Could it ever be a wise move to borrow to invest in your pension?

CharlieC2210

If the interest rate on a loan was low enough could it be a good investment to borrow money to put into your pension?

sevenhills

The tax relief could be higher than the interest on a loan, if you are not paying tax when drawn. But I wouldn't advise borrowing.

QrizB

Not quite what you're asking, but similar ...

About a year ago I took a £15k personal loan at 3% APR so I could buy a car. In the end, the car I bought was less than half that price so I put the rest into my SSISA. My reckoning is that my SSISA should grow by more than 3% pa over the term of the loan and so I'll be ahead on the deal. (I'm not expecting it to grow enough that I get a free car ...)

Obviously, there's a risk that it won't grow that much!

Pipthecat

There are a lot of variables to consider, for example your age.  You borrow now, pay into your pension and benefit from the tax relief.  However you can't touch that money until you are 55.  How will you service the loan if you fall into financial difficulties etc

If you can afford to service the loan, then why not drip feed that money into your pension.  Why take the risk of trying to time the market.

Universidad

I think my view on this is that there are definitely circumstances in which it could be a profitable move, but I'm not sure any of them would be "wise".

MX5huggy

Yes. I’m not paying off my sub 3% 10 year mortgage any faster than required while putting as much as I can afford into my Salary Sacrifice pension. It’s a choice of £59 paid off the mortgage or £100 into my pension. 

No I borrowed £6k on a 0% credit card for a 3% fee for 25 months. I’ve now got that £6k in a savings account paying 3.3% I’m not willing to invest that money I don’t want to find I only got £4k in an ISA when the credit card needs paying back.

Marcon

Pipthecat said:

There are a lot of variables to consider, for example your age.  You borrow now, pay into your pension and benefit from the tax relief.  However you can't touch that money until you are 55.  How will you service the loan if you fall into financial difficulties etc

If you can afford to service the loan, then why not drip feed that money into your pension.  Why take the risk of trying to time the market.

....rising to 57 in 2028.

hugheskevi

CharlieC2210 said:

If the interest rate on a loan was low enough could it be a good investment to borrow money to put into your pension?

I would say yes.

Through my job I have great redundancy, ill health and death benefits. That put me in a good position to accelerate financial progress through leverage. The key point was that I always ensured I could pay back borrowing from future salary (ie never relying on more future borrowing), and then didn't overpay mortgage, took out more borrowing from mortgage when remortgaging and exploited 0% interest credit card borrowing of around £50-£70,000 at most times for a decade.

I didn't take out loans, but that was primarily because I could get as much borrowing as I wanted using credit cards and constant fee free balance transfers.

When I decided to take unpaid leave to go travelling I repaid all the borrowing from salary - effectively working for about a year just to repay debt.

The rewards were very significant, although a large part of that was luck in catching a rising market, which along with higher rate relief made a huge difference.

Carefully managed debt can definitely play a role in a well planned strategy, but a lot of care needs to be taken, and don't get too greedy. I would be far more hesitant if only basic rate relief were available and nothing else - the reward would probably be too small for the risk.

A key thing to consider is your exit strategy from the debt, and whether you will be happy balancing volatile assets with debt when both reach their largest point. For example, you might decide to repay an interest only mortgage using a pension - that would be very tax efficient, but if the assets are in a DC pension then the investment will probably be north of a million (taking into account the DC pension will adjust fund retirement) and maybe quite a lot more - in which case could you handle losses of several hundred thousand, and would you be willing to deal with the psychological consequences of such a big loss. If not, a more modest plan would be needed - important to take into account at the outset to avoid having to change strategy half way through.

Pat38493

sevenhills said:

The tax relief could be higher than the interest on a loan, if you are not paying tax when drawn. But I wouldn't advise borrowing.

To add one point here - if considering tax relief as a reason to do this, keep in mind that the tax relief only happens once when you put the money in whilst your debt will continually accrue interest, and keep in mind that you still may have to pay tax on the way out, so it's quite complicated to calculate the potential benefit.  

Other than that, I guess the answer is that it could sometimes be beneficial as other posters have pointed out, but it has to be analysed carefully and you really need to know what you are doing, and there will be risk involved.

Linton

To take an extreme example I could afford to pay off my 3% fixed for life ER mortgage but obviously have no intention of doing so.  Much better to have the money invested.

CharlieC2210

Thanks for all the advice. I'm 55 btw, and I'm not thinking about huge amounts. Maybe up to £10,000.