Borrowing to increase contributions
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Bemma
Posts: 75 Forumite
I've previously posted about depleting my savings and increasing my Sal Sac in the run in to 55 to boost my DC pension pot. This seems to be fairly commonplace and with a sensible eye on risk (redundancy etc) is prudent, but is mitigated the closer you get to 55 with access to TFLS.
I benefit from Salary Sacrifice and any further contributions gain a 57% uplift from net pay due to tax and NI benefits.
I currently Sal Sac as much as I can afford, depleting savings would be next… borrowing would then possibly come in to play. Currently 50, so this is all future consideration for me.
Has anyone considered a more 'hardcore' approach by borrowing to increasing pension contributions?
1. 0% credit card: Daily expenses on a 0% card and increase Sal Sac. When 0% period over TFLS to pay balance.
2. Low cost loan: Use the loan capital to fund the loan repayments and Sal Sac as fast as you can into pension. When the capital is all gone, TFLS to repay the rest of the loan.
3. Mortgage: I think this deserves it's on thread, so will leave it for now.
4. Anything else.
I think 1. could be done on the run in to 55 depending on the duration of the 0% period. Timing when the debt has to be repaid for 55+. Kind of like Stoozing into a pension, I get a 57% uplift for zero cost.
Option 2. Need to be a lot more careful to ensure you will always have the capital to keep the repayments up. Possibly consider this 55+ so that would always have access to TFLS if things went very wrong.
I benefit from Salary Sacrifice and any further contributions gain a 57% uplift from net pay due to tax and NI benefits.
I currently Sal Sac as much as I can afford, depleting savings would be next… borrowing would then possibly come in to play. Currently 50, so this is all future consideration for me.
Has anyone considered a more 'hardcore' approach by borrowing to increasing pension contributions?
1. 0% credit card: Daily expenses on a 0% card and increase Sal Sac. When 0% period over TFLS to pay balance.
2. Low cost loan: Use the loan capital to fund the loan repayments and Sal Sac as fast as you can into pension. When the capital is all gone, TFLS to repay the rest of the loan.
3. Mortgage: I think this deserves it's on thread, so will leave it for now.
4. Anything else.
I think 1. could be done on the run in to 55 depending on the duration of the 0% period. Timing when the debt has to be repaid for 55+. Kind of like Stoozing into a pension, I get a 57% uplift for zero cost.
Option 2. Need to be a lot more careful to ensure you will always have the capital to keep the repayments up. Possibly consider this 55+ so that would always have access to TFLS if things went very wrong.
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Comments
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Nice idea , will be good to see what people think.0
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I like this idea, and have been wondering over the past few days if I can do something similar in terms of borrowing to pay for living costs which are currently paid for out of salary, but time isn't on my side as I've got 30 odd years left until retirement, so far too much horizon risk for me.
If you're fast approaching retirement however, then sacrificing more pension to benefit from tax relief which is used to pay off said debt within a short space of time seems like a decent ruse to me. You'd want to keep the extra cash in the pension as cash, and not as an investment, due to volatility risk.
I'd be interested to hear others thoughts on this as well.0 -
Has anyone considered a more 'hardcore' approach by borrowing to increasing pension contributions?
1. 0% credit card: Daily expenses on a 0% card and increase Sal Sac. When 0% period over TFLS to pay balance.
2. Low cost loan: Use the loan capital to fund the loan repayments and Sal Sac as fast as you can into pension. When the capital is all gone, TFLS to repay the rest of the loan.
3. Mortgage: I think this deserves it's on thread, so will leave it for now.
4. Anything else.
If investors simply buy more stock by leveraging with debt. Then yes, stock prices will rise yet higher. Doesn't improve the underlying trading fundamentals though. Borrowed money is cheap currently for good reasons. Worth remembering that there's no such thing as a free lunch.0 -
Thrugelmir wrote: »If investors simply buy more stock by leveraging with debt. Then yes, stock prices will rise yet higher. Doesn't improve the underlying trading fundamentals though. Borrowed money is cheap currently for good reasons. Worth remembering that there's no such thing as a free lunch.
I think the premise is that the money to be sacrificed into pension is money used as living expenses. The ruse is the tax avoidance, not any investment gains.
For example, if the op has £2k p/m living expenses which are currently being paid for out of salary, and has two years before can access drawdown facility, why not borrow £24k+ over a number of years and use that to pay off the monthly £2k, whilst the salary is sacrificed, and thus turns into £3k+ in the pension per month.
The £3k+ per month going into the pension is maintained in cash, so not subject to any investment risk, and is after two years then withdrawn from the pension pot to pay off the remaining loan lump sum and any associated interest. The result is an additional £10k give or take.0 -
I am currently using savings to fund sal sac down to minimum wage. Funds are going into cash. As I am 56 I can access the money at any time.0
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Yes, this is a very common approach and makes perfect sense.
In an era where you can get 0% interest on cards and <2% interest on mortgages, it makes complete sense to invest, rather than rushing to pay off your mortgage quicker than necessary.
And that's before you take into account the enormous tax benefits of investing into a pension.
If you are currently mortgage free a mortgage would obviously have a cost to it as you'd have to pay solicitor and bank fees, but that could be worth it given the tax relief benefits.0 -
Makes sense to be heavily leveraged when you are young. Not as you approach 55. Also, if you are worth 2 million.then borrowing 20 k is fine.
However if you are heavily leveraged within 5 years of retirement and a bear market hits your stocks then you are f***d. Imagine how it would feel having a net worth of 0 at 55.
So, if you really get 57% uplift and the debt is a small fraction of your net worth then go for it.0 -
Sorry, this seems to have go off on a tangent from what I meant! Bad choice of words from me probably, 'borrowing' to invest easily raises a red flag! I should maybe just call it 'stoozing into DC pension'.
I'm NOT talking about leveraging and gearing investments in stocks and shares etc. Way beyond my knowledge, experience and comfort zone. I think MaxiRobriguez gets it! Borrow cheaply at or near 55+ years old for living expenses so that increased salary can be sacrificed into pension to get an uplift from tax/NI/HICBC savings.
As an example taking option 1.
At age 53+, get a 24 month 0% purchases credit card. Use for living expenses of say £1000/mth. This frees up £1000 of net salary, which can be sacrificed and results in £1570 (in my case) into pension. So in 24 months £37,680 in pension, with a debt of £24,000. Take out £24,000 from pension and clear debt, result: £13,680 in pension for zero cost. Actually, it would be a little different than that as at least minimum payments must be made against the debt.
All cash, little risk (minimum payments need to be maintain).
I'm sure, variants with balance transfer cards could be done, but probably not applicable for me. Interested in other people's thoughts or who have done this.
Option 2 etc adds another level of complexity, but interested if anyone's done it. I'm not sure it would be any better than recycling for me (within the rules).0 -
I, and I suspect others, are doing it almost by accident.
We have an offset mortgage and make a monthly repayment that is less than we would if we weren't contributing to AVC pots that run alongside our DBs.
Are both over 55 so in theory could access anytime we wanted to, although mindful of DB actuarial reduction.
We aren't maximising it though as we will still pay the mortgage off from take home income over next couple of years.
I'd be reluctant to stooze in the way you suggest, even though I can see the mathematical benefit, preferring to mix and match as we go through our financial journey.0 -
Thrugelmir wrote: »I'd suggest that you first try and obtain a 0% credit card with a £24k limit and a no monthly repayment requirement. Somewhat of a fundamental flaw in your thinking. In addition you'll need to find one that offers 0% for the full period, not just an introductory term. Given the changes in the credit card market recently your options maybe somewhat limited.
Sainsbury's dual credit card 0% on purchases for 25 months but you do have a minimum payment to make to maintain the 0% You also get the bonus of nectar points earnt on all purchases.0
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