from your £40,000 you have taken £27,100 out very quickly and the remaining £12,900 has bought you £28,920 that's still in the pension pot. All completely free of material investment risk. That money left in the pension pot is 2.24 times your remaining net cost, meaning you've more than doubled your money on that £12,900.

spartacus173500

Thank you once again for explanation, and comprehensive reply.

A couple of further (final?) questions if I may:

"Assuming all of your contributions are from higher rate income, your £40,000 of pension contributions would work out as:

Pay in: 40000 * 0.8 = £32000.
Pension provider adds 25% of 32000 for basic rate relief = £40000 in pension pot.
HMRC gives you another 8000 tax relief, net cost now 32000-8000 = £24000"

1 If my Gross Salary is £60k, and I already pay tax and NI via PAYE, and contribute £6k to Company Pension by Salary Deduction, my 'pensionable earnings' would now be?

2 What would the Pension Provider and HMRC now add and what would your example below now become - still attractive I assume?

3 To make payment I just need to contact my existing Personal Pension provider and they will do the rest, or do I need to contact HMRC as well?

Thx - it's just trying to get my head around 'cash in the bank now' vs 'longer term income'