Income Drawdown - does this make sense?

bocaboca

We have £80k interest-only mortgage costing 1.4%. We have £60k to cover this in Premium Bonds which is currently yielding 2.5% ( with that slim tantalising chance of "The Big One").

Would it make sense to invest an additional, say, 25% of salary into the DC pension and hence avoid the 40% income tax; any resulting deficit in income could be drawndown from the Premium Bonds.

In 3 years time when we hope to retire, we then pay off the mortgage from the £125k tax-free allowance.

Hope that makes sense..... what do you think?

RickyC_IFSWP

Hi bocaboca

That seems reasonable. Just ensure that your pension funds are gradually moving into lower risk/cash based funds, (given so close to retirement) and also that the full 25% contributions receive 40% tax relief. (I'm sure you're aware already that you receive 20% tax relief at source and will need to claim the other 20% via self assessment.)

I'm not sure I follow what you meant by the deficit in income though. Could you elaborate?

kidmugsy

bocaboca wrote: »

We have £80k interest-only mortgage costing 1.4%. We have £60k to cover this in Premium Bonds which is currently yielding 2.5% ( with that slim tantalising chance of "The Big One").

Would it make sense to invest an additional, say, 25% of salary into the DC pension and hence avoid the 40% income tax; any resulting deficit in income could be drawndown from the Premium Bonds.

In 3 years time when we hope to retire, we then pay off the mortgage from the £125k tax-free allowance.

Hope that makes sense..... what do you think?

(i) Premium Bonds yield about 1.3%p.a., so you must expect your return to sink in future.

(ii)But that's secondary; the idea of avoiding income tax in a way that lets you pay off a cheap mortgage with your lump sum sounds to me to be a pretty good idea.

kidmugsy

RickyC_IFSWP wrote: »

I'm not sure I follow what you meant by the deficit in income though. Could you elaborate?

He means that they can't spend the income that they divert to pension contributions so they'll spend some PB money to compensate.

AlwaysLearnin

Sounds very reasonable.

Only comment I would make is that if you think that you will need to supplement your income if you make pension contributions to take your income down to the 40% threshold, being ~£42k, then it could be 'painful' when you retire with a £375k pot. Unless you have some other significant amounts, it might be worth transitioning yourselves to the amounts you'll be living off in retirement over the next 3 years. This will have the added benefit of meaning you'll save a decent amount in the process too.

atush

Always avoid HRtax where you can, relative with any existing contributions.

In fact, unlike many I can see a place for avoiding BR tax with pension contribs as many dont take into acct retiring early when they have no income so will have 10.5K PA to use. Nor do they take into acct a non working spouse with little pension provision who has a separate PA that is wasted if they have no taxable income.