Remortgaging to make pension contributions

Tucosalamanca

I currently have a very modest mortgage which could be paid off in the next couple of years (Only paying base plus 0.5% so no urgency at this point)
I'm thinking of taking a low cost fixed rate mortgage in order to make additional pension contributions.
My thinking is borrow at less than 2% and gain tax relief of 20-40% when investing into pension.
Pension funds won't be invested in anything risky and timescales marry up quite nicely (5-10yr plan).

What are people's thoughts?

steampowered

Yes that makes complete sense.

You are borrowing at 1% on the mortgage, and receiving in return:

• 20 - 40% tax relief, depending on whether you are a higher rate taxpayer (possibly more if you are subject to child benefit tapering).
• Perhaps 5-6% per year average growth on a typical medium risk investment.

The downside is that the pension will be taxed on the way back out, but you can take a tax free lump sum, and if you are a higher rate tax payer you might be a basic rate taxpayer in retirement. Obviously the numbers work out with you being far better off having the pension. 

You can also consider investing in a stocks & shares ISA for flexibility. That will get you investment returns far higher than what you are paying on the mortgage and more flexibility, but no up front tax relief. 

Tucosalamanca

That's how I see it.

Not keen on the ISA route, as I see that as borrowing to speculate, which isn't always a good plan and goes against my now cautious nature.

The up-front tax relief on pension is a strong incentive as it basically underwrites any potential losses.

I'm not so worried about taxation at the other end, as only aiming to take 25% lump sum and draw up to tax free allowance (£12,500pa / £25,000 as a couple) in the years between retirement and reaching state pension age.
Depending on circumstance/pension value I might choose to defer state pension for a couple of years, but that's a way off at this point.

saucer

Tucosalamanca said:

I currently have a very modest mortgage which could be paid off in the next couple of years (Only paying base plus 0.5% so no urgency at this point)
I'm thinking of taking a low cost fixed rate mortgage in order to make additional pension contributions.
My thinking is borrow at less than 2% and gain tax relief of 20-40% when investing into pension.
Pension funds won't be invested in anything risky and timescales marry up quite nicely (5-10yr plan).

What are people's thoughts?

That’s what we do, and others on here. As long as you bear that investment risk in mind, it is a much wiser use of income. Just don’t try suggesting on the Mortgage Free Wannabes forum

Dh6

I suppose it all depends on your personal circumstances and your employment stability. 

I’m self employed, so for me paying the mortgage off was a big weight off my shoulders. 

If I was unable to work our household income would drop by 80% . 

It makes financial sense to redirect funds into pension but emotionally having no mortgage is huge.

Best of luck 

Albermarle

From a tax point of view investing in a pension is good but I also noticed this comment from the OP.

Pension funds won't be invested in anything risky and timescales marry up quite nicely (5-10yr plan).

I would be very interested to know what invested pension funds have no risk ? I think there would be a very big queue if such things existed !

Tucosalamanca

Albermarle said:

From a tax point of view investing in a pension is good but I also noticed this comment from the OP.

Pension funds won't be invested in anything risky and timescales marry up quite nicely (5-10yr plan).

I would be very interested to know what invested pension funds have no risk ? I think there would be a very big queue if such things existed !

The funds would be going into a SIPP.
I could do nothing and just leave it as ‘cash’. What’s more likely is investment in  broad based tracker funds, looking at income rather than growth.
Basically nothing speculative or anything I consider risky or overvalued.

Thrugelmir

All equities carry risk of some kind. That's the nature of investing. 

cfw1994

Tucosalamanca 

I'm not so worried about taxation at the other end, as only aiming to take 25% lump sum and draw up to tax free allowance (£12,500pa / £25,000 as a couple) in the years between retirement and reaching state pension age.

Just on the bit in bold…I assume you mean your partner will do something similar to get their tax free allowance of £12,500 from their own pension fund.  Just checking you know you don’t get a ‘double allowance from one pension’ (although there is the married persons allowance to get you around £1,260, I believe)….

Other than that, and accepting that even trackers have some risk, plan sounds reasonable…..

Kim1965

Dh6 said:

I suppose it all depends on your personal circumstances and your employment stability. 

I’m self employed, so for me paying the mortgage off was a big weight off my shoulders. 

If I was unable to work our household income would drop by 80% . 

It makes financial sense to redirect funds into pension but emotionally having no mortgage is huge.

Best of luck 

Same. Self employed, no security. Paying my mortgage off feels a step in the right direction. 
 I can see how it makes sense, although it is not a risk free strategy. 

Tucosalamanca

cfw1994 said:

Tucosalamanca 

I'm not so worried about taxation at the other end, as only aiming to take 25% lump sum and draw up to tax free allowance (£12,500pa / £25,000 as a couple) in the years between retirement and reaching state pension age.

Just on the bit in bold…I assume you mean your partner will do something similar to get their tax free allowance of £12,500 from their own pension fund.  Just checking you know you don’t get a ‘double allowance from one pension’ (although there is the married persons allowance to get you around £1,260, I believe)….

Other than that, and accepting that even trackers have some risk, plan sounds reasonable…..

Yes, partner will do something similar. Chances are that my lump sum will be gifted to my partner so that they can make additional contributions and gain further tax relief before drawing on it.
We're modest folk so £25,000pa income will be just fine, not planning on being taxed for a moment more than is necessary!