Taking equity out of house and putting into pension

Elmroad82

Hi all,

I’m doing some financial planning and I’m in the following scenario which seems to good to be true…I have equity in my house. Let’s say I’m on 100k and I currently pay 20k into my pension out of my gross pay leaving 40k pensionable allowance?   If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

 The only disadvantage I see is that a) money is locked away b) if the stock market bombs there would be a paper loss? C) And I’d be taxed when I take the money out if it’s outside the 25% lump sum?

thanks - please point out any pitfalls in my loosely put together plan!

On-the-coast

That’s about right. 

On the negative side:
- a paper loss could be a real loss. 

- psychology of home ownership
- inflexibility
- rules can change
positive side:
- if salary sacrificing you can “bank” 2 more percent from NI. 

- Some of your contribution would get you 40 percent relief (but I think you realise that.)

leosayer

I effectively did this for years by opting to increase pension contributions rather than paying off my mortgage.

The main risks are:
- Unable to access the funds eg. to fund a house move
- Future changes to pension taxation 
- You invest badly and wipe out any potential gain you may have had
- Interest rates and house prices move against you, potentially causing negative equity
- Your lose your high paying job and can't make the mortgage payments

dunstonh

If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

Assuming you are a basic rate taxpayer in retirement, you will pay an effective 15% tax.   So, you need to factor in the tax relief going in and the tax paid coming out.

Elmroad82

dunstonh said:

If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

Assuming you are a basic rate taxpayer in retirement, you will pay an effective 15% tax.   So, you need to factor in the tax relief going in and the tax paid coming out.

Or I could add this into my wife’s pension that barely has anything in as she’s contributed only the minimum which would be even more tax efficient 

Linton

Elmroad82 said:

dunstonh said:

If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

Assuming you are a basic rate taxpayer in retirement, you will pay an effective 15% tax.   So, you need to factor in the tax relief going in and the tax paid coming out.

Or I could add this into my wife’s pension that barely has anything in as she’s contributed only the minimum which would be even more tax efficient 

I dont see why putting money into your wife's pension would be more tax efficient than into yours.  What rate of tax relief would you wife receive? Obviously better to get  HRT relief from your assumed £100K income than just basic rate relief if that is all you wife would get.

If you were to put the money into your wife's pension you or rather she would still be limited by her earned income restriction.  Is she on >£40K/year?

dunstonh

Elmroad82 said:

dunstonh said:

If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

Assuming you are a basic rate taxpayer in retirement, you will pay an effective 15% tax.   So, you need to factor in the tax relief going in and the tax paid coming out.

Or I could add this into my wife’s pension that barely has anything in as she’s contributed only the minimum which would be even more tax efficient 

Assuming your wife is a basic rate taxpayer given her limited pension provision and that she would be a basic rate taxpayer in retirement (state pension eats most of the personal allowance) then the net gain of using the pension is a one off 6.25%.       

Borrowing to invest is very high risk.    The net gain of 6.25% is not worth the risk.

Elmroad82

dunstonh said:

Elmroad82 said:

dunstonh said:

If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

Assuming you are a basic rate taxpayer in retirement, you will pay an effective 15% tax.   So, you need to factor in the tax relief going in and the tax paid coming out.

Or I could add this into my wife’s pension that barely has anything in as she’s contributed only the minimum which would be even more tax efficient 

Assuming your wife is a basic rate taxpayer given her limited pension provision and that she would be a basic rate taxpayer in retirement (state pension eats most of the personal allowance) then the net gain of using the pension is a one off 6.25%.       

Borrowing to invest is very high risk.    The net gain of 6.25% is not worth the risk.

I thought about my wife’s pension to balance it up. Is there just one tax band above the 12.5k pension taking allowance? (At the moment?) ie at pensionable age if I have 40k per year to take and my wife has 20k does it make any difference if we try abd balance to have 30k each in our pots?

Elmroad82

dunstonh said:

Elmroad82 said:

dunstonh said:

If I pulled 80k equity out of my house at a rate of say 5.5% then put into my pension over the next 2 years, (40k next month and 40k on 7 April-25) am I right in saying that I’d get at least 20% tax relief on that? And this ignores the growth of pension funds.  Ie for every 80p I put in I’d get at least £1 back? Is this too good to be true? If so I’d be making 14.5% more than money sat in my house?

Assuming you are a basic rate taxpayer in retirement, you will pay an effective 15% tax.   So, you need to factor in the tax relief going in and the tax paid coming out.

Or I could add this into my wife’s pension that barely has anything in as she’s contributed only the minimum which would be even more tax efficient 

Assuming your wife is a basic rate taxpayer given her limited pension provision and that she would be a basic rate taxpayer in retirement (state pension eats most of the personal allowance) then the net gain of using the pension is a one off 6.25%.       

Borrowing to invest is very high risk.    The net gain of 6.25% is not worth the risk.

How did you calculate the 6.25%? Thanks 

Elmroad82

@dunstonh just over 45k

PropertyGuru_Wannabe

I completely agree with dunstonh.  6.25% net gain vs losing your job/property/marriage breakup is not worth it.  I would add that you should also factor in tax and unknown life expenses.  For example if you are putting in 20% tax relief but when you retire, you are a higher tax payer, then you are effectively losing 10% or more on tax, especially if there is growth in the pension pot.  When you need the money to fix a roof, buy a car, or repair a flooded house, then you may be in a pickle, especially if you failed to budget the extra mortgage payments you need to make.

This FIRE movement to retire early has it's pro's and con's, and I don't completely agree with it, especially when people don't factor in emergency or care home costs properly and are left short based on the advice of FIRE Guru's who at times has their own interests at heart.  It is however a good start for newbies who don't know what to do with their money.  There are potentially better uses for your money if you are astute enough to recognise the opportunities.