Would you use mortgage debt to fund carry forward relief?

Peter314

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.

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...

That's what I decided to do. Self employed, age 57, expected income 2015-16 about £160k. I maxed out my offset mortgage to pay £40k into a SIPP. Another £8k will come from liquidating an isa. With tax relief that's £60k and enough to avoid the 62% band as well as the 45% band. That much free money really does seem like a no brainer.

kidmugsy

nick777vvv wrote: »

Ah, good point.

Any idea how soon, after writing the cheque to the provider, you can claim back the 20% from HMRC?

Please see the correction I made to my post.

mania112

So here's a recap:

Carry forward allows you to breach the annual allowance (of £40k) by returning to the past 3 tax years and using up your allowance to the maximum in that year.

Let's assume you have £150k available to you.

Next you need to have owned a pension for those years, even if you haven't contributed to it - it just needs to have been created before the year you're carrying forward from first. (this rule is silly, hopefully they'll drop it one day)

You then need to have earned income in this tax year of £150k (income in previous years doesn't matter).

If all this is correct, it seems like a good idea to me. Your benefit of relief alone is better than 1.99% pa. This assumes you're an additional rate taxpayer now and will withdraw this pension at basic rate - otherwise you're relying on 25% tax free cash and the investment to perform to make the numbers stack-up.

I wouldn't worry about losing your job and not being able to pay the mortgage, because:

a) I assume you have income protection
b) It's not a healthy way to look at life!

bowlhead99

mania112 wrote: »

I wouldn't worry about losing your job and not being able to pay the mortgage, because:

a) I assume you have income protection
b) It's not a healthy way to look at life!

b) seems bonkers because a key rule of making a prospective investment is to look at downside risk. If you are borrowing to invest you need to consider the consequences. So while 'fretting about the unknown' is a barrier to having a happy and healthy life, it is certainly healthy to think 'what could go wrong?' with a strategy. Not doing so, would be naive.

If you weren't concerned about potential negative events because it wasn't 'a healthy way to look at life', why would you be paying out insurance money for income protection in a)?

FWIW I have borrowed in the past using credit card deals, overdrafts or loans near a tax year end to help me make SIPP investments (avoiding a high marginal rate which I might not have if I left the investment to the following tax year) or VCT investments (30% relief without needing to wait to my late 50s to liquidate the investment) .

To know whether it works out OK requires some hindsight. For example if you borrowed money in March 2008 to catch 40% tax relief and paid off the loan over the following 6-12 months, you might have been much better off waiting until you had saved up the money and invested it in March 2009 even if that only gave you 20% tax relief. So, all you can do in advance of knowing how it eventually works out, is consider all the potential consequences of taking on additional borrowing at x% to fund investment which might give returns of -y% to +z% over the period of the borrowing.

If you're nearer to retirement and have a chance that the investment can be used to settle the additional borrowings rather than having to cover it from income, that reduces the risk.

jamesd

The downside risk here is just using the pension pot to repay the mortgage borrowing faster than desired and ending up with less net tax gain as a result. Still no net loss in that scenario.

mania112

bowlhead99 wrote: »

b) seems bonkers because a key rule of making a prospective investment is to look at downside risk. If you are borrowing to invest you need to consider the consequences. So while 'fretting about the unknown' is a barrier to having a happy and healthy life, it is certainly healthy to think 'what could go wrong?' with a strategy. Not doing so, would be naive.

If you weren't concerned about potential negative events because it wasn't 'a healthy way to look at life', why would you be paying out insurance money for income protection in a)?

FWIW I have borrowed in the past using credit card deals, overdrafts or loans near a tax year end to help me make SIPP investments (avoiding a high marginal rate which I might not have if I left the investment to the following tax year) or VCT investments (30% relief without needing to wait to my late 50s to liquidate the investment) .

To know whether it works out OK requires some hindsight. For example if you borrowed money in March 2008 to catch 40% tax relief and paid off the loan over the following 6-12 months, you might have been much better off waiting until you had saved up the money and invested it in March 2009 even if that only gave you 20% tax relief. So, all you can do in advance of knowing how it eventually works out, is consider all the potential consequences of taking on additional borrowing at x% to fund investment which might give returns of -y% to +z% over the period of the borrowing.

If you're nearer to retirement and have a chance that the investment can be used to settle the additional borrowings rather than having to cover it from income, that reduces the risk.

That's a very long response to my opinion that thinking you might lose your job is a depressing way to live. I think you should remain positive that you're good at your job and you will continue to work for your company because they need you.

But yes, financially, the repercussions need to be considered. In this case, not too much to worry about (which is why i've said i assume the OP has income protection). Someone with +150k salary will have nothing to worry about in life, generally.

grey_gym_sock

mania112 wrote: »

So here's a recap:

Carry forward allows you to breach the annual allowance (of £40k) by returning to the past 3 tax years and using up your allowance to the maximum in that year.

Let's assume you have £150k available to you.

Next you need to have owned a pension for those years, even if you haven't contributed to it - it just needs to have been created before the year you're carrying forward from first. (this rule is silly, hopefully they'll drop it one day)

You then need to have earned income in this tax year of £150k (income in previous years doesn't matter).

let's extend this recap a bit further ...

if you are earning exactly £150k in this tax year, then you can get tax relief on a pension contribution of £150k. but not all of it will be at 40% . after the first c. £108k of pension contribution, you've wiped out your higher-rate liability, and so you only get 20% relief on the last c. £42k contribution. so in this case, you might prefer to limit your contribution to £108k.

but, if you're earning at least c. £192k, you can make a pension contribution of £150k, and get at least 40% relief on all of it (not to mention: 45% on some of it).

Snakey

I think the OP has had some stellar advice in this thread, but I'm far from convinced he's reading it properly. You know when you just get that feeling?

I'm posting this mainly so that when he sees it and has finished cussing me out (as the Americans say) for being so mean and rude as to suggest such a thing, he might actually take some notes and do some proper calculations, rather than going by some online ready-reckoner that was never meant to give the full story and thinking that the only point at issue is whether it's sensible to take out the loan and the rest of us can be safely ignored as white noise.

mania112

I would guess he doesn't have high enough income.

nick777vvv

Snakey wrote: »

I think the OP has had some stellar advice in this thread, but I'm far from convinced he's reading it properly. You know when you just get that feeling?

I'm posting this mainly so that when he sees it and has finished cussing me out (as the Americans say) for being so mean and rude as to suggest such a thing, he might actually take some notes and do some proper calculations, rather than going by some online ready-reckoner that was never meant to give the full story and thinking that the only point at issue is whether it's sensible to take out the loan and the rest of us can be safely ignored as white noise.

You're spot on about the stellar advice Snakey. What a super community. And despite your sarky comments, I'm sure you've a good heart and want to help.

I'm not sure what you've got against online calculators but I found it a useful starting point before getting serious with the calculator and digging out the old P60's to check on past contributions etc. My earnings are £165k over 2015/16 (similar to past years) so I'm comfortable I meet the criteria.

If I've missed anything or you think I've misunderstood or misinterpreted please do chip in. I'm simply after guidance from those who are better informed than me and am grateful for all advice. And let's keep it positive, eh?