Pension contributions as repayment vehicle for mortgage. Feasible?
Comments
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I'm doing something similar. I actually increased my mortage to do some home improvements (it's really made a difference, it was the right thing). I'd always wanted to pay off my mortgage by 60 so I could retire then if I wanted.
I worked it out and it was do-able by over paying. Except I wouldn't have much retirement income by 60 (one pension at £4.5k) unless my side business takes off. Which was fine, I could work on my business. But the tax relief on pension contributions kept nagging at me. If I worked to pay off the mortage quicker, I couldn't put extra into my pension.
So I did the sums. Putting the extra into the pension instead allows me to pay off the mortage and have retirement income. Because of salary sacrifice, for every £68 I don't get in take home pay, I have £100 in the pension (basic rate tax payer, getting tax & NI relief because of SS). Then I can take 25% tax free on retiring. I also get my personal tax free allowance each year and won't pay NI as a pensioner (currently). That's a huge tax advantage. I would take out the money across five years to pay off the mortage making sure I didn't go into the higher tax bracket.
This is a DC pension in addition to two work DB pensions and would be taken to fund the gap between 60 and 65.
That's actually paying off by 65, but knowing I have the money by 60 which feels the same to me.
Unlike you, I'm not going the interest free mortgage route. I have a repayment mortgage and, although I extended the term to age 75, I'm still paying it off gradually. I'm not sure it would be a good idea to go interest free as that is putting all my eggs in the pension basket. Also, what happens if I want to move?
So that's my thinking. It's looking good at the moment, but with all things like this, it's worth keeping an eye on as conditions may change.0 -
Please can I have an interest free mortgage?interest free mortgage route.
Pretty please!!!!0 -
greenglide wrote: »Please can I have an interest free mortgage?
Pretty please!!!!
:rotfl:
Must not have had enough tea this morning. I, of course, meant interest only ...0 -
pinklady21 wrote: »Hello
I am trying to work out whether I am better overpaying on my interest only mortgage, or whether I should put that £500 - £600 into an AVC with my employer's pension scheme, with a view to using that cash to repay the capital on the mortgage.
The problem is that there is no way to work it out - you can only "guess" based on your view of what the markets/economy/interest rates etc will be over the next 15-20 years (which nobody knows).
The gamble is deciding whether AVCs+tax relief+investment growth will return more than mortgage overpayments+interest over the period.
Unfortunately, neither I, nor anyone else, can give you a definitive answer to that....
On the face of it, the tax relief on pension AVCs does look attractive but then that might not count for much if the markets return very little over the next 20 years.
As a previous poster alluded, economically speaking we are in unknown territory at the moment - it's anyone's guess what will happen over the next 20 years.0 -
BTW, if it was me in your shoes, I think I might take the risk and go with pension contributions and that juicy tax relief.
That's not me saying you should do that of course....my circumstances are likely to be different to yours, and I may (or may not
) have a higher risk tolerance...... 0 -
Does it have to be either one or the other. Why not both?0
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BTW, if it was me in your shoes, I think I might take the risk and go with pension contributions and that juicy tax relief.
That's not me saying you should do that of course....my circumstances are likely to be different to yours, and I may (or may not) have a higher risk tolerance......
The tax advantages and the 25% tax free lump sum make the pension route attractive. But if that route is taken I think the asset allocation should be conservative so there's little to no chance that you'll lose money as you know that the mortgage reckoning is sure to come. Of course you could split the difference and use some money to make extra payments and some to put into the pension.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
That's not me saying you should do that of course....my circumstances are likely to be different to yours, and I may (or may not) have a higher risk tolerance......
For many it's the security of their employment in their latter years that's the determing factor. Losing your job when you are over 50. Can have a life changing impact on ones finances.0 -
bostonerimus wrote: »The tax advantages and the 25% tax free lump sum make the pension route attractive. But if that route is taken I think the asset allocation should be conservative so there's little to no chance that you'll lose money as you know that the mortgage reckoning is sure to come. Of course you could split the difference and use some money to make extra payments and some to put into the pension.
Or alternatively, use a sensible asset allocation (which may be upto medium risk) but use a low target growth rate.
If we look back at endowments, which is what the OP is proposing in a roundabout way, its not that the underperformed. Many have done very well for the risk level they took. The problem was they were mostly invested at cautious to medium risk with inappropriate target growth rates for that level. i.e. they have achieved 5-7% p.a. returns over the term but the contribution rate was set on the basis of them needing 8-13% p.a. to hit target.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
Thank you everyone who has been kind enough to reply. This has given me a lot of food for thought.
It is indeed similar to the old "endowment" route in many ways, and the hope that in this case the investment vehicle of the pension will grow sufficiently to do two things - be able to pay off a large lump sum at some point within 15 years, and provide a decent income in retirement.
I need to confirm more details about my current pension pot - what is its value, how quickly it is growing, and what difference an additional £500 a month AVC might make.
Although of course these are all best guesses, as I agree, we live in very uncertain times.
I simply took the employers' recommendation on asset allocations, so probably medium risk, but I am also ashamed to say I do not actually know if the pension is DC or DB which is kind of shocking given how much money I have invested in it!
I have another question:
Am I correct to assume that once I reach 55, I can then draw out up to 25% of the pension pot? Is this tax free?
Can this only be a one off - or can I subsequently make lump sum withdrawals?
Assuming I am still in employment, do I also have to retire at that point, or can the pension keep going even though the pot is reduced?
Thank you - and apologies to the pensions experts for my lack of knowledge!0
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