To CSAVCS or not...

Marmot

Hi,

I’m just trying to work out what would be the best plan for me and hoping I could get a bit of valuable input on here.

It’s a bit mortgage related but mainly it’s about whether I’d be better off putting ££ into a pension instead..

I’m 52 y.o and employed by the Civil Service (only Alpha scheme membership).  I have 18 year mortgage with £106k outstanding.  I recently remortgaged onto a 2 year fix which will expire July 2025.  I’ve been saving away each month (in an account with a higher interest rate than my mortgage rate) with the plan that when I get to end of this mortgage term I’ll overpay a lump sum which will bring my mortgage balance down to £90k.  I’ll then be remortgaging (probably a 5 year fix or maybe a tracker) with 16 years left on my term.

If I just stuck with the standard mortgage payments then this would mean my mortgage runs until I’m 70 which isn’t really what I want.  Ideally I’d like it done by 65/66.

So I was planning from August 25 (once onto my new mortgage deal) to start overpaying by £200 each month and this would have the mortgage cleared by the time I’m 65 (I’m guesstimating what the interest rate on a re-mortgage would be which I know isn’t ideal but I’m fairly sure I can manage a £200 overpayment p/m even if the interest rate was 6% at time of remortgage).

But… I then started thinking is overpaying the mortgage actually the best plan?  And should I instead put that £200 a month into a DC pension?

I could join the CSAVCS scheme and then I’d also get tax relief on the £200 going in each month right? So I’d have £240 added to the pension each month.  And then after 11 or so years I could take 25% of that pension tax free and knock a chunk off the remaining balance on the mortgage.

And then, even with having to pay tax, if I took the remaining balance out of the CSAVCS I should be able to clear the mortgage balance.

So my question is - does it make more sense to start paying into CSAVCS? Because I can get 25% out tax free.  Or to just overpay the mortgage / save overpayments into an account and collect interest then pay lump sums when I can?

Many thanks for reading this far!

Marmot

Dazed_and_C0nfused

I could join the CSAVCS scheme and then I’d also get tax relief on the £200 going in each month right? So I’d have £240 added to the pension each month.  

That's not possible.

The contributions would either be made under the net pay method, in which case you don't get any pension tax relief but avoid paying tax on the £200.

Or under RAS (relief at source) where you do get pension tax relief.  Which is 25% of your net contributions so £200 becomes £250 (£250 x 20% = £50).

Marmot

The CSAVCS page says this:



So I think it is RAS.  So it would be £250 going in each month.

And what I've not put on my original post is that I understand that the value of the pension could go up or down so it wouldn't be a guaranteed way of assuring the money at the end whereas a savings account would.

r6mile

CS AVC scheme is net pay - I know as I am a member.

What’a your salary? If you are a basic rate taxpayer then the CSAVC scheme has no advantage (in terms of tax relief) over a normal relief at source SIPP - in the CSAVC scheme £125 into the pension would cost you £100 net, in a normal SIPP you would pay £100 which would turn into £125 into the pension.

If you are a higher rate taxpayer, the CSAVC scheme will save you having to chase HMRC for HR tax relief.

The CSAVC scheme has pretty low charges so if you are ok with a relatively limited choice of funds (I find the selection pretty good tbh but obviously not as extensive as with a SIPP) then I think it’s a good option. It has a Cash Fund which might work for short-term saving .

hugheskevi

You are describing a pension mortgage - popular many years ago, but not really nowadays, although I never understood why, given the tax advantages. You can still Google the term though, and read about them. The main problem was people not monitoring investments and being surprised when the outcome from forecasts from many years earlier differed from expectation.

The rewards are not great if you are a basic rate taxpayer both now and in all future years, just a 6.25% gain from the tax and tax free lump sum. This has to be balanced against the additional investment risk you are then taking, which could go either way over such a short period. If you invest in cash, you are forgoing returns and that will eat into your 6.25% tax gain.

If you are a higher rate taxpayer whilst working the odds are very strongly in your favour.

Marmot

Thanks @hugheskevi and @r6mile - that's really helpful.  I'm not a higher rate taxpayer at the moment, might get there soon if I can hop up a grade but for now I think I'll stay with savings/overpayment plan.  Great info always from this board