Reply to: Borrowing to fund pension contributions

[BlandResponsibleName]

Open a SIPP and put 100 in it that way you will have a valid pension scheme in place. When you have more funds you can catch up the last 3 years so up to 120k in.

You will miss the potential gain on the fund but won't be taking the risk of tying your finances up and still be able to claim the tax relief on the contributions later on.

This is good advice. At least open a SIPP now because you can only use allowances from that point.

Personally I'd be inclined to go for it if you've already got a rainy day fund and if you haven't already got a pension.

Another factor is that the chancellor is supposedly looking at targeting pension tax relief in the forthcoming budget. Personally I'm trying to put as much as I can in before he does that. It's the last thing we contractors have got after the dividend tax and flat VAT raids. I wish they'd just cut state spending rather than raise tax (especially on responsible things like saving).

[Smartie]

Markets

It's thought that many of the world's stock markets are too highly valued at the moment. Because of record low interest rates and too much QE (government money printing) asset prices including stocks have been pushed up.

Some are saying Europe/Japan look OK and even the UK but basically piling loads of money in now may not be a great idea. Drip feed it in and keep some back for when markets drop if you're going for a SIPP.

Of course that's what most people are doing at the moment in 'the most hated bull market ever'.

[BrilloPad]

It's not even Brexit.

Most companies are trying to get rid of or at least minimise property space e.g. offices, retail space due to the costs. The companies who want property want warehouse or factory space in the back of beyond.

I did once getting commercial property as part of a pension. It was 1% of an office block. The return was okay - not spectacular.

I think I made 8% a year. The unit was let at 8% a year(after fees). The worth of the unit went up 25% over 5 years. I never understood why I only got 8% a year......

[SueEllen]

For first 2 reasons. Commercial property will not do so well due to Brexit. IMO.

It's not even Brexit.

Most companies are trying to get rid of or at least minimise property space e.g. offices, retail space due to the costs. The companies who want property want warehouse or factory space in the back of beyond.

[MB2]

Open a SIPP and put 100 in it that way you will have a valid pension scheme in place. When you have more funds you can catch up the last 3 years so up to 120k in.

You will miss the potential gain on the fund but won't be taking the risk of tying your finances up and still be able to claim the tax relief on the contributions later on.

[BrilloPad]

I'm inclined to agree, but expand on property for me - BTL for income generation in retirement? Or as an appreciating asset? Or commercial property (via a pension)?

For first 2 reasons. Commercial property will not do so well due to Brexit. IMO.

[Markie BII]

However, rather than putting money into your pension you should invest in property. Or if it has to be pension invest in bitcoin funds.

I'm inclined to agree, but expand on property for me - BTL for income generation in retirement? Or as an appreciating asset? Or commercial property (via a pension)?

[BrilloPad]

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

People have been predicting the end of low interest rates for years. With Brexit they will probably go lower.

However, rather than putting money into your pension you should invest in property. Or if it has to be pension invest in bitcoin funds.

[Markie BII]

And if it doesn't?

That's a risk only I can judge. I'm interested in the views of the experts here on the other risks.

[northernladuk]

And if it doesn't?

[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.

[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.

[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.

[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.

[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?