Pension funded mortgage

In message , Fred writes

I think you are making a mistake by concentrating on the Pension 'wrapper' and not what you want to put inside it, i.e. equity based products, property, fixed interest. If you are happy to invest in those products you can then decide on the most appropriate wrapper. A Pension may be one of the ways, as would an ISA.

So it depends on how you think your investment in the pension will perform.

Perhaps if I put your question another way. If you had a mortgage free house, would you borrow money against to invest and if so what would you invest in?

Thanks for the response.

My reason for concentrating on the pension wrapper is that that *guarantees* me an immediate return of 40p for every 100p I invest. And on this basis (and assuming fixed rate mortages) scheme (2) is guaranteed to be cheaper than (1) even before we consider the performance of the fund I invest in. I'll probably move over to sipps soon (just waiting on the SL demutualisation) so I should have almost as many investment option inside a pension as outside.

But it seems to me that scheme (2) always beats (1) as long as returns in the fund exceed costs - which is reasonably guaranteed if opt for a low risk fund.

I do have a mortgage free house and no, I probably wouldn't borrow money against it to invest. Though having said that, there are some very interesting schemes possible from next year which involve putting all or part of your house into your pension. But that's another story.

Thanks again Fred

In message , Fred writes

No it doesnt. It guarantees that for 60p your pension fund will have £1 in it. The 'return' comes later ands the annuity will be taxed, possibly, at 40%.

What if it goes down in value?

But what about the tax on the annuity?

But, in effect, that is what you are proposing.

Eh? I think you need to read the small print.

Quite!

So presumably you are planning to use the 25% tax free lump sum to pay off the mortgage, so your total fund would need to be at least 400,000.

Firstly, are you sure you'll be a 40% tax payer until you are 65?

Secondly, using part/all of the tax free lump sum to pay off your mortgage would reduce/eliminate the tax free lump you'd otherwise have at your disposal had you gone the repayment route. In other words you'll get less net pension and less flexibility.

What you are proposing does sound sensible, but I don't think it's quite the no-brainer you seem to think.

Been discussed on here. It's very unlikely that putting the house you live in into your pension scheme would be a sensible financial move. Putting a house you rent out into a pension scheme might be.

I think it could reasonably be described as an immediate return (after all some of it does come back in the form of a tax reduction). You could even describe it as a 67% return since you actually put in 60p (after allowing for the tax return) but the fund is immediately worth 100p. This isn't that difficult from all those deposit accounts that bump up their AER by adding in a one-off bonus.

And remember that the 100k that I would withdraw from the fund would be tax-free since it'll be within the 25% allowance. Yes, it's true that their are restrictions on how you can use your pension fund, but if you regard the fund as a means of generating a retirement income rather than a legacy these aren't so bad these days - least not from my pov. And I certainly wouldn't complain if my pot grew large enough to generate an income that could attract some 40% taxation!

I'm not sure that's a fair summary. As far as I'm concerned I'm using the tax-free lump sum in my pension to reduce the cost of buying a more expensive property. Given that I'm happy to commit myself to the purchase and the pension then I can't see any significant downside.

Fred

Thanks for the response.

No, I can't be certain that I'll be still paying 40% at 65. But since I can put as much as I like into my pension fund (tax free) from next year I don't see this as a problem - I simply make sure I put the money in whilst I am paying 40%.

Yes, I appreciate that - but it seems a better use of the money than alternatives - plus I can still invest in Isa's etc. And, the proposed scheme should increase my pension since the 100k I invest in the fund only has to maintain it's face value to pay off the mortgage. Hopefully the 100k will at least keep up with inflation and so increase the fund.

Yes, I'd agree that putting your primary residence into your pension pot isn't that clever. However, if you are currently aged 50+ with a poor pension and a mortgage free property then it can make sense to take out a new/second mortgage to kick-start your pension rather pay an equivalent monthly payment into your fund..

Fred

Note that you only get the higher rate relief on pension contributions which were actually taxed at the higher rate. So if only the top 100 of your earnings was taxed at the higher rate, you won't get the HRR on the whole of your 10K contribution!

You may know that, but it's not clear from the way this has been phrased in the thread up to now.

Matti