Taking out a loan to increase pension pot?

MEM62

born_again said:

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?

Absolutely this!! 

JohnWinder

It’s a very appealing idea, and although not gambling in the sense that the ‘house’ wins overall, you could win or lose with your idea, partly depending on how much interest you finish up paying.
Put aside for a moment the 25% uplift, the idea shouldn’t work, ie be expected to benefit one, because it’s akin to a perpetual motion machine. Perpetual motion in the sense that everyone gets better returns by borrowing; we’d all do it if it worked. By leveraging with borrowing you are increasing your risk; you pretty much have to increase your risk to get better returns, but increasing risk doesn’t ensure better returns sadly, that’s why it’s called ‘taking more risk’ since if you always got better returns it wouldn’t be more risky.
What does the 25% uplift do? It effectively reduces the interest rate on your borrowing. Your interest is £500/year on a loan which is worth £12500, 4%/year. Nothing has changed except the risk you’re proposing is less than without the uplift.

If you are happy with more risk, would it be better to simply increase the risk level of the portfolio? A bigger than otherwise fall in its value, as a result, would not embarrass you the way being unable to repay the debt might should it come to that.

Would it help to do some modelling to show how big an effect this idea might have on your pension, by assuming some return figures? Might find it small enough that a few months without fags is better.

Bostonerimus1

This is essentially buying on margin and something that is not for a prudent long term investor. When your investments or pensions lose money your losses are multiplied. Take what you would use to pay off the loan and put that in your pension.

Albermarle

JohnWinder said:

It’s a very appealing idea, and although not gambling in the sense that the ‘house’ wins overall, you could win or lose with your idea, partly depending on how much interest you finish up paying.
Put aside for a moment the 25% uplift, the idea shouldn’t work, ie be expected to benefit one, because it’s akin to a perpetual motion machine. Perpetual motion in the sense that everyone gets better returns by borrowing; we’d all do it if it worked. By leveraging with borrowing you are increasing your risk; you pretty much have to increase your risk to get better returns, but increasing risk doesn’t ensure better returns sadly, that’s why it’s called ‘taking more risk’ since if you always got better returns it wouldn’t be more risky.
What does the 25% uplift do? It effectively reduces the interest rate on your borrowing. Your interest is £500/year on a loan which is worth £12500, 4%/year. Nothing has changed except the risk you’re proposing is less than without the uplift.

If you are happy with more risk, would it be better to simply increase the risk level of the portfolio? A bigger than otherwise fall in its value, as a result, would not embarrass you the way being unable to repay the debt might should it come to that.

Would it help to do some modelling to show how big an effect this idea might have on your pension, by assuming some return figures? Might find it small enough that a few months without fags is better.

In the long run it is unlikely to be a 25% uplift as the pension pot will be partly taxable. The real uplift could be only 6.25% 

NlghtOwl

The main drivers which can destabilise an investment (and you future) are fear and greed.  Easy to fall into this and think you are ‘behind’ and try to catch up, whereas simple and boring actions of regular investing over the long term has proved the winning formula. Good luck