Increase Mortgage Term to Increase SIPP Payments?

fcjf

Further to reading this Forum I have been thinking about changing my mortgage strategy to reduce the monthly payments and make additional payments into my SIPP with the surplus cash available. I have been mulling figures and strategy over for a while but would welcome a sanity check on my thinking and any comments. Details are;
House Value: £350,000
Current Mortgage balance £136,000 with 2 years remaining of a 5 year fix @ 2.89% ; overall term remaining 13 years.
Redemption figure of £3520
Current Mortgage Payment £1206
Current Endowment Payments £100 ; Endowment matures Nov 2017 – expect £40,000

I am 47 years old, a HRT payer earning £63,000 PAYE and £10,000 net profit from BTL (based on current tax regime with full mortgage payment relief). I am currently paying £15,000 per year into a Company DC Pension (me 8% company 16%) and the pot currently stands at £140,000, also contributing to SIPP approx. £5,000 per year from BTL profits, SIPP pot is £10,000. I also have a protected rights DB pension currently at £20,000 per year which I can take from 65. My wife has no Pension provision and is currently well under the 40% tax bracket but we are changing BTL ownership ratio’s so that in 3 years’ time will fall into the HRT bracket so will divert some SIPP payments to her.

I am thinking about re-mortgaging now to a longer fixed rate over a longer term and use the difference between my current mortgage and endowment payments and the new payment to pay into my SIPP.
10 yr fix @ 2.99% over 20 years = £770 payment. Currently paying £1306 so reduced mortgage payment saving of £536 paid into the SIPP, which would be topped up by the 40% tax relief.
The amount of tax relief alone over the 10 year period of the fix would be in the region of £32,000 but the increased interest paid after 10 years would only be £14000. The capital that would have been paying off the Mortgage would be in the SIPP and the value of that capital would be dependent upon how the Investments in the SIPP perform (currently in VLS80) so this is a risk. The plan at the end of the 10 year fix period would be to either pay down the mortgage or continue with the strategy, especially if my wife is in the HRT bracket and we can up the cash/tax to top up her pension

I cannot see any reason why I shouldn’t do this, especially as long as I am a HRT payer and have the scope to recover 40% based on current rules. My initial driver for doing this was to help reduce the additional tax burden I will face due to future BTL taxation rules. I suppose I could wait another 2 years until out of the fixed term and avoid the redemption fees but the tax saving over the next 2 years would more than compensate for that. I know that there could be some tweaks to my plans but as a principal is this a sensible strategy?

jimi_man

Hi

I'm no expert but looking at your figures, you earn £63k so £20k of that is in 40% tax bracket. You say you already pay £15k + £5k into your SIPP so that seems to use up all your allowance. Therefore any extra payments into it from a reduced mortgage will be at 20%.

This is on the assumption that rental income does not attract tax relief for the purpose of pension contributions.

As I say I'm not an expert, so hopefully someone else can feel free to correct me if necessary.

fcjf

I'm sure the rental profit is taxable so the £9,600 I'll pay into the SIPP will offset the £10,000 BTL taxable income however you have made me think about the extent of pension payments I can make before I would be below the HRT cut off. My DC pension payments are made via Salary sacrifice and I'm not sure how this affects taxable income so hopefully someone can advise accordingly.

jamesd

Salary sacrifice is wonderful.

Initially in higher rate you save 40% income tax and 2% employee NI.

Then you shift to 40% income tax and 12% employee NI for the range where your pay is in the basic rate NI range but your non-work income means your income is still liable to higher rate income tax. This is for your rental income mostly.

After that comes basic rate income tax and 12% NI.

Plus any possible cut of employer NI you may get.

So for some of your income you can get at least 52% combined NI and income tax saving.

But it gets better. NI is calculated for each pay period, not each year. Arrange your salary sacrifice so most of it is done just above minimum wage then for the rest of the year you take full pay and you can save a lot of NI by getting basic rate 12% NI relief for all of the sacrifice. If your employer lets you change during the year, as the law has allowed for pension contributions for a few years now. So you could arrange to do most of your sacrifice with 52% relief.

jamesd

As you've probably realised by now, using your SIPP instead of salary sacrifice is throwing away a fair bit of money. On £9,600 a year if you can arrange for all sacrifice to save you 12% NI it's preventing you from saving £1,152 in NI.

Your plan to reduce mortgage monthly payments and use pension money is an excellent one. But what about that early repayment penalty? Not so good. Why not cheat instead? Get yourself a 0% for purchases credit card or two and put an average of £536 a month on the cards until the early repayment penalty goes away. Then you still get to start on the extra money into the pension now but save the early redemption charge that may well cost you more than you can save. The endowment can eventually clear the cards if you want to do that.

fcjf

Im maxed out on payments I can make into my work DC pension, 8% is the max I can pay and 16% (17% when I'm 48), is the max my employer will pay so unless I've misunderstood something about salary sacrifice I can't take any further advantage. I'm don't really understand your first response about being paid just above minimum wage, are you suggesting that I should defer my salary for a number of months?
The redemption is something that is bothering me. I was going to use un-used pension allowances for the last three years and put the endowment money straight into the SIPP. I already have two 0% purchase credit cards for stoozing so maybe having more without a means of paying it off would be a stretch so to avoid the redemption charge I could be satisfied that the endowment money covers what I would be paying in from reduced mortgage payments. I was thinking about remortgaging now and go for the 10 year fix just for the certainty of payments for the next 10 years. Nobody knows what is going to happen to interest rates going forward so fixing now at a good rate for 10 years with a plan to take advantage of tax relief seems attractive.

timthebin

Im maxed out on payments I can make into my work DC pension, 8% is the max I can pay and 16% (17% when I'm 48), is the max my employer will pay

I think you're slightly confused here - 8% is the max you can contribute to get the 16% employer contribution...

There's no max you can contribute as long as you (i) don't exceed the annual allowance (which you can technically do but its financial suicide) and (ii) ensure you're taking at least minimum wage (as above).

Hope this helps.

fcjf

OK thanks and yes if that's the case I haven't understood it properly.

So if I increase my company DC contributions by £9600 per annum, split over a few months where I would in effect only get above minimum wage I would maximise NI savings? I'm sure I have seen something where I am only allowed to change my contribution % once a year but I'll have to check that and look into this strategy in a bit more detail. One of the other attractions of the SIPP is that the funds that the Company invest the pension in are limited and maybe not as good as I could pick in a SIPP. Whether the SIPP investment is worth more than the NI savings are something I'll have a look into as well.

jamesd

The old salary sacrifice rules from HMRC were once a year or significant life event. Auto-enrollment rules require that you be able to start or stop at any time so that would have banned salary sacrifice for pensions. So HMRC removed that restriction for pension contributions and firms are now free to do it whenever they like.

Mine used to still discourage changes to save them the work of making the changes but a while back introduced a form to make the requests easy. So your employer can do it, but they don't have to except for the ones required by auto-enrollment.

jamesd

Dropping your after-sacrifice pay to just over minimum wage for a few months is how you save the maximum amount of NI, 12% on most of the pension contribution. Spreading it out evenly makes the NI bill as high as possible.

Transferring from work to SIPP pension from time to time is how you get over the investment restriction. It is common for there to be a block on transfers while you're still an employee. There are two ways around that:

1. Opt out then immediately opt back in. There are usually no transfer restrictions on the old account.

2. Explain about the investments to your employer. They save 13.8% employer NI if they share none of the saving with you, so they gain from encouraging you to use the work scheme. I did with mine and they sorted out a transfer arrangement with the pension firm. Anyone can also see that making employees opt out then back in to do it is daft, better to make it easy.

fcjf

Thank you. That's definitely something I'm going to look into as long as my company allow me change my contributions more than once a year, which I seem to recall them limiting me to, but I'll ask.