Lump sum portion and recycling

duffymunster

Hi,

I've turned 55 and can now access DC pension pot. I am thinking about taking some of the tax free lump sum to use against a debt in order to free up cash flow. It's a personal loan that I took in 2022 and wanted to pay off aggressively but inflation hit shortly after and beyond and pay hasn't followed suit. I am wondering about the wisdom of paying down this liability and then using the better cash flow to rebuild that part of my pension while I work for a few more years and give me a bit more breathing space. I have a small emergency fund but no other savings and ideally I want to build those up a bit too. If I lost my job I'd be pushed to rebuild the pot of course, but equally I think I'd have to use some of the pension to address this liability too.

I do not want to fall foul of any recycling rules - which I've read about - and I think I'd be looking to go above the £7500 threshold. What do people think about this ? Would it be considered recycling ? Similarly if I did the same a few years down the line with my remaining mortgage ? I'm aware I'd be whittling down my tax free allowance but at the moment there is absolutely no danger of that being used in its entirety.

QrizB

A personal loan taken in 2022 should have an interest rate of 3%, or so (unless you were considered a particularly poor risk). That's less than you can earn in a savings account, so I can't see much point in trying to pay it off early from savings. Doubly so for paying it from a pension.

How much is the loan, what's the interest rate, how much are the payments, and how long are you on the hook for?

duffymunster

 3.9%  - it was late 2022 when interest rates started to climb - and around £450 pcm. It's not so much about profiting vs savings, but about having some headroom each month  I'm up to remortgage next year so I'm considering the transition to higher interest rates and looking to improve ability to meet the lending criteria.

So the idea is to remove the highest interest bearing debt (the next highest would be mortgage) then once new mortgage terms agreed, look at how much I can put back into pension and emergency fund, while I'm working. If I did contribute more to the pension I can see that it could be construed as recycling tax free money.