Lerveraging pension contributions when at or near 55

Pat38493

I will be 55 in about a year from now and at least theoretically able to access my pension funds.

For obvious reasons I am looking to maximise my pension contributions at the moment and I am already putting in 40K this tax year and hoping for close to that in the next couple of years.

Due to a big capital investment (new bathroom) and an emergency (burst pipe), my cash flow forecast for next April when my next bonus is hopefully due, is looking a bit shaky (still +ve but only just).

I was thinking that worst case with any more emergencies I might have to make a reduction in my % pension contributions in Feb and/or March.

However - when thinking further about this I thought - hang on.  Every £ that I put into my pension gets one off higher rate tax relief and I can take 25% of it out tax free.

Therefore during this period in the run up to retirement in the next few years hopefully, there could be scenarios where I am better off dipping into an overdraft occasionally or even (shock horror) a credit card as even credit card interest rates of 10% or whatever, over a single year, would make it worthwhile based on the tax relief gain (not even taking into account any investment gains) I will make.

Does this make sense or am I missing something?

ussdave

If you're going to use a credit card use a 0% interest one and make sure you have a solid plan for repaying it in full when the 0% expires.  Shouldn't be hard if you have pension access by that time.

Albermarle

On paper it looks a good idea, but a couple of points come to mind.

The fact that your cash flow is affected by events, maybe shows you should have a larger reserve of cash savings, or non pension investments.
If you take on extra debt, do you have a plan how to pay it, if you lost your income, through losing your job, getting seriously ill etc.? Do you have some kind of income protection insurance for example?
Also from your other posts, you and your OH seem to be very well set up with pensions, retirement income etc, so is it really worthwhile going into debt to increase the size of your pension, when you are already worried about LTA issues, and probably have more potential pension income than you need.

I think if someone had an inadequate pension pot, it would tip the balance more in favour of taking on the risk of extra debt. Not sure it is really worthwhile in your case. Just an opinion !

Pat38493

Albermarle said:

On paper it looks a good idea, but a couple of points come to mind.

The fact that your cash flow is affected by events, maybe shows you should have a larger reserve of cash savings, or non pension investments.
If you take on extra debt, do you have a plan how to pay it, if you lost your income, through losing your job, getting seriously ill etc.? Do you have some kind of income protection insurance for example?
Also from your other posts, you and your OH seem to be very well set up with pensions, retirement income etc, so is it really worthwhile going into debt to increase the size of your pension, when you are already worried about LTA issues, and probably have more potential pension income than you need.

I think if someone had an inadequate pension pot, it would tip the balance more in favour of taking on the risk of extra debt. Not sure it is really worthwhile in your case. Just an opinion !

Thanks these are good points and to be sure, I am not talking about one of these crazy schemes I've seen blogs about claiming that you should take out a loan to fund your pension scheme and make better returns than the interest on the loan.

I am more referring to a very short term cash flow thing for one or two months due to my annual cash flow not being constant on the income side.

Example - my last credit card bill was £1791 which I normally pay off in full each month automatically.  The statement says that if I only made the minimum payment I would pay off £25 leaving 1766 of debt and pay £19.38 in interest for the month.

Now - let's assume I only have £25 in cash available due to a truly short term cash flow management problem  - if I lower my pension contributions to pay get £1766 of income extra that month, I'll have to reduce my pension contribution by £2943 gross to achieve that.  Therefore I have just lost £1177 in my pension pot in order to avoid a £19.38 charge.  OK if I assume 20% tax later on way out and 25% tax free it would be about a grand or so that I would have lost?  Seems like a no brainer in that context.

A month later I will most likely have a big extra cash amount so this will just be a one month thing.  Of course I now have a debt of £1766 to pay off outside the pension the following month, but I have to pay that money either way so it then becomes a cash flow question for the following yearly cycle.  I am still accounting for this money as spend in the current period in my spending analysis so I am not borrowing from myself either.

Also I avoid the admin of having to change my pension contributions with my employer for only one or two months and the Credit card is much more easily managed.

Of course as you point out, this is only in the context that it's truly a very short term one off cash flow issue rather than a true debt that might last longer, and of course LTA issues and so on.  Also it only makes sense in the context of someone like myself who is at or near the age when I can access funds and hasn't accessed anything yet.

Also of course we are talking about piffling amounts that maybe aren't worth bothering with normally.

This is a credit card, so I'm guessing that if I just used a bank overdraft it would be even more favourable - which is of course what I would do in reality - I just used the credit card to point out that even with higher interest rates it seemed favourable.

The other context of course is, if I can't consistently live within an annual spend that's consistently higher than my target spend in retirement I will have issues - this is something I am also managing as I am categorising all my spending in detail for the next couple of years so I really know what will be scaled back or disappear.  I am still pondering the topics around cash floats and emergency funds - I've read some very interesting blogs suggesting that they are not necessarily beneficial in the long run as the opportunity gains that you lost over 4 decades or more by having a large amount of cash consistently sitting around, outweighs the gain even in some of the worst case scenarios, unless you have an totally enormous cash float of 7+ years.

NedS

Also, depending on your planned retirement date and cash requirements, it may be useful to use the 3 x Small Pots rule to cycle cash into a pension and withdraw again (upto £10k) without triggering the MPAA and restricting future contributions.

Albermarle

Pat38493 said:

Albermarle said:

On paper it looks a good idea, but a couple of points come to mind.

The fact that your cash flow is affected by events, maybe shows you should have a larger reserve of cash savings, or non pension investments.
If you take on extra debt, do you have a plan how to pay it, if you lost your income, through losing your job, getting seriously ill etc.? Do you have some kind of income protection insurance for example?
Also from your other posts, you and your OH seem to be very well set up with pensions, retirement income etc, so is it really worthwhile going into debt to increase the size of your pension, when you are already worried about LTA issues, and probably have more potential pension income than you need.

I think if someone had an inadequate pension pot, it would tip the balance more in favour of taking on the risk of extra debt. Not sure it is really worthwhile in your case. Just an opinion !

Thanks these are good points and to be sure, I am not talking about one of these crazy schemes I've seen blogs about claiming that you should take out a loan to fund your pension scheme and make better returns than the interest on the loan.

I am more referring to a very short term cash flow thing for one or two months due to my annual cash flow not being constant on the income side.

Example - my last credit card bill was £1791 which I normally pay off in full each month automatically.  The statement says that if I only made the minimum payment I would pay off £25 leaving 1766 of debt and pay £19.38 in interest for the month.

Now - let's assume I only have £25 in cash available due to a truly short term cash flow management problem  - if I lower my pension contributions to pay get £1766 of income extra that month, I'll have to reduce my pension contribution by £2943 gross to achieve that.  Therefore I have just lost £1177 in my pension pot in order to avoid a £19.38 charge.  OK if I assume 20% tax later on way out and 25% tax free it would be about a grand or so that I would have lost?  Seems like a no brainer in that context.

A month later I will most likely have a big extra cash amount so this will just be a one month thing.  Of course I now have a debt of £1766 to pay off outside the pension the following month, but I have to pay that money either way so it then becomes a cash flow question for the following yearly cycle.  I am still accounting for this money as spend in the current period in my spending analysis so I am not borrowing from myself either.

Also I avoid the admin of having to change my pension contributions with my employer for only one or two months and the Credit card is much more easily managed.

Of course as you point out, this is only in the context that it's truly a very short term one off cash flow issue rather than a true debt that might last longer, and of course LTA issues and so on.  Also it only makes sense in the context of someone like myself who is at or near the age when I can access funds and hasn't accessed anything yet.

Also of course we are talking about piffling amounts that maybe aren't worth bothering with normally.

This is a credit card, so I'm guessing that if I just used a bank overdraft it would be even more favourable - which is of course what I would do in reality - I just used the credit card to point out that even with higher interest rates it seemed favourable.

The other context of course is, if I can't consistently live within an annual spend that's consistently higher than my target spend in retirement I will have issues - this is something I am also managing as I am categorising all my spending in detail for the next couple of years so I really know what will be scaled back or disappear.  I am still pondering the topics around cash floats and emergency funds - I've read some very interesting blogs suggesting that they are not necessarily beneficial in the long run as the opportunity gains that you lost over 4 decades or more by having a large amount of cash consistently sitting around, outweighs the gain even in some of the worst case scenarios, unless you have an totally enormous cash float of 7+ years.

In your post title you mentioned 'leveraging' which rang a few alarm bells. However as you are more looking at very short term cash flow management, it seems less of a risky idea and quite sensible.

Regarding the blogs about cash floats etc, as you will know there are different opinions on this forum. I think for most people it goes beyond a rational analysis, and it just feels better to have a decent amount of cash stashed away, just in case. Peace of mind being more valuable to most people, than squeezing the last drop of returns out.

NedS

Pat38493 said:

I will be 55 in about a year from now and at least theoretically able to access my pension funds.

For obvious reasons I am looking to maximise my pension contributions at the moment and I am already putting in 40K this tax year and hoping for close to that in the next couple of years.

Due to a big capital investment (new bathroom) and an emergency (burst pipe), my cash flow forecast for next April when my next bonus is hopefully due, is looking a bit shaky (still +ve but only just).

I was thinking that worst case with any more emergencies I might have to make a reduction in my % pension contributions in Feb and/or March.

However - when thinking further about this I thought - hang on.  Every £ that I put into my pension gets one off higher rate tax relief and I can take 25% of it out tax free.

Therefore during this period in the run up to retirement in the next few years hopefully, there could be scenarios where I am better off dipping into an overdraft occasionally or even (shock horror) a credit card as even credit card interest rates of 10% or whatever, over a single year, would make it worthwhile based on the tax relief gain (not even taking into account any investment gains) I will make.

Does this make sense or am I missing something?

The overall plan makes sense but obviously there are risks, as highlighted by others above, especially when taking on debt to do so. We have done a similar thing in running down our cash savings in the knowledge we will shortly hit 55 and can access pension funds (the plan is to initially utilise up to 3 x Small Pots) without jeopardising future contributions (although I plan to retire very shortly anyway).

Can you delay the planned bathroom expenditure to a point you can fund it from a TFLS withdraw, or is it linked to the current emergency (burst pipe)?

I would be extremely wary of utilising CC debt but it may be an option to overcome very short term cash flow needs. But being an MSE member and life-long tax payer, I get the desire to squeeze every last drop of available tax relief out of the government, and you make a strong case in your lengthy reply above (which I have only just re-read fully).

Pat38493

NedS said:

Can you delay the planned bathroom expenditure to a point you can fund it from a TFLS withdraw, or is it linked to the current emergency (burst pipe)?

I would be extremely wary of utilising CC debt but it may be an option to overcome very short term cash flow needs. But being an MSE member and life-long tax payer, I get the desire to squeeze every last drop of available tax relief out of the government, and you make a strong case in your lengthy reply above (which I have only just re-read fully).

It's a bit of an edge case in the end and quite specific.  The bathroom expenditure is already done - not connected to the emergency.  The bathroom part was actually all planned.  It has just happened to all come together in the same month where we have a lot of items to pay, but in the end the only one that wasn't planned is the consequences of the burst pipe - I have a large voluntary excess on my insurance on the basis that it will save money in the long run, so there will be a fair sized excess to pay and no doubt they will say it is 2 claims - buildings and contents so 2 excess to pay.

The trigger for this was really that my plan during the next few years was to put 40K per year (even more if I can afford it as I have rollover available) into the pension and reduce my contributions if I need extra cash.  This was the part I was re-thinking a bit.  If I need a lot of extra cash then yes I would do that, but if we are just talking about covering a grand or two over a 1-2 month period it wouldn't make sense in the grand scheme of things when these kind of months where I will end up with various rare costs coming up all at the same time are not common - next year in theory should be ok as both our main holidays next year are already paid up, and the bathroom thing which also included moving some walls and doors so was not just a new bathroom suite, was the last major project we plan before probably downsizing in a few years. 

The house we are in now is way too big and expensive for the two of us in the long term so although I know that a lot of people who plan to downsize end up not doing it because they can't find somewhere cheaper that they like, but I feel pretty confident that we will not stay in this house in the long term (beyond next 5 years max) and will get somewhere smaller and very likely significantly lower cost.

I am just trying to re-train myself a bit because I have always been extremely risk averse in the sense of pathologically avoiding going into an overdraft with the bank or whatever.  However when I think it through, there could be scenarios where it actually makes more sense to do that and relax a bit about it, as long as it's decided on a rational basis and not just "winging it".

Pat38493

NedS said:

Also, depending on your planned retirement date and cash requirements, it may be useful to use the 3 x Small Pots rule to cycle cash into a pension and withdraw again (upto £10k) without triggering the MPAA and restricting future contributions.

Huh!  Are you saying I could transfer my pension into multiple 10K pots and then get all the money out tax free?  Is that allowed?

Albermarle

Pat38493 said:

NedS said:

Also, depending on your planned retirement date and cash requirements, it may be useful to use the 3 x Small Pots rule to cycle cash into a pension and withdraw again (upto £10k) without triggering the MPAA and restricting future contributions.

Huh!  Are you saying I could transfer my pension into multiple 10K pots and then get all the money out tax free?  Is that allowed?

Not quite.
The 'Small Pots Rule' is to enable someone to cash in a small pension ( < £10K), without it affecting their ability to contribute to other pensions in future. That is because it does not trigger the MPAA. In addition it means the crystallisation does not contribute to LTA. However you only get 25% tax free and the rest is taxable as normal.
You can cash in up to three Small Pots Pensions in this way.
Some providers will split off three Small Pots Pensions from a bigger one, which although against the spirit of the Rule, is legal if done correctly.
Or if you are still contributing to a pension, you can start three new ones and divert some contributions ( < £10K) to each of them. 
So overall you can crystallise up to £30K, without it affecting MPAA or LTA.

mark55man

NedS said:

Also, depending on your planned retirement date and cash requirements, it may be useful to use the 3 x Small Pots rule to cycle cash into a pension and withdraw again (upto £10k) without triggering the MPAA and restricting future contributions.

@NedS - thank you for this.  I had seen but forgotten the 3 x trick.

I was just looking at ways of safeguarding against the (very low) risk of having triggered MPAA by starting income drawdown in retirement but then finding that my early retirement didn't stick.  3x10K is exactly the shortfall that would make up the missing 18 months in my plans. (I figure if still happy after 18 months then I'm good!!!)

My maths is that an approx  £100K uncrystallised pension can be turned into 3x10K + 70K.  The 70K could then have tax free lump sum of  17.5K giving me. £47.5K for 18 months of which

• £17.5K is tax free from the large pot 
• £7.5K is tax free from the 3x small pots 
• and £22.5K is taxable (12.5K@0%) and £10K at 20%.   

That means and after tax income of £25K tax free + 12.5 (PA) + £8K = £45.5K without triggering MPAA albeit consuming all my tax free allowance.  

Needs more thought but a useful strategy