Borrow back mortgage overpayment to fund pension?

Sanxxx · 1 December 2017 at 12:16PM

Currently I have £47k overpayment on a mortgage that will end next May, I have an option to extend the mortgage for a variable period from one month up to State Retirement Age, which in my case is 6 1/2 years.

The rate of the mortage is variable , currently 2.25% (soon 2.5%).

I'm about to start a new job where my earnings will be c£87k, so over £40k will be liable to the 40% tax rate.

The new company will make an employer contribution of 10% month (DC scheme) and I can 'afford' to contribute c15% of salary, so that means c£22k/year going into pension. My 'living' amount includes the current c£480/month mortgage payment.

With a £40k/max pension allowance I have room to contribute c£18k/year more.

The question is does it make any sense to borrow back all or some of the overpayment in order to fund my pension up to the £40k max for 2+ years and minimise my higher rate tax liability? This would be done via further salary sacrifice. I have no other debts that need paying.

(To me it does, but I have a nagging feeling I'm missing something obvious, such as other opportunities for using £47k@ 2.25% outside of Bitcoin/Casino/3.30 at Newmarket)

Thanks in advance.

Keep_pedalling · 1 December 2017 at 12:39PM

From the info you have given it seems hard to believe you can’t afford those payments from that sort of salary, what the hell do you spend it all on?

ermine · 1 December 2017 at 1:04PM

Sanxxx wrote: »

The question is does it make any sense to borrow back all or some of the overpayment in order to fund my pension up to the £40k max for 2+ years and minimise my higher rate tax liability? This would be done via further salary sacrifice. I have no other debts that need paying.

Yes. Go for it. I assume your pension will be such that you are a 20% taxpayer in retirement, but your gain on running this through your pension will be 66% (every £100 save costs you £60 foregone) into your pension. You will pay tax on the pension of 20%, but since you get 25% of the pension as a tax-free lump sum you only pay that 20% on 3/4 of it, so at 15% on the total. Losing 15% beats losing 40%.

In the 6.5 years until you reach SPA you will pay more on the mortgage, but not as much more on the mortgage as you would have paid in tax. If mortgage rates skyrocket to 10% in those 6.5 years then since you are over 55 you draw down some of your pension so your total income is less than whatever the additional rate tax bracket is and suck up paying the 40% tax you would have paid anyway. Less the 25% lump sum. I would say if mortgage rates go up such that using the pension is sub-optimal then Britain has much greater problems like rioting on the streets to contend with...

cloud_dog · 1 December 2017 at 1:07PM

Keep_pedalling wrote: »

From the info you have given it seems hard to believe you can’t afford those payments from that sort of salary, what the hell do you spend it all on?

I'm not sure the OP is implying that.

I read it that they have access to some capital (mortgage overpayment), and by extending their existing mortgage period (payments) would it be beneficial to use the capital as additional payments in to a pension and then when they retire (I assume) use the enlarged PCLS to pay off the mortgage.

For the OP - I suppose it is a question of certainty over increased financial benefit (larger pension/lump sum). You mention 6.5 years to extend the mortgage, will you draw your pension in 6.5 years, will 6.5 years be sufficiently long enough to ensure healthy growth in the pension investment?

AlanP_2 · 1 December 2017 at 1:43PM

cloud_dog wrote: »

For the OP - I suppose it is a question of certainty over increased financial benefit (larger pension/lump sum). You mention 6.5 years to extend the mortgage, will you draw your pension in 6.5 years, will 6.5 years be sufficiently long enough to ensure healthy growth in the pension investment?

At a 40% saving which equals a 66.66% gain the OP doesn't need any growth over 6.5 years to be better off just to not lose more than ~30%.

With 6.5 years to go I would go for fairly low risk / low volatility assets to reduce that possibility. Even break even with inflation is a fantastic deal.

cloud_dog · 1 December 2017 at 2:02PM

Yes but, that is a question only they can answer.

kidmugsy · 1 December 2017 at 2:12PM

Sanxxx wrote: »

With a £40k/max pension allowance I have room to contribute c£18k/year more.

Do you have no unused annual allowance from earlier years to carry forward? I'd use those to the max because 40% tax relief may not last forever and anyway you are presumably over 55 so the money won't be inaccessible to you in an emergency.

Fill yer boots.

Triumph13 · 1 December 2017 at 3:20PM

Keep_pedalling wrote: »

From the info you have given it seems hard to believe you can’t afford those payments from that sort of salary, what the hell do you spend it all on?

I wouldn't have been quite as brutal as that, but that did set alarm bells ringing for me too.
With an £87k salary and only being able to 'afford' 15% pension contributions that means the OP is burning through over £50k pa post tax of which less than £6k is mortgage. Three possible scenarios spring to mind:

OP has hellishly high work-related costs which will cease on retirement eg lives in the country, but rents a flat in London for in the week. In this case all may be well as they won't need anything like the same amount in retirement;
OP already has substantial pension provision so as to be able to maintain his lifestyle in retirement - in which case he must be looking at Lifetime Allowance issues and at being a 40% tax payer in retirement - in which case putting more into the pension could be a very bad move indeed;
OP is in for a nasty shock when they retire and should really be looking at reducing their expenditure now to something closer to what they will have in retirement - thus largely negating the need to take back the mortgage overpayments.

ex-pat_scot · 1 December 2017 at 3:38PM

Triumph13 wrote: »

I wouldn't have been quite as brutal as that, but that did set alarm bells ringing for me too.
With an £87k salary and only being able to 'afford' 15% pension contributions that means the OP is burning through over £50k pa post tax of which less than £6k is mortgage. Three possible scenarios spring to mind:
OP has hellishly high work-related costs which will cease on retirement eg lives in the country, but rents a flat in London for in the week. In this case all may be well as they won't need anything like the same amount in retirement;

OP already has substantial pension provision so as to be able to maintain his lifestyle in retirement - in which case he must be looking at Lifetime Allowance issues and at being a 40% tax payer in retirement - in which case putting more into the pension could be a very bad move indeed;

OP is in for a nasty shock when they retire and should really be looking at reducing their expenditure now to something closer to what they will have in retirement - thus largely negating the need to take back the mortgage overpayments.

4. Children.
5. Lots of children.

Mine hoover up industrial quantities of cash.
At his (?) level of income, if he has any children at univ, then he's looking at £6,000 student loan contribution per child.
Extra curricular activities in total can be eyewatering.
School fees...

However, in retirement the little darlings should hopefully be off the books, or largely on their way towards, and costs should (I dearly hope) be dropping down to a 2-person level.

MallyGirl · 1 December 2017 at 3:39PM

Sanxxx wrote: »

The question is does it make any sense to borrow back all or some of the overpayment in order to fund my pension up to the £40k max for 2+ years and minimise my higher rate tax liability? This would be done via further salary sacrifice. I have no other debts that need paying.

(To me it does, but I have a nagging feeling I'm missing something obvious, such as other opportunities for using £47k@ 2.25% outside of Bitcoin/Casino/3.30 at Newmarket)

Thanks in advance.

I am doing something similar except that I have an offset mortgage so I am just letting the balance rise rather than fall at the moment. I have 10 years left on the mortgage and want to retire early in 10 years (@60). DD is likely to finish uni in 8 years so we will definitely work to see her through that. The balance is less than £100k at 10% LTV so it is a pretty safe move. I haven't gone quite as far as the full £40k but I will exceed £30k this year and may still add some more big AVCs via sal sac. Given the musings about future budgets limiting this benefit in some way it makes sense to act now and get at least 10 years growth on the extra.

somethingcorporate · 1 December 2017 at 9:16PM

ex-pat_scot wrote: »

4. Children.
5. Lots of children.

Mine hoover up industrial quantities of cash.

:rotfl::rotfl::rotfl:

Borrow back mortgage overpayment to fund pension?

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