Would you use mortgage debt to fund carry forward relief?

nick777vvv

I'm a higher rate tax payer and have not used up my pension tax relief allowances over recent years.

I've also got an interest only mortgage with about £150k paid off and £150k to go. I pay 1.99%.

I can get immediate access to the £150k I've already paid and it would still cost me only 1.99% - cheap money. I'm now wondering whether I should be using this to take advantage of the 40% tax relief I would get by investing the money in a SIPP.

Traditional thinking says 'keep paying down the mortgage' but the thought of saying goodbye to the higher rate relief (not to mention the distinct possibility of getting a higher rate of return than 1.99% on the investments) is making me think twice.

Does that sound like a plan? Or am I missing something? The fact that higher rate relief may not be with us forever is also pushing me to think that I should grab it while I can...

peterg1965

That sounds like a very high risk strategy to me. Lots of variables here but age would be a factor, job security another. There is no absolute guarantee of making more than 1.99%, although over the long term this would be probable. I think a sensible stance would be a balance of paying down the remaining mortgage whilst also putting spare money into a pension to take advantage of the HRT relief. What other pension arrangements are in place?

If you had sufficient carry forward available a £150k deposit into a pension would result in a £187500 balance and in addition a £37500 HRT rebate, so in essence costing you £112500. If you are close to 55, you could then access 25% of the pension realising another £46875, leaving £140k to drawdown.

nick777vvv

I'm 50, so would be able to get at the funds again in five years. The size of the potential tax rebate (going back three years) looks quite significant and even with some dull, safety first funds I should easily beat 1.99%.

And I guess, worst case scenario, I could always cash in in five years, take the 25% tax free and simply pay the tax I would have paid anyway on the balance.

Hmmm. Sounds too easy...

ischofie1

I think there's 2 key a

kidmugsy

nick777vvv wrote: »

I'm a higher rate tax payer and have not used up my pension tax relief allowances over recent years.

I've also got an interest only mortgage with about £150k paid off and £150k to go. I pay 1.99%.

I can get immediate access to the £150k I've already paid and it would still cost me only 1.99% - cheap money. I'm now wondering whether I should be using this to take advantage of the 40% tax relief I would get by investing the money in a SIPP.

At age 50 it seems an attractive notion to me. Is your job reasonably secure? Do you have a decent emergency fund in cash? Would you be happy to invest the pension money in something fairly low risk with the intention of accessing the TFLS at 55?

I suppose that in an unemployment emergency you could live by drawing out of the mortgage until 55 when your pension money becomes available. Have you got plenty of other money in the pension already? Would you be prepared to buy insurance against loss of income?

ischofie1

Sorry fat fingers with earlier post.
2 key areas here - your age. You can't get at the pension money for 5 years.
Could this be a problem if you lose your job?
How do you intend to get money from the pension to pay the mortgage off bearing in mind it may be a large sum?

If you have to draw out pension at the same 40% tax rate as the relief it went in at, your gain would be 10% Considering the TFLS.
If you take out at the lower 20% rate the gain would be 30%.
The assumes returns match mortgage rate.
A 2% return is hardly challenging albeit not guaranteed.

Personally I would go the pension route provided you can satisfy yourself that loss of job is not going to land you in the soup & you have an exit plan for getting money out of the pension to pay the mortgage.

Thrugelmir

nick777vvv wrote: »

I'm 50, so would be able to get at the funds again in five years. The size of the potential tax rebate (going back three years) looks quite significant and even with some dull, safety first funds I should easily beat 1.99%.

And I guess, worst case scenario, I could always cash in in five years, take the 25% tax free and simply pay the tax I would have paid anyway on the balance.

Hmmm. Sounds too easy...

What if the markets take a dive at the point in time you decide to exit. In the intervening period interest rates are once again rising.

Snakey

Pension contributions (other than ones made by your employer) are also restricted to your earned income in the year. So unless your salary/business profits are £150k - persumably not, otherwise you would be an additional rate taxpayer - then you'll need to spread it over two or more tax years.

On the upside, it's the ideal time to do that, assuming you can get the money for this year's contributions physically into the pension by 5 April.

Another point similar to the above, don't forget that you only get higher rate relief to the extent that you pay higher rate tax (in the year you make the contribution). You can't contribute your entire annual income and get 40% on the whole lot, nor can you bring forward higher rate tax paid in the past and get it refunded this year.

jamesd

nick777vvv wrote: »

I've also got an interest only mortgage with about £150k paid off and £150k to go. I pay 1.99%.

I can get immediate access to the £150k I've already paid and it would still cost me only 1.99% - cheap money. I'm now wondering whether I should be using this to take advantage of the 40% tax relief I would get by investing the money in a SIPP.

A wise move, lucrative for you even if you did nothing but leave the money in cash inside the pension.

The previous paragraph presumes that you would want to do it in one tax year and given that there is also a cap on pension contributions by an individual (but not their employer, say in salary sacrifice) of their earned income it implies that level of income.

The pension annual allowance taper means that you and others with incomes over £110k will have your ability to make pension contributions limited from 6 April 2016. The taper affects those who have an income excluding pension contributions of £110k or more or an income including pension contributions of £150k or more. Carry forward is still allowed, though.

Are you still choosing to pay income tax or have you started opting out of that yet? *

Buying VCTs is one of the ways to opt out, along with the pension contributions you're considering. The 30% VCT relief means that those who are willing to take the investment risks involved can offset their income at relatively modest cost. Relief is capped at the income tax actually paid during the tax year and has to be repaid if the shares are sold within five years except after death. There are a broad range of VCTs available from relatively low risk asset backed or fixed exit ones to highly speculative ones.

*the choice of provocative wording was deliberate

jamesd

Thrugelmir wrote: »

What if the markets take a dive at the point in time you decide to exit. In the intervening period interest rates are once again rising.

You smile and be happy that you are not invested in the markets that take a dive, of course. Or you wait until after the recovery. My current preference for avoiding this risk is P2P, where I'm currently able to get likely returns well in excess of the long term average of the UK stock market, without exposure to the 40% value drop risk that exists in that market.

Triumph13

The other factor to consider is where you are in respect of lifetime allowance, particularly if you expect to be a HRT payer in retirement. Getting 40% relief now only to pay 55% when you take it out is rather less appealing. If you expect your future contributions from employment to take you up to the LTA then paying any extra into a SIPP now would probably make little sense.