Using a loan to top up pension pot?

Would it be a crazy thing to do? I’m a few years off early retirement so I’ve been prioritising saving for the income I need, but could this be an affordable way to throw a lump sum into my pension too?

If I borrow £10k at 2.9% across 3 years the interest would be £453, but that £10k paid into my personal pension turns into £12k savings plus £2k in lower income tax (I’m a higher rate tax payer) so I’m actually £3,547 better off.

And borrowing the cash now rather than saving up the £10k means the pension would have 3 years to grow... of course it might not, but it seems like I’m only risking the £453 interest.

I feel like I should get ready to duck, but I’m genuinely curious about others views!

Comments

  • Your maths don't make sense.

    If you added £10,000 to a "relief at source" pension it would get a 25% uplift leaving £12,500 in the fund not £12,000.

    And although overly simplistic the £12,500 could potentially save you £2,500 in tax (the gross contribution increases the amount of basic rate tax payable, which in turn could reduce the amount of higher rate (or intermediate) tax payable.
  • bowlhead99
    bowlhead99 Posts: 12,295
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    edited 16 June 2019 at 6:52PM
    SMcGill wrote: »
    If I borrow £10k at 2.9% across 3 years the interest would be £453, but that £10k paid into my personal pension turns into £12k savings plus £2k in lower income tax (I’m a higher rate tax payer) so I’m actually £3,547 better off.

    And borrowing the cash now rather than saving up the £10k means the pension would have 3 years to grow... of course it might not, but it seems like I’m only risking the £453 interest.

    I feel like I should get ready to duck, but I’m genuinely curious about others views!
    The other poster is correct that your maths is off a bit, as £10k would be the capital contribution amount on a £12.5k contribution (i.e. £10k is 80% of £12.5k), then you would tell HMRC that you had contributed £12.5k gross and it had cost you £10k, and they would respond by sending you back £2.5k so that eventually it has only cost you £7.5k from your bank account (60% on the gross £12.5k.

    Then you have a £12.5k pension investment (plus investment growth)hat you can draw down partially or fully at age 55, or later depending on your retirement plans, with a quarter of it being tax free and the other three quarters being subject to tax at your appropriate marginal rate of tax for that tax year.

    Few things spring to mind:

    - if you wait a bit and do it close to the end of the tax year e.g. next March, and you already have a bit of spare cash in your bank accounts or other savings, you can perhaps get away with borrowing just £7.5k instead of £10k because although you'll give the pension company £10k, you can do your tax return on 6 April and after a few weeks will get £2.5k right back from HMRC. Or if you have the borrowing power to borrow and pay back more than £7.5k, you could still borrow the £10k or more anyway and use it to fund an even greater gross contribution.

    - once you have drawn income out of a DC pension scheme (ie any more than just the tax free 25% lump sum) you will have a restriction on how much you can contribute annually in future. So if your plan for clearing the last bit of the debt involves paying off the loan by getting the money back out of the pension relatively quickly, this may damage the future opportunities to make further large contributions as you finish off your last few years of work. So, make sure you can afford the repayments. Plans change unexpectedly sometimes.

    - increasing contributions is great if you are a 40% taxpayer on the full amount of the £12.5k gross as you'll effectively get 40% relief on all of it and probably not be a 40% taxpayer in your earliest retirement years while waiting for other pension pots to come in. Some of the spending money you take from your pension might fall within your annual personal allowance taxed at 0%, tremendously efficient after 40% relief on way in. But if your salary less existing pension contributions don't put you at least £12.5k above high rate tax threshold, you won't get the 40% relief on every penny. Some taxpayers think that as they are higher rate they will save 40% tax on everything out into a pension even if they were only, say, earning £55k. That's is clearly not the case - not sure if that's a common misconception.
  • SMcGill
    SMcGill Posts: 294
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    Thanks both for correcting my maths, I see now my misunderstanding.

    Bowlhead99 you’ve picked up on exactly what’s been going through my mind. My early retirement will be funded through savings so my income will be minimal, which is why I wanted to seek views on whether borrowing now, while I’m earning a good salary, was worth considering.

    I have the cash to retire early or to have a better pension, but I don’t have the cash for both! I need to figure out where my balancing point is between the two and borrowing might make a difference so it’s good to see nobody yet has said it’s a totally daft idea!
  • jamesd
    jamesd Posts: 26,103
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    Not at all daft. It could easily be the tool that lets you do both. Don't forget cheap credit card deals.
  • AnotherJoe
    AnotherJoe Posts: 19,622
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    I'd be concerned that at an age when you are considering early retirement you don't have £10k available in cash. Have you put all your spare income into a pension?
  • anselld
    anselld Posts: 8,262
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    SMcGill wrote: »
    Would it be a crazy thing to do? I’m a few years off early retirement so I’ve been prioritising saving for the income I need, but could this be an affordable way to throw a lump sum into my pension too?

    If I borrow £10k at 2.9% across 3 years the interest would be £453, but that £10k paid into my personal pension turns into £12k savings plus £2k in lower income tax (I’m a higher rate tax payer) so I’m actually £3,547 better off.

    And borrowing the cash now rather than saving up the £10k means the pension would have 3 years to grow... of course it might not, but it seems like I’m only risking the £453 interest.

    I feel like I should get ready to duck, but I’m genuinely curious about others views!

    You say you have been prioritising saving so presumably you have at least 10k in savings you could put in the pension. So the question becomes are you getting a better interest rate on your savings than the 2.9% you would be charged on a loan?
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