SIPP most efficient way to pay off a mortgage?

bubswilson

I need to take out a mortgage on a principle residence, of c. 150K. I'm 42 years old.

Am I wrong in thinking a SIPP will be the best way of paying this off?

If I over-invest in my SIPP in 'safe' (eg bonds etc) investments, then I recoup the 40% income tax on the money invested, effectively giving me a guaranteed 40% return (+ any return on the investments).
If I understand correctly, I can withdraw money from my SIPP from age 55 (not sure if this is the case if I'm still working...as I will be).
Any views? Perhaps I'm missing something.

Thanks

dunstonh

Am I wrong in thinking a SIPP will be the best way of paying this off?

Probably but only assuming statistical reasons.

If I over-invest in my SIPP in 'safe' (eg bonds etc) investments, then I recoup the 40% income tax on the money invested, effectively giving me a guaranteed 40% return (+ any return on the investments).

So, what you will contribution be each month assuming a low target growth rate of say 3% p.a.? Remembering that you can only draw 25% of the final fund value, you will also have to account for making sure that it will be able to meet 100% of the mortgage. In effect, despite getting 40% tax relief you will have to pay around 3 times more than using an ISA. Although you would get a pension income out of it.

bubswilson

My thought is that I would be investing in a pension anyway.
If I supplement this to cover my mortgage, then I'm securing a 40% bonus (which I wouldn't get with an ISA, because with an ISA I have already paid income tax, with a SIPP, the money is invested gross...). Come retirement (or anytime post age 55 I believe), I can withdraw 25% Of the accumulated funds. Seems like a very efficient investment to me and better than alternatives to pay off the mortgage. Just wondering if I'm missing something..

se999

Thanks for starting this thread. I was starting to look into this too, hadn't heard about linking pensions and mortgage until yesterday.

Is there any chance of anyone coming up with some figures for how it would work.

OH is 48, again 40% taxed. With the age until the cash can be withdrawn being shorter it seems to lower the risk of the option.

Can you use your current SIPP and just take out a flexible interest only mortgage?

Also as the original poster says, after the cash withdrawal what happens to the rest, and if you want to continue paying into a pension how is the subsequent investment treated e.g. could you do a later 25% withdrawal of the later contributions?

Dan_Collins_2

I dont mean to sound all pc and FSA like, but the only risk free way to repay your mortgage is on a repayment basis!

se999

Nearly nothing is risk free.

People are being advised to invest in pensions anyway as a method of securing their future income.

If this doesn't seem to be working, at any point you can lower your pension contributions and/or switch to another type of mortgage.

In the past we stuck to repayment mortgages and avoided the hype of the endowment mortgages because our risk analysis was that then it was too high a risk option.

The tax relief gives a buffer which makes this option worth considering. I just need some extra info to help me decide if it is a realistic option.

silvercar

I would have thought there are risks that you cannot keep up with the interest payments on your mortgage at any stage before 55 you will have a lack of funds.

If you get to 55 and don't want to start taking your pension can you access the lump sum? Even if you can, taking a lump sum out of your pension at a relatively young age would impact on the income your pension can produce when you do want to retire.

Dan_Collins_2

The problem with pensions (I really am no expert, I will leave that to Big D) as a repayment vehicle along with ISA, IMO, is you never know if the rules will change. If our current government is ousted, the new mafia will want to play with a new set of toys!! You could find your self short because you are no longer able to use the pension in the way you planned.

Hence forme the only way to reduce the risk as much as pos is with a repayment mortgage. The only risk is that you dont pay your mortgage!

dunstonh

I am a fairly high risk investor and a higher rate taxpayer and I still dont use the pension. There are benefits of course but the negatives are substantial.

The biggest one is the fear that the Govt will abolish the 25% pension commencement lump sum. They already looked at it in the last round of changes and renamed it by no longer calling it tax free cash and calling it pension commencement lump sum.

Dan_Collins_2

See told you Big D knows best!

bubswilson

...This IS a repayment basis. It's simply a deferred repayment basis.
You could invest in gilts in your sipp (safest investment possible)..and still get 40% back. IF I pay back monthly (traditional repayment basis), I am foregoing this tax benefit. With respect, aren't you renouncing a tax benefit?