Borrowing to fund pension contributions

[Markie BII]

Hi. Newbie here. Have looked through archives but can't see this coming up before - possibly because it's barmy, you tell me.

I have a one-man limited company, from which I currently take a £12k annual salary and c £36k dividends. I'd like to divert some of the dividends into pension contribution - but I need £48k/year to cover personal expenses.

Is it insane to borrow to cover personal expenses, to free up company income to invest in the pension? Tax benefits would be significant - obviously the cost of borrowing has to be set against that, but debt is pretty cheap at the moment - especially if I can find a way of putting it on the mortgage (we have a lot of equity in the house).

Has anybody looked at this? What am I missing?

[malvolio]

Lots...

Are you emptying your company bank accounts (presumably after taxes are paid of course) to pay your necessary £48k a year? If so, that's a bad idea if you're off work for any length of time. If not, then there is your pension funding.

Also borrowing is cheap, for probably another few months, then it's going to go up.

[tarbera]

??

Hi. Newbie here. Have looked through archives but can't see this coming up before - possibly because it's barmy, you tell me.

I have a one-man limited company, from which I currently take a £12k annual salary and c £36k dividends. I'd like to divert some of the dividends into pension contribution - but I need £48k/year to cover personal expenses.

Is it insane to borrow to cover personal expenses, to free up company income to invest in the pension? Tax benefits would be significant - obviously the cost of borrowing has to be set against that, but debt is pretty cheap at the moment - especially if I can find a way of putting it on the mortgage (we have a lot of equity in the house).

Has anybody looked at this? What am I missing?

what do you do with the remaining money in your company? or is Salary+dividends = all your income? (minus tax, company expenses?)

[northernladuk]

What am I missing?

An accountant?

[Markie BII]

Salary+dividends is ~all the company income (give or take a few grand). Time off work covered by a separate rainy day fund. Borrowing costs highly unlikely to go up enough to offset tax benefits of pension contributions. What else?

[Lance]

Hi. Newbie here. Have looked through archives but can't see this coming up before - possibly because it's barmy, you tell me.

Not entirely barmy but that depends.

I have a one-man limited company, from which I currently take a £12k annual salary and c £36k dividends. I'd like to divert some of the dividends into pension contribution - but I need £48k/year to cover personal expenses.

Is that (£48k) all the money in the company? I hope not otherwise you'll have a bigger problem at corporation tax time. Any additional money in the company can go directly to your pension (your accountant will tell you how much). That is the most tax efficient way.

Is it insane to borrow to cover personal expenses, to free up company income to invest in the pension?

Yes.

Tax benefits would be significant - obviously the cost of borrowing has to be set against that, but debt is pretty cheap at the moment - especially if I can find a way of putting it on the mortgage (we have a lot of equity in the house).

Has anybody looked at this? What am I missing?

I have recently considered extending a mortgage to put into a pension.
It is reliant on
- getting a good mortgage deal (<2%) and having <10 years to pay off
- getting a good return from the pension (>5%)
- being <10 years from being able to take pension draw downs (25% of the pot tax free)
- not having a better investment option (BTL or moving to a more expensive house)
- not having already maxed out your tax benefits on pension contributions

If you can meet all those then it might be worth considering. But your story suggests otherwise.

[SueEllen]

Salary+dividends is ~all the company income (give or take a few grand). Time off work covered by a separate rainy day fund. Borrowing costs highly unlikely to go up enough to offset tax benefits of pension contributions. What else?

Your pension costs should come out of your company income before you draw your dividends.

You need to do a budget and see what you can reduce/cut out so you can fund your pension.

It really isn't viable for you to borrow so you can put money into a pension. So if you can't afford to fund a pension then unfortunately you are going to have to work longer and then rely on what is left of the state pension.

[Markie BII]

Not entirely barmy but that depends.

Is that (£48k) all the money in the company? I hope not otherwise you'll have a bigger problem at corporation tax time. Any additional money in the company can go directly to your pension (your accountant will tell you how much). That is the most tax efficient way.

No, corp tax saved in a separate business account.

I have recently considered extending a mortgage to put into a pension.
It is reliant on
- getting a good mortgage deal (<2%) and having <10 years to pay off
- getting a good return from the pension (>5%)
- being <10 years from being able to take pension draw downs (25% of the pot tax free)
- not having a better investment option (BTL or moving to a more expensive house)
- not having already maxed out your tax benefits on pension contributions

If you can meet all those then it might be worth considering. But your story suggests otherwise.

That's a very useful checklist, thanks. The required cost of debt feels a little pessimistic but yes, I agree you'd need a good deal on the debt.

Biggest risk I suspect is poor returns on the pension.

[Markie BII]

It really isn't viable for you to borrow so you can put money into a pension. So if you can't afford to fund a pension then unfortunately you are going to have to work longer and then rely on what is left of the state pension.

Let me clarify - I'm not seeing this as a permanent solution, but as a way of freeing up some cash to invest at a time when the (relatively new) business isn't generating enough. As long as the business grows to pay back the increased personal debt relatively quickly (within a few years) this seems like a tax-efficient way of getting some money into the pension early.

[northernladuk]

And if it doesn't?