Mortgage for Pension Investment?

DavidJonas

Hi All,

Does it make sense to borrow money to invest in a pension?

Let's say (let's stay hypothetical!) I am paying 40% tax and am about to remortgage and I am 50. At 55 I will be able to pay off all or practically all of the mortgage using my tax free lump sum.

The mortgage rates I am looking at are appx 1.5% on a 5 year fix.

Surely I could just raise the mortgage now, rest easy on the 5 year fix, set aside some of the extra mortgage cash to meet the extra repayments, plough the rest into my pension as AVC and boost up my pension (and tax free lump sum) at really no cost or risk to me at all.

£50,000 of borrowed cash used to subsidize my net income (over 5 years) means £83,000 in extra pension pot money at an interest cost of only £3,750. The total repayable is £53,750, making me a paper investment profit of appx £29,000.

More if the stockmarket rises over the 5 years.

All by leveraging the 1.5% interest and the 40% avoided tax.

It all depends on having a big enough tax free lump sum there now of course.

Is this what people do? Maybe I am just behind the curve!

Or is it illegal perhaps? It's not pension recycling, though.

Dazed_and_confused

Paying 40% tax doesn't necessarily mean you get higher rate tax relief on all your pension contributions.

You might be paying higher rate tax on £1. And contributing £10,000 into a relief at source pension scheme.

Your higher rate tax relief would be £0.20. Or £0.21 if Scottish resident for tax purposes.

Marcon

DavidJonas wrote: »

£50,000 of borrowed cash used to subsidize my net income (over 5 years) means £83,000 in extra pension pot money at an interest cost of only £3,750. The total repayable is £53,750, making me a paper investment profit of appx £29,000.

More if the stockmarket rises over the 5 years.

...and if the stockmarket crashes? Where do you get the idea your AVC is risk free if it is impacted by the markets?

DavidJonas

Marcon wrote: »

...and if the stockmarket crashes? Where do you get the idea your AVC is risk free if it is impacted by the markets?

It would be some kind of risk in that sense, yes.

But the risk of a stock market crash overlapping with my 55th birthday is a risk I am comfortable with. Statistically at 50 I am running worse risks than that in the next 5 years!

Besides, we're not talking about borrowing hundreds of thousands.

DavidJonas

Dazed_and_confused wrote: »

Paying 40% tax doesn't necessarily mean you get higher rate tax relief on all your pension contributions.

You might be paying higher rate tax on £1. And contributing £10,000 into a relief at source pension scheme.

Your higher rate tax relief would be £0.20. Or £0.21 if Scottish resident for tax purposes.

Yes, you are right of course.

Let's assume all the AVCs would receive 40% relief.

Paying into defined contribution pension (stocks).

Albermarle

It would be some kind of risk in that sense, yes

It is not some kind of risk , it is a real risk . The only way to avoid it is to keep the pension money in cash or something similar to cash - annual return < 0.5% . After fees approx. zero .

But the risk of a stock market crash overlapping with my 55th birthday is a risk I am comfortable with.

It could just as likely happen the day after you add to the pension.

So the plan itself is not a bad one, but I think you should be less overconfident about investments growing , when you look at the detail.

AlanP_2

Albermarle wrote: »

It could just as likely happen the day after you add to the pension.

So the plan itself is not a bad one, but I think you should be less overconfident about investments growing , when you look at the detail.

To just "bank" the tax relief gain leave it as uninvested cash in the pension, or choose a Money Market / Cash type investment.

Limits upside dramatically but does the same for the downside.

I am using these for a chunk of my AVC alongside my DB pension as I plan on taking it as cash within 2 years and spending it over the following two so don't want (or need) to take any investment risk.

ermine

DavidJonas wrote: »

But the risk of a stock market crash overlapping with my 55th birthday is a risk I am comfortable with. Statistically at 50 I am running worse risks than that in the next 5 years!

Bloody hell, you are sitting on at the end of a historically long bull run and you are comfortable with risks of a crash in the next five years? Do you look before crossing the road?

Other than that, a terrific idea. Keep it in a cash fund, or bonds. 40% free money over five years is effectively 8% p.a. for the first year, 10% the next etc.

This worked for me, late in my career - go for it. But do think about the stock market risk you could be eating- you don't have to keep it in equities, or at least all in equities...