Taking out a loan to increase pension pot?

thinky789

I'm a bit behind where I would like to be in terms of money in my private pension pot, and don't have much immediate cash available right now to top it up.

I suddenly  had a thought that if I borrowed say, 10k, as a loan at around 5% interest, and stuck the loan all into my pension pot, that might potentially be a good idea to increase my pension pot?

This is because:

- The 10k in the pension pot would increase 25% to 12.5k immediately, because of the tax-free nature of the payment
- The natural increase in the pension pot (while not guaranteed) through) over, say, 5 years would happen quicker than if I tried to dripfeed small amounts as and when I can over that 5 years
- The repayments on the loan, even with the interest, would be small in comparison to the benefits I gain from the above 2 points.

(I do have a good credit score and a secure income so that side would hopefully be taken care of)

But it would be good to get people's thoughts on this, I've not heard of anyone doing it before so maybe there's something important I'm missing!

MeteredOut

Where can you get a loan at 5%, which is less than the base rate?

I'd first be getting a more realistic rate to base calculations on by using a loan eligibility calculator.

Albermarle

It is not a totally crazy idea but you should think about the following;

Although you get the tax relief, it is quite likely you will pay some tax when you withdraw it at a late date. The minimum tax benefit is only 6.25%, although it can be more 

5 years is a relatively short/minimum time to invest. Although on average you should see some growth ,there would be a significant possibility of very low growth or even a loss.

I think if you were a higher rate taxpayer and benefiting from 40% tax relief, the sums would look better.
Also the longer the time before you need the pension the better.

born_again

thinky789 said:

I'm a bit behind where I would like to be in terms of money in my private pension pot, and don't have much immediate cash available right now to top it up.

I suddenly  had a thought that if I borrowed say, 10k, as a loan at around 5% interest, and stuck the loan all into my pension pot, that might potentially be a good idea to increase my pension pot?

This is because:

- The 10k in the pension pot would increase 25% to 12.5k immediately, because of the tax-free nature of the payment
- The natural increase in the pension pot (while not guaranteed) through) over, say, 5 years would happen quicker than if I tried to dripfeed small amounts as and when I can over that 5 years
- The repayments on the loan, even with the interest, would be small in comparison to the benefits I gain from the above 2 points.

(I do have a good credit score and a secure income so that side would hopefully be taken care of)

But it would be good to get people's thoughts on this, I've not heard of anyone doing it before so maybe there's something important I'm missing!

So you have the funds to pay a loan. Why not put that amount into the pension each month instead?

I suggest you look at this MSE link & the rates. Note that quoted rates may not be what you get when you say what the loan is for.

https://www.moneysavingexpert.com/loans/cheap-personal-loans/

Credit score is not seen by lenders. History is what counts & income to expenditure/ available credit.

Gary1984

Don't do it. If you're struggling to get cash together now to put in your pension, how are you going to manage loan repayments on top of that?

The only time I'd consider this is in the year or two before retirement where you could keep the total loan as cash in your SIPP short term then repay the full thing out of a tax free lump sum once retired.

Pipthecat

Risk plays a factor.  You have to consider the implications of topping up your pension with a loan you have to pay back over time and you can't get at the money until your are 55+ should you need it. 
1) If you can't pay the loan back, or need a further loan for some other reason you could come unstuck. 
2) Are you confident that investing "now" is better than drip feed investing?  Time the market wrong and you could end up with a loan which is costing you money not making it.

I would invest what would be your loan payments into your pension on a monthly basis.    

thinky789

Some great comments so quickly... thanks!

I've had a look on an eligibility calculator and I'm eligible for 6% interest for a loan of this amount

The main reason I'm considering it is:
- the 'instant lift' of 25% when putting money into a pension pot, which dwarfs the interest rate on the loan
- the benefits of putting in a large amount now and giving it time to grow naturally. I can invest it for at least 10 years if needed, so it's unlikely the value would drop in that the time . If I drip-fed smaller amounts in over time, obviously that 10k wouldn't be in the pot immediately, it would take several years to put it in (so any growth in the pot would happen more slowly too).

The points made above about waiting to do something like this much closer to retirement age, plus considering whether it's the best use of money right now versus other things I could do with it, are helpful.

Roger175

thinky789 said:

Some great comments so quickly... thanks!

I've had a look on an eligibility calculator and I'm eligible for 6% interest for a loan of this amount

The main reason I'm considering it is:
- the 'instant lift' of 25% when putting money into a pension pot, which dwarfs the interest rate on the loan
- the benefits of putting in a large amount now and giving it time to grow naturally. I can invest it for at least 10 years if needed, so it's unlikely the value would drop in that the time . If I drip-fed smaller amounts in over time, obviously that 10k wouldn't be in the pot immediately, it would take several years to put it in (so any growth in the pot would happen more slowly too).

The points made above about waiting to do something like this much closer to retirement age, plus considering whether it's the best use of money right now versus other things I could do with it, are helpful.

You'd get the uplift due to tax relief anyway regardless of whether you take out a loan and make a one off payment or whether you drip feed it in over the next X years. Don't forget investments can go down as well as up, so putting in a lump sum by committing to a loan is very risky. You can spread that risk (pound cost averaging) by just making regular payments (using the money you'd be earmarking for loan repayments) and avoid the interest payable.

OK, If the lump sum started growing instantly and continued to do so, you might be OK, but there are no guarantees that this would be the case.

born_again

thinky789 said:

Some great comments so quickly... thanks!

I've had a look on an eligibility calculator and I'm eligible for 6% interest for a loan of this amount

The main reason I'm considering it is:
- the 'instant lift' of 25% when putting money into a pension pot, which dwarfs the interest rate on the loan
- the benefits of putting in a large amount now and giving it time to grow naturally. I can invest it for at least 10 years if needed, so it's unlikely the value would drop in that the time . If I drip-fed smaller amounts in over time, obviously that 10k wouldn't be in the pot immediately, it would take several years to put it in (so any growth in the pot would happen more slowly too).

The points made above about waiting to do something like this much closer to retirement age, plus considering whether it's the best use of money right now versus other things I could do with it, are helpful.

Think about it this way.
£10K loan is going to be just over £200 a month.
Pay that in each month, as you say can afford it. You are also covering yourself, should anything happen to your secure income (take it this is your job & you never know what will happen in the future) That if that did happen, you can stop the payments, rather than having to pay a loan you can not afford. With all the grief & trouble that is going to cause.

The most you can pay into pensions in a single tax year, and still receive tax relief, is either £40,000 or 100 per cent of your qualifying earnings.

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Rattusnorvegicus

a better way might be to take on more risk and less bonds inside your pension.

not advocating for stuff but a large chunk of mine jumped 40% this year... nasdaq.

Heck even the S&P 500 is up 23% YTD...

I dont really worry about paying in as my 10y annualised compound number moves between 12% to 20%

The bottom line is that good investments are worth more long-term than any amount of cash just shovelled in.

The question people fail to ask is what is it you want from your pension the other side?

In my case its good growth followed by slurping 10% dividends in market slumps. I want a nice juicy dividend in retirement that outperforms people with 2.5x my pot size.

In any event my thesis is based on a US 12 year bull based on double bubble of 2 largest population groups hitting the workplace.

Having an investment strategy is a good start. Knowing how to run your investment strategy even moreso, is far more important than just dumping cash.

Sure i like to play the stock market ponies.... but i'm not crazy enough to use leverage. Contrary to what Gordon Gecko thinks ... Greed is bad.

My MPT Beta is 1.36 and my alpha is 3.36... so those in the know can work out how edgy i am or not.

Pat38493

You have to be quite careful about this as you really need to be sure you can pay the money back.

Having said that, you could also look at using a stoozing card to do this if you are not that far from retirement, and you can find one with zero or very low cash transfer fees - this can be cheaper than a loan at the moment if you have a good credit rating.

This all assumes you are working and have earned income to match the pension contributions against.

Finally - theoretically at least you should be aware of pension recycling regulations - if you take out a loan to put money in your pension, and then soon after that, take out tax free cash from your pension, you should stay within the pension recycling rules (although frankly I'm not sure how HMRC would ever know whether you took out loans or not unless they were already investigating you for something else).

However I also agree with other comments along the lines of - if you can't afford to make additional monthly  payments to the pension, how can you afford loan payments?