Another pension vs mortgage query.

bolwin1

Here's another pension vs mortgage query. I've been trying to get my head around this, so please let me know if I'm off the mark with this plan.  

I'm 55 years old & buying a house.

I could afford to buy the new place without a mortgage (when my place sells), however my house sale is moving slowly & the purchase quickly, so I've taken a mortgage out to be able to buy the new place without selling.  

Once my place does sell, I'll be in possession of £250K cash + a £250K mortgage. Figures rounded for simplicity. 

I suspect I can make the money work smarter via a pension than simply paying the mortgage off.

 

Current pension £600K DC + £10K DB from age 60. Confirmed full state pension at 67. Salary £90K.(recent promotion).

I'm currently paying £14K p.a. into company pension via salary sacrifice. This costs me £8,120 after tax & NI are considered.

If I increased this to £40K p.a. this would drop me out of higher rate tax & cost me £23,200 p.a. (an impact of £15,080 p.a. in my paypacket). 

I could cover this by holding back £15,080 from repaying the mortgage & using this for living expenses. That way, I'd be no worse off on a monthly basis. 

Rinse & repeat for 4 years & I'd have to hold back a total of £60,320 from my mortgage repayment. I'd end up with 4 * £26K more in my pension than I would have done by carrying on as now = £104K. After 25% tax free & 20% basic tax, this would effectively be worth £88,400. Net this off against the £60,320 mortgage paid back over the 4 years I'd be £28,080 in 'profit'. 

I can't help thinking I'm missing something as this seems too easy. Appreciate I've not included mortgage interest, but I'd expect pension returns to exceed that. 

I know could salary sacrifice more with my carry forward allowance but the benefits would be a lot lower as the only benefit would be the tax free element (20% tax on the way in & 20% tax on the way out).

Am I missing anything ?

Another_Saver

Nope.
Definitely more efficient to up your pension contributions to drop back into basic rate tax. Your plan seems solid, just make sure you can actually repay the mortgage out of either cash or taking your pension income upto the higher rate threshold without compromising your living standards. Also, keeping a cash reserve, say by maxing out your £50k premium bonds allowance is probably sensible.

kinger101

bolwin1 said:

I know could salary sacrifice more with my carry forward allowance but the benefits would be a lot lower as the only benefit would be the tax free element (20% tax on the way in & 20% tax on the way out).

Am I missing anything ?

Actually, with salary sacrifice, you save both income tax and national insurance, so there's still a significant benefit in basic rate band as you save 20% income tax and 12 % national insurance.   So you buy 85 p for 68 p (not 80 p).

With £600K in the DC pot and £10K pa DB, that's equivalent of £800K toward the LTA already.  You should make sure you're aware of the implications of breaching this.

 

egroeg1980

I did the numbers on that same balance not so long ago and ran it through my tax man (admitedly, he's not an advisor, but wanted a 'qualified sounding board' to ensure my man-math (far from) had me right.
I'm circa 150k/pa and have unused carry-forward allowance left on 2017/18/19 tax years, so it makes sense to make your 'adjusted net income' as low as you possibly can, especially in your case if it brings your code down a notch or less outlay % on tax.

If you've just had a promotion, then hopefully you can swallow the defecit of 15,080pa which will pay dividends on where you're rerouting the funds to avoid the minor impact of interest on the £60,320.

Good work and good luck Bolwin!

Thrugelmir

How good are your investment skills? 

bolwin1

Thrugelmir said:

How good are your investment skills? 

Not good. It's all in Vanguard VLS80 and I don't feel the need for anything more sophisticated. I think I'm OK with the level of risk as I wasn't particularly concerned when the market dropped earlier in the year for a while.  
Thanks for the comments all - I'd not considered the NI at 12% below £50K, so more food for thought. It will be nice to not have to pay 40% tax

[Deleted User]

You are exposing yourself to short term risks by leveraging in this manner.  Thats smart for someone who does not care about short term, eg a 30 year old.  Tougher for someone within 5 years from retiring.  You will likely gain, but in the unlikely event that you don’t, your losses will be magnified. And if you quit your job and start drawing down your pension at that time, it will hurt.

GunJack

one thing that's not often mentioned in these sort of discussions, is that with no mortgage you need a much lower level of income from pension funds to be able to retire, which puts you in a much better position if you want to stop work.....

pensionpawn

GunJack said:

one thing that's not often mentioned in these sort of discussions, is that with no mortgage you need a much lower level of income from pension funds to be able to retire, which puts you in a much better position if you want to stop work.....

This is true, however by fixing your rate (e.g. 1.37% for 5 years) my mortgage would be considerably less than my council tax. The argument for clearing your mortgage is peace of mind and that is a huge quality of life enhancer. However some people may be happy never to repay their mortgage before they croak it because their monthly payments become less and less significant (compared to other costs) over time and their investments grow.

GunJack

pensionpawn said:

GunJack said:

one thing that's not often mentioned in these sort of discussions, is that with no mortgage you need a much lower level of income from pension funds to be able to retire, which puts you in a much better position if you want to stop work.....

This is true, however by fixing your rate (e.g. 1.37% for 5 years) my mortgage would be considerably less than my council tax. The argument for clearing your mortgage is peace of mind and that is a huge quality of life enhancer. However some people may be happy never to repay their mortgage before they croak it because their monthly payments become less and less significant (compared to other costs) over time and their investments grow.

When your retirement income is 2xDB pensions plus SP when it gets there, being mortgage-free is very important

...and possibly why people with DC pensions look at it a bit differently??

pensionpawn

GunJack said:

pensionpawn said:

GunJack said:

one thing that's not often mentioned in these sort of discussions, is that with no mortgage you need a much lower level of income from pension funds to be able to retire, which puts you in a much better position if you want to stop work.....

This is true, however by fixing your rate (e.g. 1.37% for 5 years) my mortgage would be considerably less than my council tax. The argument for clearing your mortgage is peace of mind and that is a huge quality of life enhancer. However some people may be happy never to repay their mortgage before they croak it because their monthly payments become less and less significant (compared to other costs) over time and their investments grow.

When your retirement income is 2xDB pensions plus SP when it gets there, being mortgage-free is very important

...and possibly why people with DC pensions look at it a bit differently??

Of course, if someone has more income than they can shake a stick at, or are approaching LTA, pay off debt, it's a no brainer. However for everyone else keeping manageable debt running at historically low interest rates is seriously worth considering if they have healthy investments.