MSE News: Budget 2014: Radical reforms to give greater access to pensions savings

gadgetmind

fordcapri2000 wrote: »

Interested in anything to do with tax on pension if you can point me in the right direction.

It's dead simple. It's treated as income in the year in which you take it (other than the 25% tax free) and is taxed exactly as other income but without NI.

actd

Apologies if this has been covered and I've missed it, but it seems to me that there is now a lot of sense in switching a mortgage to interest only and putting the capital element of the mortgage into a pension instead - this means that you are getting tax relief on your mortgage payments, but the returns on the pension are likely to be higher than the mortgage interest rate, and then at retirement, the cash lump sum is used to pay off the mortgage. I did a quick calculation on my £40k mortgage, and with overpaying, it will be paid off in 11 years, but if I put the £250 per month capital element into a pension at 6.75% return, I end up with a pension pot of just over £61k over the same period - that means that even if the whole lot is taxed at 20% (because I have other pensions to take up the 25% tax free allowance), I end up with about £17k after tax and after the mortgage is paid off. I do end up paying double the interest, but that actually doesn't cost me any more over the long term (and in fact, as this is a mortgage on a rental property, that interest is tax deductible anyway in my case).

Am I missing something somewhere or should I be contacting my mortgage provider to go interest only?

Triumph13

actd wrote: »

Apologies if this has been covered and I've missed it, but it seems to me that there is now a lot of sense in switching a mortgage to interest only and putting the capital element of the mortgage into a pension instead - this means that you are getting tax relief on your mortgage payments, but the returns on the pension are likely to be higher than the mortgage interest rate, and then at retirement, the cash lump sum is used to pay off the mortgage. I did a quick calculation on my £40k mortgage, and with overpaying, it will be paid off in 11 years, but if I put the £250 per month capital element into a pension at 6.75% return, I end up with a pension pot of just over £61k over the same period - that means that even if the whole lot is taxed at 20% (because I have other pensions to take up the 25% tax free allowance), I end up with about £17k after tax and after the mortgage is paid off. I do end up paying double the interest, but that actually doesn't cost me any more over the long term (and in fact, as this is a mortgage on a rental property, that interest is tax deductible anyway in my case).

Am I missing something somewhere or should I be contacting my mortgage provider to go interest only?

What you are missing is risk. To get a 6.75% return you would need to be investing a significant proportion in equities. If they bomb just at the point you need to pay off the mortgage then where does that leave you?
If you tried to do it with risk free assets (ie cash) then you would probably get a lower return than your mortage - unless you have a fantastic deal. You would need to do a very cafreful comparison weighing up the interest charge on the mortgage (after tax relief) against the safe returns in the pension - which would give a net 5% tax gain from the TFLS if you are a basic rate payer both putting in and taking out. You also need to add in costs and make sure that you can get the money back out of the pension in an acceptable timeframe without straying into the 40% tax band.

Linton

actd wrote: »

Apologies if this has been covered and I've missed it, but it seems to me that there is now a lot of sense in switching a mortgage to interest only and putting the capital element of the mortgage into a pension instead - this means that you are getting tax relief on your mortgage payments, but the returns on the pension are likely to be higher than the mortgage interest rate, and then at retirement, the cash lump sum is used to pay off the mortgage. I did a quick calculation on my £40k mortgage, and with overpaying, it will be paid off in 11 years, but if I put the £250 per month capital element into a pension at 6.75% return, I end up with a pension pot of just over £61k over the same period - that means that even if the whole lot is taxed at 20% (because I have other pensions to take up the 25% tax free allowance), I end up with about £17k after tax and after the mortgage is paid off. I do end up paying double the interest, but that actually doesn't cost me any more over the long term (and in fact, as this is a mortgage on a rental property, that interest is tax deductible anyway in my case).

Am I missing something somewhere or should I be contacting my mortgage provider to go interest only?

At the moment moving to interest only may look good but you are adding to the risk as for example interest rates may well rise or investments may perform badly. A long term 6.75% annual return sounds rather ambitious to me. If you have significant other wealth to clear the mortgage should things turn out badly it may be a risk that could be worthwhile taking, otherwise......

More worth considering would be to not overpay - just pay the standard amount and invest the rest.

dunstonh

Apologies if this has been covered and I've missed it, but it seems to me that there is now a lot of sense in switching a mortgage to interest only and putting the capital element of the mortgage into a pension instead

You mean like a pension mortgage or an endowment mortgage? You may recall what happened to those and I doubt many people would say its sense.

Try and find a lender willing to do it is going to be another problem. Many have pulled out of interest only.

atush

fordcapri2000 wrote: »

....

It is not my plan to take it all out, and I have even rang Aegon last week to restart payments, I am just over the moon that we no longer have to take annuities out. Along with the fact that I want to work as long as possible, one day from putting me six foot under even .. so paying into a pension for as long as possible has become far more attractive.

Interested in anything to do with tax on pension if you can point me in the right direction.

You haven't HAD to buy annuities since 2006?

atush

I agree with Linton, don't go IO, but do stop overpaying and put that money into pension.

should rates rise, you can then reconsider. And this way no fees for re-mtging.

actd

dunstonh wrote: »

You mean like a pension mortgage or an endowment mortgage? You may recall what happened to those and I doubt many people would say its sense.

Try and find a lender willing to do it is going to be another problem. Many have pulled out of interest only.

Didn't pension mortgages die because the 25% allowance wasn't covering the mortgage - this removal of that limit surely changes that, as you'd only pay 20% tax instead of 55% if the tax free allowance didn't cover the mortgage.

Some good advice above, so many thanks - the advice to stop overpaying seems to be a balanced approach to the risk, which is sensible.

A couple more points though. I have a choice of two current pensions I could contribute to. Firstly, one at legal and general (so a big company) - last year my pension fund increased by 17%, and it's been doing that consistently since it was frozen about 7 years ago - the fund has doubled in that time) - they are now going to change the balance of risk in the last 10 years until retirement, so that will no doubt come down, but it's certainly good growth.
The second pension is a new workplace pension, and this has an interesting option - apparently I have the choice to pay as much as I want, and I have the option to take a salary sacrifice, and my company then pays this sacrifice into my pension. We have been told that this is HMRC approved, and the effect of this is not only do I not pay tax on this contribution (the P11 benefit isn't taxable on pensions), but I also don't pay National Insurance on this sacrifice (so I could take a greater sacrifice while achieving the same takehome pay) - that's quite a significant added benefit.

As before, comments and/or corrections greatly appreciated.

actd

ah, one more thing - I wasn't intending to re-mortgage. I'm one of the lucky people with a mortgage at 2% above base. Any remortgaging would almost certainly either lose that, or involve a hefty fee, so I was only considering this if my existing lender allows my to amend my existing mortgage to interest only - it would be to their benefit, they'd get about £11k in interest over the next 11 years, instead of about £5.5k (although they may not be so rational about not trying to fleece me for a charge as well) - this is on a property with lots of equity and I have a perfect credit and payment record.

wotsthat

actd wrote: »

ah, one more thing - I wasn't intending to re-mortgage. I'm one of the lucky people with a mortgage at 2% above base. Any remortgaging would almost certainly either lose that, or involve a hefty fee, so I was only considering this if my existing lender allows my to amend my existing mortgage to interest only - it would be to their benefit, they'd get about £11k in interest over the next 11 years, instead of about £5.5k (although they may not be so rational about not trying to fleece me for a charge as well) - this is on a property with lots of equity and I have a perfect credit and payment record.

You could extend your mortgage to your retirement date if you wanted to increase the capital to be diverted to a pension. Think that's fee free.