Loan versus pension contribution - is this correct?

Diddidi

So, at age 54 (almost), I've managed to pay off my mortgage and have some funds set aside which I wanted to use to upgrade our cars and do up the house etc. However, my financial advisor has advised me to max my pension contribution for this year to make use of tax efficiencies (I'm a 40% tax payer).

So what I was thinking of doing was taking out a personal loan for the cars and then use the funds to max my pension contributions. I based this thinking on the following calculation: if I take out a loan for £8K for one car and repay that over 24 months at an APR of 4.3% I end up paying back £420 approx in interest. However, if I use the £8K and put that into my pension, then I immediately get £2K for the grossed up figure and then a tax refund of £3K based on my 40% status. Because I can access my pension in just over a year and I have no further debts, it seemed like a low risk approach.

Is this thinking correct or have I got it completely wrong? Is anyone else doing anything similar?

Thank you!

dunstonh

40% relief and investment returns greater than the interest on the debt favour the pension.

As long as the monthly payments are affordable, then its a no brainer.

Because I can access my pension in just over a year and I have no further debts, it seemed like a low risk approach.

Just because you can, doesnt mean you should. Early access when not needed is wasteful.

AnotherJoe

Are you retiring at 55 or will you continue working, and if so will you be a higher rate taxpayer then?

Diddidi

"Are you retiring at 55 or will you continue working, and if so will you be a higher rate taxpayer then?"

Am thinking of working part-time or going self-employed to incorporate some travel, - income will drop but perhaps just marginally into 40%.

bigadaj

Diddidi wrote: »

So, at age 54 (almost), I've managed to pay off my mortgage and have some funds set aside which I wanted to use to upgrade our cars and do up the house etc. However, my financial advisor has advised me to max my pension contribution for this year to make use of tax efficiencies (I'm a 40% tax payer).

So what I was thinking of doing was taking out a personal loan for the cars and then use the funds to max my pension contributions. I based this thinking on the following calculation: if I take out a loan for £8K for one car and repay that over 24 months at an APR of 4.3% I end up paying back £420 approx in interest. However, if I use the £8K and put that into my pension, then I immediately get £2K for the grossed up figure and then a tax refund of £3K based on my 40% status. Because I can access my pension in just over a year and I have no further debts, it seemed like a low risk approach.

Is this thinking correct or have I got it completely wrong? Is anyone else doing anything similar?

Thank you!

Isn't the tax refund £2k?

jamesd

The Money Purchase Annual Allowance that will reduce your permitted pension contributions to £4000 a year into money purchase - defined contribution - pensions for the rest of your life if you take out even a penny of the taxable 75%. So don't.

Tax free lump sum recycling of at least £7,500 per twelve month period is within the limits for tax free lump sum recycling so the £2,000 that you are considering will be fine, with no penalty charges.

The tax refund will be £2,000, not £3,000. Still a good deal.

Diddidi

bigadaj wrote: »

Isn't the tax refund £2k?

It is - yes, I was using a calculator that seemed to assume I was a 45% tax payer :rotfl: Thanks for spotting thisi

AlanP_2

Rather than a 4.3% loan why not a 24 Month O% on Purchases Credit Card?