Discretionary employer pension contributions & mortgage affordability assessments from First Direct

carl0s

I'm a director of my own one-man-band. Usual set up - small salary, dividends, etc.
First Direct have, as always, been great, and they viewed my affordability based on what I *could* have paid myself each year (company net profits, plus my dividends and salary).

This is good because I don't pay myself what I don't need. I leave money in the business. It's all just kind of sitting there as a rainy day / bad year fund though. I can't do anything with the money for myself though, without drawing it and paying additional income tax, of course.

Last year I started a SIP which is an S&P 500 tracker. I have made a £30k employer's contribution. This seems like a good use of money that's sitting there in the business account.
Going forwards I was planning to chuck a reasonable amount into there each year, perhaps £20k, maybe a bit more. The reduction on my corporation tax liability will obviously be welcome.

However before I did that, I thought I had better check with First Direct how they would view this in light of my affordability. It's a discretionary contribution at the end of the day. I can choose whether to put the money in there or not.

It's not good news though. If I was to put £20k into there each year, then when they view my 3-years' accounts if I try to re-mortgage or move house or something, then they would view my salary-equivalent 'earnings'/affordability as £20k less than they otherwise would have.

Any thoughts on that?

K_S

becarl0s said:

First Direct have, as always, been great, and they viewed my affordability based on what I *could* have paid myself each year (company net profits, plus my dividends and salary).

@carl0s It should be profit + salary. I don't know of any lender who considers profit+dividends+salary as dividends are paid out of the profits so that would be counting it twice.

To answer your question, imho the approach outlined in your post is reasonable and what one would expect most lenders to do.

Might there be some quirky lender that will take these as 'discretionary' for affordability, perhaps, who knows. But that's certainly not going to be at FD rates.

MWT

Not sure if there is a route to use salary sacrifice as a path to getting the pension amount to remain in play for mortgage purposes..?

I believe that some lenders at least will consider the sacrifice as discretionary and hence allow it to be added back for affordability calculations, not sure about First Direct though... ?

carl0s

K_S said:

becarl0s said:

First Direct have, as always, been great, and they viewed my affordability based on what I *could* have paid myself each year (company net profits, plus my dividends and salary).

@carl0s It should be profit + salary. I don't know of any lender who considers profit+dividends+salary as dividends are paid out of the profits so that would be counting it twice.

Thank you, yes you're no doubt correct. I'm not an accountant but either way it is what I could have paid myself, rather than just what I did pay myself that year.

dunstonh

Last year I started a SIP which is an S&P 500 tracker.

Hopefully that is not the only fund as that would be pretty awful investing.  Its a single sector fund designed to be held in a portfolio of other single sector funds.  i.e. a fund for US equity, another for UK, Europe, Japan etc etc.   Typically around 10 funds at least.    In this cycle, US equity has been the stand out performer.  In the previous cycle is was amongst the worst.     It is rare for the best performer in one cycle to be the best in the next.   You are putting all your eggs in one basket. 

Not sure if there is a route to use salary sacrifice as a path to getting the pension amount to remain in play for mortgage purposes..?

Not with shareholding company directors. There is no real salary to sacrifice.

Any thoughts on that?

It is a business expense that reduces your profit.    So, on paper you are earning less.   You would need a lender that accepts that.

MWT

This is one for the OP's accountant I guess, but as the current contribution is company only, and the salary sacrifice would similarly be considered a company contribution I'm not sure that pension tax relief really comes into play....

K_S

MWT said:

This is one for the OP's accountant I guess, but as the current contribution is company only, and the salary sacrifice would similarly be considered a company contribution I'm not sure that pension tax relief really comes into play....

@mwt Well out of my zone of expertise you might well be correct. I've deleted the post to avoid misleading any readers.

carl0s

dunstonh said:

Last year I started a SIP which is an S&P 500 tracker.

Hopefully that is not the only fund as that would be pretty awful investing.  Its a single sector fund designed to be held in a portfolio of other single sector funds.  i.e. a fund for US equity, another for UK, Europe, Japan etc etc.   Typically around 10 funds at least.    In this cycle, US equity has been the stand out performer.  In the previous cycle is was amongst the worst.     It is rare for the best performer in one cycle to be the best in the next.   You are putting all your eggs in one basket. 

It's better than nothing surely, and I am not an investment expert, but actually I put half in the S&P 500 tracker and half in a Lindsell Train UK managed fund. I understand many have suggested that the S&P 500 is a very good choice if you are to only have one investment. This is off topic though.

dunstonh

I understand many have suggested that the S&P 500 is a very good choice if you are to only have one investment. This is off topic though.

No it isn't.   You are based in the UK.   Sterling is your home currency and you are subject to UK taxation.     S&P500 is a choice of Americans living with the dollar as their home currency.  Americans are very inward looking and frequently invest with US equity.   Partly due to culture and partly due to US taxation.  In the US, funds are taxed internally on gains.   In the UK they are not.  So, tracker funds are the best option in the US.   And the S&P500 is one of the main indexes for the US.  You have been reading information that is aimed at the US investor.    European investors tend to be more global in nature and     The United States accounted for 15.9% of the global GDP in 2019    The S&P500 is less than that.   You are putting all your global allocation into just one country.        And having a 50% home bias is even worse.    The UK accounts for around 4% of global GDP.   
So, you have got 100% of your money in under 20% of the market. 

Put it this way, if an adviser recommended 100% into the S&P500 tracker then it would be classed as a missale.  Putting it 50/50 with a UK fund would also be a missale.

It may be off topic but your investments really do need looking at as it will cost you in the long run.     

carl0s

dunstonh said:

I understand many have suggested that the S&P 500 is a very good choice if you are to only have one investment. This is off topic though.

The United States accounted for 15.9% of the global GDP in 2019 

Not 24% then ?

You're talking about peoples emotional tendencies as though I must align with them.
"You're from the UK. UK people tend to do this. American people tend to do that."

MWT

carl0s said:

dunstonh said:

I understand many have suggested that the S&P 500 is a very good choice if you are to only have one investment. This is off topic though.

The United States accounted for 15.9% of the global GDP in 2019 

Not 24% then ?

You're talking about peoples emotional tendencies as though I must align with them.
"You're from the UK. UK people tend to do this. American people tend to do that."

Just look at it this way, an IFA could not advise you to do what you have done, so don't be surprised at the comments from an IFA.

...but it is your money and your choice so if you are happy just do as you please...

You may turn out to have made a better choice in the long run or you may not but you have the freedom to do it anyway.