Lifetime mortgage to fund sipps?

animox

Does anyone think there is any gains in taking out a lifetime mortgage to fund a sipps plan?

bowlhead99

Generally, borrowing to fund investment is not necessarily a bad thing if you are able to keep servicing the loan in every scenario that could come up. One option with a lifetime mortgage (if the house value is high enough compared to the loan) can be to have the interest payments roll up to be paid at the end so you don't need to pay the monthly interest out of your salary or pension income.

However, if you wanted or needed to sell the property, the mortgage would need to be paid off, and if that left you with less cash than you needed to move on with your life, you would have to draw your cash shortfall out of your pension.

When taking cash out of the pension, most of it is taxable at your marginal rate, which might be higher than the tax relief you got when funding the pension in the first place - e.g. if you need to get £100k out of your pension and you already have earned income that tax year, your total income might put you into 40% or 60% tax bracket while you had only been getting 20% relief when making the pension contributions in the first place.

Also when drawing the money out of your pension you have to sell investment assets and it would be painful to do that if we had just gone through a stock market crash which had hammered your pension pot by 30-50%.

So, if you are ever going to sell the property to relocate, downsize , move into care, etc etc - your SIPP money is locked away in risk-based investments and behind a tax trap.

Another main negative to funding a pension contribution via cash obtained on a lifetime mortgage (rather than a normal repayment mortgage) is that lifetime mortgages are typically a lot more expensive than normal repayment mortgages. So the hurdle for your investment performance is higher - the investments it is funding will need to give higher returns to profitably pay off a mortgage at 4% or 5% than one at 2 or 3%.

Another barrier to people borrowing a huge wodge of cash against their property and stuffing it into a pension is that the amount you can put into a pension in a given tax year is limited by the annual allowance, and - even if you have carry forward allowance from earlier years which might enable you to contribute more than the standard allowance - it is limited by your earned income.

So, someone who dreams of borrowing £50k and stuffing it into a pension to create £62.5k of pension assets after basic rate relief at source, is going to be thwarted if he doesn't actually have £62.5k of income. If you are only earning £30k, you can't put more than £30k gross into your pension, so a dream of borrowing £100k at high interest rates to fund pension contributions is something that would take several years to implement.

Marcon

Looking at your other posts, both you and your wife have been/are on debt management plans. Even if you could borrow as you suggest, it sounds highly inadvisable.

animox

Inadvisable for what reason?

AnotherJoe

animox wrote: »

Does anyone think there is any gains in taking out a lifetime mortgage to fund a sipps plan?

Absolutely not, because ;

• after age 75 it wouldnt work at all
• you wouldnt / shouldnt need to when working
• between retirement and state pension it could give a small boost
• after SP comes in, the gain in tax relief would be minimal
• its gambling that returns from your investments would beat whats likely to be a relatively high interest rate on the mortgage, say 5-6%, which is marginal
• if investment returns arent higher due to bad investments, a downturn or both, you'll be even worse off, which for someone that needs to get a lifetime mortgage to raise funds would be a double whammy

bostonerimus

eek:

Don't borrow to invest and gamble that you'll do better in the market...leave that up to the closed end funds/investment trusts. Keep your personal finances simple and robust so that you can survive the inevitable down turns.

Marcon

animox wrote: »

Inadvisable for what reason?

Since you ask to have it spelt out (I was trying not to): your history of being unable to manage money.

Thrugelmir

bostonerimus wrote: »

Don't borrow to invest and gamble that you'll do better in the market...leave that up to the closed end funds/investment trusts. Keep your personal finances simple and robust so that you can survive the inevitable down turns.

The inference being passive investing has never underperformed certain benchmarks over periods of time. :think: