Taking equity out of house and putting into pension

eskbanker

Elmroad82 said:

dunstonh said:

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 

Contributing £100 to a pension results in £25 being added in tax relief, then on the way out again, 25% of the £125 (£31.25) is tax-free, with 75% taxed at 20% (leaving £75), so the net amount received is £106.25.

Linton

Elmroad82 said:

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 

That is the net effect of the 25% tax free lump sum assuming you are a basic rate tax payer both when you contribute and when you withdraw.  ie you gain 25% of your net contribution from the reduction in tax and lose 0.75 X1.25 X 20% tax =18.75% of your net contribution when you withdraw.  The difference being 6.25%.

If your are in different tax bands when contributing and withdrawing the effect could  be much higher.

Elmroad82

The withdrawal tax is the same though? Regardless of if you were a higher salary earner or basic salary earner or the amount in your pension pot? Ie if I have 100k or 600k in my pension pot, the tax is the same?

leosayer

The OP said £100k income so in the best case they will get 40% relief (or 42% if using salary sacrifice) on the way in and potentially 15% tax on the way out after 25% tax free cash.

In other words, a contribution of £100 will cost only £60 and will result in drawdown net income of £85 if income is kept below the high rate tax threshold. That's over 40% uplift.

Of course, this all depends on income taxes and pension taxes and thresholds not changing and not going over the lump sum allowance.

Marcon

Elmroad82 said:

The withdrawal tax is the same though? Regardless of if you were a higher salary earner or basic salary earner or the amount in your pension pot? Ie if I have 100k or 600k in my pension pot, the tax is the same?

Yes and no! The tax is levied on withdrawals, not the amount in the pot - BUT 25% is tax free, so the bigger the pot, the higher the amount of tax free cash you can take. 

Elmroad82

leosayer said:

The OP said £100k income so in the best case they will get 40% relief (or 42% if using salary sacrifice) on the way in and potentially 15% tax on the way out after 25% tax free cash.

In other words, a contribution of £100 will cost only £60 and will result in drawdown net income of £85 if income is kept below the high rate tax threshold. That's over 40% uplift.

Of course, this all depends on income taxes and pension taxes and thresholds not changing and not going over the lump sum allowance.

Hi, so the net increase is (85-60)/60? Ie 25% (abd this ignores the fund growth) … assuming not changes in legislation. 

In summary if I was looking at a 15 year horizon I’d need to be able to comfortably predict a return of  greater than 25% to justify any other investment?  Ie in property / gold/ ISAs?

Elmroad82

So in view of that, it’s almost better to have one very large pot to withdraw the lump sum from, then divide normal living expenses from the 2 pensions equally to ensure the 12.5k zero taxable income are taken from my wife’s and I pension pot.