Pension or Mortgage overpayments?

Pension or Mortgage overpayments?

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Discussion

MOBB

Original Poster:

3,575 posts

126 months

Wednesday 27th July 2016
quotequote all
I'm a contractor (Accounting) and am currently overpaying my mortgage as much as possible using dividend payments taken from my Ltd Co.

I contribute a relatively small personal pension scheme, nothing from my Ltd Co at present.

I'm thinking of paying as much as possible into my personal pension from my Ltd Co (not sure what employee/employer mix) instead of the mortgage overpayments - is this sensible with the current rules? Plan would be to draw a lump sum when I can (tax-wise) to pay off the mortgage (in about 10 years).

Probably need an advisor don't I?......................

Jockman

17,912 posts

159 months

Wednesday 27th July 2016
quotequote all
I do all Employer contribution, no Employee from my Ltd.

I also overpay the mortgage on a personal basis.

CaptainSensib1e

1,432 posts

220 months

Wednesday 27th July 2016
quotequote all
Depends on your personal situation, but assuming your are on a low mortgage rate, it will probably make more sense to put the money in a pension. You'll get at least 20% tax relief, and you should be able to get a better return from investing the money than you would from paying off your mortgage.

Ozzie Osmond

21,189 posts

245 months

Wednesday 27th July 2016
quotequote all
MOBB said:
Probably need an advisor don't I?......................
Hmmm I'm not sure your situation is complicated enough for that.

Assuming,
  • your mortgage cost is sensibly low, and
  • you are a 40% taxpayer
then you will PROBABLY be better off investing in pension than paying down mortgage. Maybe a lot better off. For a 20% taxpayer the same principles apply although the tax relief is obviously halved so the balance is less favourable.

BUT if you want to be 100% sure of £1 value for every £1 you've got - pay down mortgage.

PurpleMoonlight

22,362 posts

156 months

Wednesday 27th July 2016
quotequote all
Given the 7.5% dividend tax, pension contributions are now more attractive for many.

JulianPH

9,912 posts

113 months

Wednesday 27th July 2016
quotequote all
Quick, back of fag packet maths;

I've assumed £100k mortgage debt being paid down at £10,000 per year or the £10,000 per year being grossed up into a pension. I have also assumed 3% interest on the mortgage and 3% annual return on the pension after all charges.

If you are a basic rate taxpayer your would have, after ten years:

£100k mortgage debt, have paid £30k in interest and would have a pension worth £143K.

You could withdraw the whole pension fund (25% tax free and the balance I assume at 40%) and after paying off the mortgage you would have £3k left in your pocket (NOT taking into account the £30k of interest paid over the period). So a cost to your of £27k

If you are a higher rate taxpayer then it is:

Same £100k mortgage debt and £30k interest costs, but a pension worth £191k.

Withdrawing your whole pension (on the same tax terms as above) and after paying off the mortgage (AND factoring in the £30k of interest) you would have £34k profit in your pocket.

If you just overpay the mortgage by £10k a year (assuming your mortgage allows this) then you will pay £16.5k in interest (saving £13.5k) but with nothing in a pension to offset against this. Of course you will also have to factor in the additional tax due the £10k a year withdrawals for the overpayment. So there will never be any profit that redirecting this money into a pension would achieve if you are a higher rate taxpayer. There will, however, be certainty (something not to be undervalued).

You can adjust the figures to your own circumstances but the tax advantages of putting the same money into a pension appear to outweigh the mortgage overpayments.

PM me if you want me to run your personal figures in the same way. I am not an adviser though and therefore can't give you any advice other than to say the money in the pension could do much better or much worse depending on external factors. Also, the interest you pay on your mortgage is likely to change over the next ten years.

If anyone spots any errors in my calculations then please not they were only quick and I am happy to stand corrected.

EDITED already for stupidity!



Edited by JulianPH on Wednesday 27th July 16:32


Edited by JulianPH on Wednesday 27th July 16:34

Welshbeef

49,633 posts

197 months

Thursday 28th July 2016
quotequote all
The other thing to consider is the pension rules may change in the future reducing down from 40% to 20% relief to all. Once it's gone it's gone.

Worth considering.


Ozzie Osmond

21,189 posts

245 months

Thursday 28th July 2016
quotequote all
Welshbeef said:
The other thing to consider is the pension rules may change in the future reducing down from 40% to 20% relief to all. Once it's gone it's gone.
Yes, it's impossible to repeat this too often. Make hay while the sun shines.

N.B. You can carry forward unused annual allowance from the previous three years and claim full tax relief on contributions you may have missed.

Welshbeef

49,633 posts

197 months

Thursday 28th July 2016
quotequote all
Ozzie Osmond said:
Welshbeef said:
The other thing to consider is the pension rules may change in the future reducing down from 40% to 20% relief to all. Once it's gone it's gone.
Yes, it's impossible to repeat this too often. Make hay while the sun shines.

N.B. You can carry forward unused annual allowance from the previous three years and claim full tax relief on contributions you may have missed.
And that's £40k a year so £120k you could drop into a pension and get 40% on that straight away so an instant £200k pot.
You can take out 25% tax free so £50k so in reality the £200k has only cost you £70k.... Now that's when you play the smart game.

Jockman

17,912 posts

159 months

Thursday 28th July 2016
quotequote all
Welshbeef said:
And that's £40k a year so £120k you could drop into a pension and get 40% on that straight away so an instant £200k pot.
You can take out 25% tax free so £50k so in reality the £200k has only cost you £70k.... Now that's when you play the smart game.
Was it £40k three years ago?

PurpleMoonlight

22,362 posts

156 months

Friday 29th July 2016
quotequote all
The OP is making company contributions not personal contributions, so any future reduction in personal contribution tax relief doesn't apply to him.

grahamm

211 posts

201 months

Friday 29th July 2016
quotequote all
Welshbeef said:
And that's £40k a year so £120k you could drop into a pension and get 40% on that straight away so an instant £200k pot.
You can take out 25% tax free so £50k so in reality the £200k has only cost you £70k.... Now that's when you play the smart game.
I believe it is £40k per year gross (may have been £50k three years ago), so 3 years at £40k gives you a pot of £120k which has cost a 40% tax payer only £72k, or a 20% tax payer £96k. There may also be NI savings or dividend tax savings to take into account.

oyster

12,577 posts

247 months

Friday 29th July 2016
quotequote all
grahamm said:
Welshbeef said:
And that's £40k a year so £120k you could drop into a pension and get 40% on that straight away so an instant £200k pot.
You can take out 25% tax free so £50k so in reality the £200k has only cost you £70k.... Now that's when you play the smart game.
I believe it is £40k per year gross (may have been £50k three years ago), so 3 years at £40k gives you a pot of £120k which has cost a 40% tax payer only £72k, or a 20% tax payer £96k. There may also be NI savings or dividend tax savings to take into account.
Thank you some real facts.

Although to be clear it's actually up to £170k this tax year (£50k from 2013-14, £40k from 2014-15, £40k from 2015-16 and £40k from this year).

PurpleMoonlight

22,362 posts

156 months

Friday 29th July 2016
quotequote all
oyster said:
Thank you some real facts.

Although to be clear it's actually up to £170k this tax year (£50k from 2013-14, £40k from 2014-15, £40k from 2015-16 and £40k from this year).
But you can't personally contribute £170,000 gross and get tax relief on the lot because the taper annual allowance will have kicked in for 2016-17.

CrouchingWayne

682 posts

175 months

Friday 29th July 2016
quotequote all
Just out of curiosity, does the (for example) £120k not get relief at the marginal rate so to get full advantage you would have had to have paid 40% on the whole amount, failing that it would be partially 40% and partially 20%?

So to take full advantage you need a gross salary somewhere in the region of £83k (being £43k roughly which is taxed at 0/20% then the additional £40k taxed at 40%)

I should know the answer to this, but it fails me off the top of my head!

Welshbeef

49,633 posts

197 months

Friday 29th July 2016
quotequote all
oyster said:
grahamm said:
Welshbeef said:
And that's £40k a year so £120k you could drop into a pension and get 40% on that straight away so an instant £200k pot.
You can take out 25% tax free so £50k so in reality the £200k has only cost you £70k.... Now that's when you play the smart game.
I believe it is £40k per year gross (may have been £50k three years ago), so 3 years at £40k gives you a pot of £120k which has cost a 40% tax payer only £72k, or a 20% tax payer £96k. There may also be NI savings or dividend tax savings to take into account.
Thank you some real facts.

Although to be clear it's actually up to £170k this tax year (£50k from 2013-14, £40k from 2014-15, £40k from 2015-16 and £40k from this year).
Thank you some real facts.... You come across as a nice chap.

grahamm

211 posts

201 months

Friday 29th July 2016
quotequote all
PurpleMoonlight said:
But you can't personally contribute £170,000 gross and get tax relief on the lot because the taper annual allowance will have kicked in for 2016-17.
Can the employer pay it in without bringing the taper allowance in to play?

PurpleMoonlight

22,362 posts

156 months

Friday 29th July 2016
quotequote all
grahamm said:
Can the employer pay it in without bringing the taper allowance in to play?
An individuals annual allowance can be paid by either them personally or their employer or combination of both.

The tapered annual allowance kicks in when an individuals 'adjusted' income exceeds £150,000, so the employer paying contributions does not itself avoid the tapered relief.

For a £170,000 personal contribution to be subject to full tax relief the individual would need earned taxable income of £170,000, so greater than £150,000 so the tapered annual allowance kicks in.


throt

3,038 posts

169 months

Friday 29th July 2016
quotequote all
I have done the overpayment mortgage route and have left a balance of 10k on it. This is due to it being a cracking offset product at 1\2% above the BOE base rate so I didn't want to pay it off and then lose the product..

I have savings too and may just buy another house. I think the housing market will come down in price within the next 2 year so I may just wait..

You can look at the pros and the cons but you can't beat being mortgage free. That as long as your sensible because at the moment the mortgage product I kept on is basically a massive credit card to go and buy whatever I choose. No chance of that but for some maybe tempting.

Welshbeef

49,633 posts

197 months

Friday 29th July 2016
quotequote all
throt said:
I have done the overpayment mortgage route and have left a balance of 10k on it. This is due to it being a cracking offset product at 1\2% above the BOE base rate so I didn't want to pay it off and then lose the product..

I have savings too and may just buy another house. I think the housing market will come down in price within the next 2 year so I may just wait..

You can look at the pros and the cons but you can't beat being mortgage free. That as long as your sensible because at the moment the mortgage product I kept on is basically a massive credit card to go and buy whatever I choose. No chance of that but for some maybe tempting.
You have the 3% extra stamp duty to consider if buying a second property (even a static caravan!)