Using mortgage funds to invest in a SIPP?

molan

Having seen various recent articles about SIPPS I wondered if it might be worthwhile borrowing money against my mortgage to invest in a SIPP for a fairly short term period.

Apologies if this is a really dumb question but I've been playing with some figures and wanted some general advice from people before investigating any further!

My outline position is:

Currently 48 and, therefore, able to withdraw pension funds at age 50 in just under 2 years time.

I have an offset mortgage that has about £55K worth of easily available potential borrowings if required.

I have a number of existing pension funds running.


Here's some rough theoretical workings I've been using:

Invest £7.8K into a SIPP
Govt tax relief @ 22% = £2.2K
Higher rate relief at 18% = £1.8K
Net cost = £6K
SIPP fund = £10K

Cost of borrowing £6K over 2 years at around 6% = circa £720
Net cost of £10K SIPP is therefore £6,720
Net gain on investment is £3,280 (excluding any performance benefits from the SIPP over the two year period)

At age 50 I withdraw 25% from the SIPP and my other pension funds in order to pay back the additional mortgage borrowings.

Net result is that for an investment of £6,720 I've generated an additional pension fund of at least £3,280.

If I were to multiply these numbers by a factor of 7 (to take up all the flex in my mortgage) then I'd make a gain of something like £23K over two years.


Given that the period is fairly short then the potential risk factor doesn't seem that great?

So what am I doing wrong - this looks too good to be true!

Any advice would be most welcome.

Debt_Free_Chick

molan wrote: »

Given that the period is fairly short then the potential risk factor doesn't seem that great?

How is your SIPP going to be invested?

molan

Debt_Free_Chick wrote: »

How is your SIPP going to be invested?

To be honest I have no idea!

I've been looking at the various H&L SIPPs and thought I would probably go for a fairly low risk one of those.

Debt_Free_Chick

molan wrote: »

To be honest I have no idea!

I've been looking at the various H&L SIPPs and thought I would probably go for a fairly low risk one of those.

hhhmmmmm ...... low risk of what?

Low risk of a fall in the value of the fund, carries a risk that the return will not match what you need (and you need to define what you need). There might even be a risk that the return fails to track inflation.

I think that in order to get a return that beats the mortgage interest rate, you're looking at equities. Then, there's a risk that the value of the SIPP falls .... it could fall to only £1k leaving your plan in tatters (sorry ).

Generally, borrowing to speculate in investments is a bad idea - because, usually, you cannot generate a return to pay back the costs of borrowing without risking a fall in the value of your investments.

You seem to be prepared to risk losing some/all of the tax payback .... but why should you, when you can avoid jeopardising the "free" money?

molan

Given the tax advantages it looked to me that I wouldn't need to beat the mortgage interest rate.

All I'd need would be for the SIPP not to lose value over the two year period?

chesky369

We've had a fairly bumpy ride in investments over the past year and the signs aren't good for the foreseeable future - two years would be too short a period to bet your investments wouldn't lose in value.

EdInvestor

The additional risk factor with all pension mortgage related ideas is that if it all goes pear shaped you can only get 25% of the money out of the pension.

averageguy11

My creed is nt to invest borrowed money in anything with risk fullstop ...i did and had more than my fingers burned

purch

various H&L SIPPs

Each SIPP is unique as it is SELF Invested.............HL only sell the wrapper, you choose the content

If you want no risk use the funds in your SIPP

A) to buy some Gilts....Treasury 2009 4% or Treasury 2009 8% or Treasury 2009 5 3/4% all yielding about 4.4% currently...........or slightly higher risk there is an Index Linked issue for 2009 also which might end up yielding slightly more or less, but whatever happens to inflation, a 2 year timeframe doesn't leave much time for the yield to be affected by too great an amount

So at maturity you'll get the face value of the Gilts back, plus your SIPP will have received the coupon interest which will accrue in your SIPP. As it is such a short timetrame you won't benefit much from compounding

Your return is thus guaranteed, and your won't lose anything other than the potential to get growth at a higher rate. Also you can calculate exactly what you need to do, and what the return will be in 2 years time, and what the 25% will be too.

leave it as Cash..........HL currently pay you 5.5% I think on cash balances, but this might/will fall if the BOE cut's the base rate, or if they decide to pay less, nothing is guaranteed

dunstonh

Do you actually know what a SIPP is and how it compares to personal pensions and stakeholders?

A lot of the media articles on SIPPs are promotions from SIPP providers. Indeed, the telegraph did a SIPP booklet recently and it was nothing short of a bunch of adverts and full of information which an inexperienced investor would use to make the wrong decision.

I recommended an L&G stakeholder a few weeks ago to someone with a 0.7% annual management charge and a spread of funds. He read this SIPP booklet and told me he wanted a SIPP as it was cheaper as it would have no initial charges. It turned out the fund he had chosen had a TER nearly three times higher than the stakeholder. The stakeholder had no initial charges and past performance was lower than the stakeholder whilst also being higher risk.

SIPPs are great when used appropriatly but there is great potential to pay more in charges and get investment options wrong.

Comments that put me on guard with your case would be that you are looking at just two years, you seem to think a tax wrapper is low risk when it is the funds that count and that you appear to be using HL which is expensive for funds compared to a stakeholder or personal pension.

purch

Or there is a European Investment Bank Bond maturing in December 2009

EIB 5.5 2009..............yields about 4.95%

just as safe as a Gilt but yielding about 50 basis points more


P.S. In the interests of transparency I should disclose that I hold this Bond as well as few others within my SIPP, and I'm holding it to maturity, ( not trying to flog it to you )