Use Your Pension to Pay Off Your Mortgage
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- čas přidán 15. 06. 2024
- Using your pension as a vehicle to pay off your mortgage can be a highly effective strategy.
The star of this video is the pension, not the interest-only mortgage. We could have compared overpaying a repayment mortgage vs investing in a pension, and we would have ended up with a similar result.
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I am a Chartered Wealth Manager and Partner in a financial planning practice based in the UK. If you would like to find out more about our services, please follow this link: go.novawm.com/getintouch
DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice. Any opinions or assessments expressed are James’ own opinions or assessments, which are not affiliated with any third party. Any representations stated as facts or views based on such facts are relevant to circumstances applicable at the time of publication. This information should never be relied solely upon to make decisions, and James accepts no liability for any investment actions undertaken by viewers. Please seek regulated financial advice or an advisor if you require assistance. The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested.
0:00 Intro
1:30 Context
2:20 Pension Reminder
3:51 Example
7:26 Stress Test
8:57 The Upside
11:06 Key Considerations
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I have done an updated version of this video that assesses this strategy using historical stock market and mortgage data. Check it out: czcams.com/video/9MfCVkRvjQs/video.html
I chose option B...pay off mortgage by the time I'm 45 and work part time for 2 days a week for the next 20 years and enjoy my time while I'm younger. Seems better to me than trying to save up as much money as possible to theoretically enjoy.. when I'm too old to properly enjoy it. Once shelter, food and bills are covered....time is much more valuable than money in my opinion. I think too many people have this backwards. And you could of course factor in the chance of not even making it to old age! Big risk that no-one seems to take on board.
Yep, I used to be the same and was just focused on saving enough money for a decent retirement, then I met my partner who's dad was diagnosed with early onset Alzheimer's when he was 50 and had to give up work. It's completely changed my outlook now. I'm still making provisions for old age, but almost everyone I know my age (30's) have gone down the route of buying the biggest house they can possibly get with massive mortgages with the intention of downsizing when they're older and having a nice retirement. Instead we live in a small cheaper house that's perfectly adequate for our needs and have more disposable income to enjoy life with. You never know what is round the corner so enjoy life as much as you can before it's too late.
This. I’m grafting now (well, actually 4.5 days a week 🎉) at 42.
Worked hard, put money into pensions (DB) and mortgages all my life. Spent relatively low %, on things I value only. Had some lovely holidays etc, and a biking hobby. I’m still finding fun!
Zero credit debt aside from where tactical (0% credit stooze into 5% savers etc!) and no other debts. Good LTV, good rates (1.28% fixed) etc, helping no end.
Long story…. 3rd home (sold 2 en route) to be paid off by 52 (give or take 2), then my 30 years service gives me enough pension per year from 60. I’ll either sacrifice up to 1/3 of it and claim from 50, or work 2 days a week to maintain a cash flow until 60.
Aware life might deal me a bad one and if so I’ll replan, in the meanwhile I’m having enough fun and can see the winning line.
Life May deal me inheritances or things like a downsize could also fund that 50-60 gap. Or I’ll indulge in 50k of debt knowing my state pension at 68-75 can pay that off later, if I get that far. The state cash is just a bonus.
Daughter can have my house when the reaper comes. Whatever house that may be.
Finally, I think about the value of my time like the OP. Eg I wont drop to 3 days now, as the extra 1.5 days a week gives good income to keep the plan on track. But I WONT go to 5 days for a bit more cash which after tax etc isn’t worth it. Little things like earning 2 days worth at 52, when daughter might be uni inclined, would exempt me from uni fees too. So earning now, not then, seems a better approach.
I’m grateful for my DB pension and ability to know with sone confidence my income in retirement… and what that means if I get to 55, 75 or 105.
I’m grateful my approach gives me time with the daughter before she’s grown up too.
Lastly, I’ll never stop working. As in “putting in effort”. But all the effort will be things I enjoy doing, whatever that job may be. Might learn pottery! Be nice to never have to do work ‘for the money’.
@@MrTaffynoel Sounds like a life without regrets to me! GL!
This is the way
Great reading these comments. Modest home here with mortgage paid off by age 44. I figure that will then give me options. How much do I need and what do I want to do with the time. The vast majority of people make it to 50 (hopefully I get there) healthy so that should bank me 6 healthy years of less work. I plan for everything over 50 as bonus time (but am still paying into a pension and LISA)!
This is exactly my strategy, I max out pension contributions to save tax, have an interest only mortgage, and pay myself first into my ISA attempting to max that out each year where possible. My goal is to have the finances to retire at 52 if I want (48 now), currently on track. Friends think mine is a risky strategy and yet are happy to pay next to nothing into their pensions, have a mortgage into their retirement years and hoping to downsize to pay off their house. I prefer the financial independence model, be free from the grind and have the option to say F*@k you to my boss whenever I want. 47 Months and counting.
👍🏻
Good luck pal, good stuff
Labour will be in charge soon and tax pensions and stop the 25 per cent to fund the public wastrels
Your mortgage is interest only. What will you do about housing when you retire?
I retired at 52. If you are a higher rate income tax payer you should certainly put all of your income above the higher rate into your pension. You'll save the higher rate and likely only pay the lower rate when you collect if from your pension (and 25% of it will be tax free)
Fantastic video. I really appreciate how you explain these, going into the numbers, details and different scenarios. Honestly, really really helpful!
Thanks for the feedback. I’m glad you find it useful!
Your videos are life changing for me. I realised I needed a financial advisor, fortunately I got a good one and am now heading to retirement at 60. Love your YT channel please keep them coming. School kids should be made to watch these as part of their curriculum.
That's great to hear Scott. I'm glad you're confident in your plan.
Thanks, very interesting. I hate debt, but I had a lot of it, mortgage, and business loan, which was double my mortgage.. The day after the business was sold I walked into the branch office of the building society and asked how much to pay off the mortgage, I got my cheque book out and signed the cheque. The feeling of being debt free for the first time in my adult life was amazing, so for me being debt free was a real driving force. Retired soon after.
Not to mention that if you were really hard up, you could always borrow from your property in the future, which you wouldn't pay any tax on as it's a debt. Debt free is the way to go.
Great viewing James thank you. It’s always extremely thought provoking 👏🏻
Glad you found it useful, Neil!
That is probably the best piece of financial advice I have ever heard! Yet you're dishing it out completely free.
Thank you James😁👌
You're welcome. (ps it's not advice, just a demonstration of what worked for someone else!)
Wow, this is a game-changer, maybe even life-changing! I have been loyally following the mortgage repayment route and it would never have occurred to me that this was a viable option. But since watching this video and crunching a few numbers this strategy would allow us to ramp up my wife's pension and give us better options in retirement. We have a bit of time to go on our fixed rate but when it comes time to re-mortgage, this will be the way to go. Your content is fantastic. As we enter the last decade (hopefully) before we retire your videos have given us a much better understanding of what we can achieve, how it can be done and a plan to get there. In a very uncertain world this is a significant comfort. Thank you!
You’re welcome, best of luck with it.
@@JamesShack Hi, any chance you've created an online calculator since this video? Would be amazing!
Also, with very uncertain times ahead, and the chances of a stock market crash looking likely, pensions invested in such could actually lose, not gain. That'd be a HUGE issue.
@@carlos777uk Just as the video suggests, the pattern is that after a crash the economy comes back. These corpos now are so big that they're more than just national companies really, so it will take them a while to pivot but rest assured they have the money to adapt to whatever happens. So TL;DR, if a crash happens, just ride it out. Might take 5 years but your money will be back to where it was or go up. And if it doesn't... well, take solace in knowing that everyone else is screwed too and so a mass solution would have to be found and it will include you somehow too. It's not like there'll be anything you can do pre-emptively about it anyway unless you want to just sleep on a cash mattress out of fear.
yes but two issues to consider: Divorce ( hopefully won't happen but women change a LOT in their 50s) and if either of you are out of work for a long period, your debt will be higher as you stopped paying off the capital. I have been mortgage free since my 30s now in my early 50s and divorced. Despite that due to the amount I was able to save ( she saved 00) I had to pay her off but still mortgage free.
I prioritised my mortgage and am so glad I did! It is no good having a massive pension that you can't access until a certain age that keeps increasing, if you are in your 30s or 40s and something happens like you lose your job, health, spouse or encounter some other unforeseen hardship that leaves you unable to pay your mortgage. That did happen to me, and I'm glad I have an actual house rather than theoretical future money.
Great video thank you James. Happy that your advice is exactly how I was thinking and aligning my plans. Atb.
This is one of the most interesting videos in money I’ve watched on CZcams so far. Thanks!
The Jeremy Hunt comment killed me! The fun police are truly out in force!
Love your channel, James! Aiming for FI by 38, using a lot of strategies you discuss. Keep it up, mate!
Nice Andrew, 38 would be mega!
I’ve asked this question to so many advisors and never been satisfied with the answer, and so continued to overpay my mortgage each month. Thank you 🍺
I love videos like these which look at different strategies! - A couple of things to keep in mind: Taking the income part of the pensions triggers the Money Purchase Annual Allowance, which will limit future pension contribution tax reliefs if the person works beyond the age of paying the mortgage.
Therefore the person should already have a substantial pot of money already saved up in a pension (or other sources) or is banking on higher returns to meet retirement expenditure.
The other thing is the tax savings of keeping the Tax free cash portion in place is extremely beneficial as this is ultimately growing along with the pension. Once you incorporate the drawdown of the pension for each situation, the picture could look different.
Great points Zach. Reasons why it may be best to hold onto the mortgage for longer or find other means to pay it off like downsizing.
A very clear and balanced presentation thank you.
Absolutely brilliantly presented James!! Loved this one... I'm in a very similar position but at 55... £136k outstanding.... Now I really have to think! Oh you've made my head ache lol
There is a link in the description of the video 👍🏻
Best content creator when comes to financial planner. I am glad I have found your channel. Thanks
Hopefully I'll get to speak to you. I filled out the videoask form.
I've only just found your channel but I subbed straight away. I'm 43 and currently as of July this year managed to pay off all my unsecured personal debt.
I've got a workplace pension which is currently paying around 8% a month total into with Aviva using their standard pension investment fund.
We're just about to remortgage in March 2023 and have
Great video James. Hunt didn't freeze the LTA as you feared but has abolished it! Big risk with your strategy is any meddling with the 25% tax free cash- be great to see how that plays out in you stress tests !
Yes government cannot be trusted. Tax rates and rules should be contractually guaranteed.
@@rocketpig1914 couldn't agree more. Contract law seems to apply in every aspect of life except for when you sign up for a pension on the basis of drawdown at 50 then after you've committed to the deal the government changes the terms with zero rights for you to pull out
This is a great explanation of how to use your pension to your advantage. The one thing you didn't mention is the annual allowance. That may limit the contributions some people are able to make to their pension without losing the tax advantages. That's especially the case for your suggestion to move money from an ISA to a pension just before you retire - if it is a significant amount of money then you'll need to spread it out over several years.
You also need to consider the money purchase annual allowance. If you take money from your pension to pay off your mortgage before you retire then you will be limiting the contributions you are able to make after that quite severely.
Indeed. Good points to consider also.
I’ve recently stopped overpaying my mortgage and instead now do salary sacrifice with work pension so this video is welcome news! I also max out a S&S LISA every year and invest whatever I have left into a S&S ISA. I’ve even opened a savings account for the first time in years as the rates on it are the same as overpaying my mortgage was, so using that to build up some liquidity/emergency fund as that’s the area I’m lacking in at the moment. Not quite convinced enough yet to switch to interest only mortgage but I’m now giving it some thought
Its sounds like you have a lot of diversity which is no bad thing. Within a few years you may be financial secure enough to be confident not needing to repay the mortgage. When you know you could pay it off, via other means, if really needed.
Great video thanks. You just appeared recommended. I’m starting a new job, crazy pension cont from them. I have 2 precious pensions (but my main one took a hit the last 3 years and has come back to 100k ish now)
I max out a Lisa every year the thinking being I can take that as cash lump sum instead of taking that out of pension and drawing the bigger mi they payment from the pension. (I’ll have a 10y Lisa fund) I never thought about using pension to pay mortgage. I’m set at a specific contribution but that works out to take my from a higher rate to lower rate tax payer as I’m on the border and it’s salary sacrificed so I’m taxed 20% (plus NI) on the cash after my pension investment. Unless I was going to earn way more I think that’s the better thing to do (more money for me, less money for the tax man)
I’m the same age as this guy but never actively thought about pension until recently with the new one I’m getting. It’s just so frustrating that any additional income will be taxed at 40% which hardly makes it worth it, unless it’s exponentially over I guess. Anyway great video. Thanks
The star of this video is the pension, not the interest-only mortgage. We could have compared overpaying a repayment mortgage vs investing in a pension, and we would have ended up with a similar result.
You also didn't say which a mortgage company will ask is what happens if pass away. There are so many complications of having a mortgage using a pension as a tool. How do a mortgage company deal with a bereaved spouse left with that pension to live on and that full mortgage needing to be grabbed by that mortgage company. There are bigger issues and risks that mortgage companies look at and your advice dosnt look at the 'What if' scenario and does your pay back tool really think about this as not everyone go down the life insurance route to cover these situations!!
@@Ste6ve1 If I was giving you advice, yes I would consider all of these acute angles. As I said in the video multiple times I cannot speak to your individual circumstances and you needed to decide for yourself if this is appropriate for you.
Anyway, if you died with a DC pension your spouse would inherit it as a tax free lump sum, and because you have got tax relief paying into it, the spouse would likely be in a better position than having overpayed on the mortgage. Of course depending on market fluctuations.
@@JamesShack totally get what you are saying and love all your stuff but you are wrong in giving this as a pay back tool only through my experience. Main Stream Media and the government will not mention to people how bad pensions are doing. For every £100 My son and daughter are putting into their pensions every month it shows a 20% loss every month after and this is happening every year. A FA will tell you to leave it there so they won't stop paying through fear of the pot being emptied. Pensions are rubbish at the moment and I would say this is not going to get any better in a recession and a war that we are paying for, well the excuse I'm given so I'm not alone. What advice would you really give in this time of turmoil with wars and as they say a long recession. There is also the scenario of divorce for a couple that is, the risk is to high to never pay any of your mortgage off as the nightmare of pensions and divorce do not go well. I had a final salary pension I wanted transferring , I had to nearly beg a FA to take it on. Third time lucky but I had to make out that my health was not good to get this transferd. I divorced and guess what, the government get that final salary pension if you die being single, the reason they make it so hard to get at. I was desperate to pay my mortgage off as I was in shit street becoming single. Again, for anyone using a pension these days is a no go tool to paying it off. A mortgage company will also say, ok, you paid off your mortgage, what will you live on for 30 years after. You can't use a tool that has been losing money for three years and don't believe a FA that says you need to look at a five year investment before you get anything out of it, can you imagine using that as a tool in Dragons Den lol. Listened to alot of your advice and thank you but you need to look at where we are with markets. Some of your advices over time have been don't pay your mortgage off and then a month later why it is best to pay your mortgage off. Looking at lots of mortgage companies you will also find an interest only fixed mortgage is higher %rate than a repayment fixed term, mortgage companies are a rip off that only look at their profits. Any mortgage company that allows this as a tool is really breaking FCA rules because of any future circumstances that could arise.
You are a young guy James. Us older generation remember the interest only mortgage crisis, great idea at time and Financial Advisers said the same but they didn't come to the rescue of millions that had to go into rented accommodation because mortgage companies insisted on repayment mortgages after 10 years down the line and then it was to late as the affordability was way to high each month. The FSA now known as the FCA now we're to blame for not keeping an eye on lenders and FA,s more. I should know, I worked for AXA within the Agency Team in keeping an eye on financial advisers selling AXA pensions and Investments. GUYS, STAY AWAY FROM LARGE INTEREST ONLY MORTGAGES. I remember the lots of people coming unstuck. If you want to do one, put ya money in bank for a rainy day each month, that way you have that support at getting at it in bad times.
@@Ste6ve1 this is an excellent point Steve. I think the longer you live and pay attention to what is going on the economy and financial industry, more sceptical you become towards the ideas of using a debt (interest only mortgage) as a vehicle of building wealth. It all looks great on paper (and as they say paper will take anything) but as history showed us people often gets stung/burnt by the debt. As they say there is no such thing as free lunch and if start gambling with bank, putting your home at stake sure thing is you will lose your home sooner or later.
I have made a similar comment myself too under this video but showing the problem from a different angle: using your pension as a savings tool. I have been working in pensions for quite some time and I have seen how legislation has been changing for decades making pension less and less reliable tool for building wealth. Don't get me wrong..i have a private pension, i invest in it every month but wouldn't I start chucking all my savings at it in a vein hope of redirecting my money to pay off mortgage in 10-20-30 yrs? NO WAY!
When DC pensions were first introduced it was a great investment tool. Now, they've become so complex, with annuity rates and Lifetime Allowance being so low and going lower in the future I bet, it would be insane to use this as a wealth planning tool. But hey, what do I know..i only invest my own money and I don't have any IFA qualifications so i must be stupid ;)
Hi James. Great show, as always, and an interesting strategy. Two points: if the IO mortgage ends he would have to pay the balance there and then, would he not? So no additional savings. Also, the sums are a bit out. 189K/198K and the sub-1000 figures.
Great video, I initially had this strategy (31y/o, 20% salary sacrifice), but ultimately decided it was too early for me to adopt. I'm thinking I wouldn't be able to access this cash until at least 60y/o, and wouldn't be surprised if the 25% tax free lump sum and other benefits were scaled back too by the time I get there, and I would likely hit the £1.07M mark way too early.
Financial independence for me in the short term was knocking down some of my mortgage, and having ISA cash available as a fallback and ability to move around when needed. But always good to be ready to switch to this approach when I feel the time is right.
Yes that might be right. It’s often better to do a bit of both, and have investments spread across different tax wrappers, especially if your a long way off retirement and tax rules could change.
It would be great to revisit this topic with spiraling interest rates and the removal of the LTA
Yup, this has NOT aged well and if people did follow this advice, may find themselves in a very poor position indeed.
I was thinking the same thing but it might be a good idea to use this as a base and see what else can be done. @@Madmas27
Well they've held at 5.25% interest so it's still £80k better off. With the BoE saying they will cut next year if things go to plan then that is going to be back to 120k. The LTA could change year to year within the UK now as the tories or labour flip flop endlessly.
@@ivermektin6874 Agreed - spiraling interest rates are good for pensions too.
@@Madmas27are you able to briefly summarise why? I might be being dim
I went mortgage free by downsizing, but I used a chunk of pension when I retired to sort another outgoing cost. I covered my roof in solar panels and got a powerwall. My house energy bills are now neutral throughout a year. I also bought an EV, and as I charge at home 90% of the time the equivalent of a tank of petrol is about £8. Yes it takes a while to get pay back on these things, but the cost living crisis hasn’t ruined my retirement…… yet.
Great video as always James. Thank you.
I think even though the logical path is to pay into your pension, a lot of people want to be free of debt, and see that as their route to financial independence. Paying off that final payment and owning your home outright is such a massive goal for most people. A very emotional goal as well. And sometimes, all the logic in the world won’t overcome the wonderful feeling you get from that.
And I understand that. It’s a huge weight off your shoulders, of course it is. But I’m with you, I got 5 years left on my mortgage and could clear it now really if I wanted. But that money is going into my pension.
I put another £10k in this month, and before I could say “tax relief” it had been topped up to £12.5k. And through my self assessment the govt is sending me a cheque for another £2.5k in tax relief. So, in effect, I put £7.5k in and I get £12.5k added to my pension. It’s crazy good! And that’s before we even talk about investment growth.
Max that pension everyone, the tax relief is mental! It is literally free money!
Not to be underestimated a property is yours!
A pension is under the control of trustees and government meddling!
Though I agree, don’t think for a minute that the government couldn’t find ways to tax you for owning a house if they needed to. I could easily see variations of the council tax being produced if things start to get really bad in the economy over the next few years.
You’ve got this pension thing wrong… it’s not tax-free.
It’s tax deferral.
Excepting the small portion which can be extracted tax-free, you’ll pay full tax on income derived from your pension. Only later in life.
@@gregmcgarry1 Ok so you're only half right. You will pay tax when you take the income but you get to 1 invest the whole amount including the tax meaning that you get the interest on those funds in addition as income. Second your pensionable income is generally lower than your income during your working life meaning if you're a higher rate tax payer now you will pay that income tax at a lower rate when you take it later. Additionally a lot of companies will match your pension contributions meaning you can effectively increase your income tax free.
@@ThePirateParrot Higher rate of tax kicks in at €40k in my country. State pension is €12k. That means one only requires private retirement funding of 28k to be taxed at higher rate meaning the tax, as I said, is only deferred.
Outliers relating to some people’s situations including matched-funding by companies are just that, outliers, and cannot be applied across the board. So, not relevant for generic commentary on a complex subject matter such as pensions.
My point holds though, the client’s stated objectives were being debt-free and s/he was already taking risk with their investment exposure.
Placing their home in interest-only is diametrically opposed to their stated objective by putting the capital on ice and adding further risk by gambling whether they’ll generate the funds to paydown the mortgage later. This is a so-called ‘Endowment Mortgage’ supercharged, Vegas-style. Very high risk. And that client’s losing at the moment given sky-high interest rates in Brexit UK.
interesting video! I have a pension contribution plan and also a 100 percent global fund ISA and can hopefully pay my mortgage off within a year👌hopefully it serves me well at retirement!
Great content James..... Real food for thought!
Thanks for Watching..Write me To participate in our current investment offer’s📊🤙🏻.
I wish I could show this video to 25 year old me. I've reached 40, planned retirement at 65 but like everyone would love to retire 55-60. I consolidated old pensions into one, started a life time ISA although I only plan to contribute £200 a year at the moment but still unsure how to be financially independent. This is certainly some food for thought though which I'll look to explore in more depth 👍🤞
Love the channel and thanks for sharing! I have a question. I am an expat that lives in Denmark and I have a 0.5% 15 year fixed mortgage and 17 years left to pay it off. Do you think that this strategy would still be valid with such a low interest rate? If I refinance the mortgage and move to an interest only mortgage I can fix it at 5% for 30 years. I am 45… would love to hear your thoughts! Thanks again for all the great tips!
Interest video, is there any chance of doing one on last weeks autumn statement to give some tips to limit tax on savings and capital gains or how best to navigate them. Very relevant for probably most of your followers. Thanks
My 2p worth.
I paid into my mortgage before putting into pension. I had offset mortgage ( dont think they do them anymore), any savings were offset against mortgage. Every spare penny went on mortgage.
Mortgage finished at 40, then i put every single penny i could afford into pension .
Worked 2 days a week for the last 3 years .
Plan to retire at end of year at 56.
Not a huge pension, but enough so i can tick over and not work with 2 nice holidays a year.
Did i do the best thing financially, who knows, but its worked for me.
Hi James, thanks for this video. This is what we've been doing. Our mortgage is due when we retire so hoping it all works out as planned...I saw you said you can pay cash into the pension. I wasn't aware you could pay into cash as opposed to investing the funds, is this applicable to a work pension? This would be ideal for us to do closer to the time the mortgage is due and then take out the cash part only and leave the rest to grow. We have other savings/investments to live on until state pension starts.
This is the approach I’ve been taking. One issue people may have is access to interest only mortgages. Common for an income of £75k needed
Indeed, they're only available for < 60% LTV and higher incomes. Not for everyone.
Hi @James Shack - I live overseas with no relevant UK earnings, and so I would get no tax relief on pension contributions. How does your analysis look for a similar strategy using a general S&S account? I guess it is much more marginal so overpaying a mortgage looks a better option. Interested in your views, I love your clear analysis!
Had this in 1990, then in 2010 the govt changed NMPA retirement date of personal pensions in uk from 50 to 55, so had five years extra to pay before accessing lump sum.
thanks for the advice . really insightful
This video was brilliant. A follow up with latest figures would be interesting
Good vid . In hindsight I wish I'd done this but for some it is always a worry that there is some unforeseen pension industry debacle and / or a future gov. will change things (again) so I would say Repayment mort over as long as poss for main house plus salary sacrifice for max pension contributions is a good balance but as you say everyone a bit different
I did this. It’s saved us over £100,000 in interest alone over the next 10 years. Also it’s removed so much stress and pressure in an unknowable climate it totally made sense. So instead of trying to find £1400 a month before the mortgage rates went up, more like £1850 a month now for 11 years I now know I can stay in bed….. I have gone back to college, no more overdrafts, no more credit card balances and no more juggling finances and arguments at home. It is totally worth doing if you can. It’s a wonderful feeling. I combined all my ensign pots into a single SIPP then took the max tax free lump sum etc etc and just paid it all off. Bliss.
Well done
This is an absolutely genius strategy. As a 30 y/o who does earn >£100k but saddled with a 30 year mortgage, this completely transforms my thinking on my mortgage - especially with the changes in the LTA.
However I’m generally quite risk averse and thus appreciate the cash flow, so may look to slightly overpay on an interest-only mortgage , not quite the perfect hybrid approach…
Great work!!
There's a risk the cash lump sum won't exist when you retire.
Awesome strategy and video, thank you 🤙
Great video. Liked and subscribed!
I didn't know that you could pay interest only during so long. I thought there was a cap on 4 years or so...
Thanks for Watching..Write me To participate in our current investment offer’s📊🤙🏻.
Very nice. As a mortgage broker (only mortgages) the only issue I can see is the eligibility for the interest only mortgage
Hi James, really enjoyed this alternative view and insight. Probably not one for me as the lifetime allowance is a blocker. Biggest challenge with this approach is being comfortable with the debt as often a mortgage is a millstone around our necks. Would be interested to know approaches for people that will exceed the lifetime allowance - think this will become a problem more people will experience given the high rates of inflation.
I did a video on it here. Hopefully it's useful : czcams.com/video/hqfsfpK8WZU/video.html
@@JamesShack top man, thanks
Hybrid approach: Reduce pension contributions if getting close to LTA and then split between ISA and repayment mortgage.
Don't get too worried about the LTA though, and certainly don't start the hybrid pivot until you really are close, like within 100k close.
There is no need to worry about the LTA limit as now as good as abolished.
Hey James, Great videos. Just wondering if you have any plans to do a video on pensions for those who are Self-Employed? Thank you
Ive had many discussions with colleagues about why pay off mortgage earlier with money that could be getting 40% tax relief plus growth. Many are very cautious though despite me pointing out that grabbing 40% tax relief could be regarded as the cautious approach. I woke up to this later than i shoudl but it did pay off for me.
Hey James. New viewer here. Going through your back catalogue of videos and learning so much. Thank you for your balanced, unbias expertise.
I, like a sizable priportion in the UK, pay into the NHS Pension scheme. Have you ever done a video on this pension scheme? Does it differ to other schemes? My understanding is that if you draw out any funds before retirement age, currently 67, you incur significant penalties and so would not be a valid strategy here. Any information is greatly appreciated :)
The NHS pension scheme is a complicated one and split into two main parts. I'm not an expert on these schemes, but i believe you can get the option of a tax free lump sum but it may reduce the ongoing income you receive.
So you need to do a calculation to work out if it's worth the cost.
@@JamesShack Thanks for the response mate.
Great videos. Is there an online calculator to work out how to take full advantage of 40% pension tax relief? I pay into a private pension and pay some 40% tax, but claiming it back from HMRC Is confusing.
Thank you for making this video, I've been banging this drum for years and people look at me like I am crazy.
You are also the first person finance expert I've seen talk about this strategy in my 20 years if reading and watching personal finance.
It seems that the 25% tax free allowance was meant for this purpose.
James been following you for over a year now. Wish you could be my personal financial adviser
Really interesting video. I think the number of assumptions on these calculations should make people extremely cautious, but hey, it already assumed the test case was comfortable with high risk investments.
I've always been dismissive of interest only mortgages, but this made me think of them in a new way.
This is amazing, indidnt even consider this as an approach. At what stage would it be wise to seek out an IFA?
Morning, would it be possible for an update now that the LTA has been abolished? Very grateful for all your content.
Option C.
Interest only mortgage with offset account and an overpayment each month of 25% of the mortgage initial monthly payment, but fixed for the term of the morgage. E.g. Mortgage repayment = £100, so you pay a fixed amount of £125.
Add the balance of what would have been the repayment mortgage monthly repayment into the offset account each month increase the amount of offset and Prime pay back.
It would be interesting to see the number crunch on that scenario.
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Hello. Really interesting video. Thanks. Is there any way that I can check if this strategy would work in my own circumstances?
Thank you for your generous knowledge sharing
I have an interest only mortgage & have been putting the money I save on the repayment mortgage into my private pension, then the tax man tops it up by 25%, then when there was about £125k in the pension I set up a SSAS & transferred it into that tax free, the SSAS then purchased a small industrial unit that rents out at £1000 pcm, this £1000 is tax free if left in the SSAS. Now the SSAS is saving up for the next unit but can also borrow using the equity in the first unit or borrow max 50% just to buy the next. You can transfer any existing pensions you have into the SSAS also, only problem that I see is later if you need the money out you can still only get the 25% tax free. Also the SSAS cost about £1500 per annum to run by a third party, best thing is anything in the SSAS is inheritance tax free for your kids or wife etc.
I switched an ISA mortgage plan to a SIPP way too late, if I had done it that way from the start I could most likely have paid the mortgage just from the tax free lump sum on the SIPP for the same monthly contribution. But beware if you do need to use the taxable portion to pay mortgage, need to be managing that properly before the mortgage is due to not negate the tax advantage of the pension with higher rate tax on pension payments. Also with the lifetime allowance currently frozen to 2028 and who knows when it will actually be increased it's highly likely that anyone starting on this route now is going to run foul of the limit and have pension income implications as a result.
This is the basic strategy that we (my wife and I) adopted 25 years ago. It works. I retired at age 48.
Would have been better off keeping the interest free mortgage
Retire at 48! So what are you doing for the next 40 years?
@@polomint46 having a life?
How did you use this strategy when you can't claim a pension before 55 years old?
@@Huwberts_Emporium I had savings too. I didn't say it was easy but it is possible.
Very interesting. Thanks for sharing
So I've worked for three different UK-based companies from medium to very large, the defined contribution pension I've had with then over the first 15 years of my career has grown at LESS THAN 1% (that accounts for money I've invested each month and looks at the underlying increase in value of the shares / assets)
Stocks and shares in the open market might be 7%+ but I've not seen anything like that. So that's the only area that I can fault your analysis, the rest of it hangs together very well.
Good clear graphics 😀.
I currently salary sacrifice 8%, with a 11% employer match. Also got a very short term mortgage so home on track to be paid off by the time I'm 42. Waiting until I'm 58, if not higher to pay off my house is too long for me.
I’m in a similar situation to your client, both mortgage and having three different “unloved” pensions. Enquiry on your way 👍
Thanks James for another interesting video. I do see one issue with this - that is if the pension investments don't achieve the intended returns or has large drawdown just before you need to pay it off. My current strategy is instead to take back substantial overpayments in time and put in a savings account instead,using the interest to add to the effective overpayment. This is because my horizon for paying it off is just 4 years,a timeline which is too short for investment.
Hi David. If you can access the pension in 4 years too, you could even put the cash into a pension, invest in something v low risk, or even cash, then take it out of the pension in 4 years. You’d then still get all the benefits of tax relief but without the risk.
Although you might trigger the MPAA of you need to withdraw the taxable part.
Not advise, just a potential avenue.
@@JamesShack Thank you,that is also an interesting idea. These are not either/or strategies - it is quite possible to do both - but currently as a risk free way of paying off my mortgage, using a savings account seems like a no brainer. I already have 10% of my II SIPP in Capital Gearing so adding more to that would be a possibility. My current thinking is against using the 25% for paying off the mortgage because once the mortgage is paid off I intend to travel/rent for several years (i.e. effectively be 'homeless') so at that point I could max out my SIPP contributions that way over several years as well as fund that lifestyle which should achieve a larger lump sum (because it will have more years to grow) that could be used to purchase a property later on outside the UK. I am paying substantial sums into my SIPP and workplace pension too.
What does it cost to discuss the same situation as your friend with a financial consultant? Also are there any ramifications for the consultant if the advise goes Pete tong
This system is essentially an endowment mortgage. Which had catastrophic effect on so many peoples lives. Definitely an idea to steer clear of
I live in Australia, and so does my mum. My mum just finished paying off her mortgage after 44 years at the age of 70.
Great video James. Yet again. I have already paid off my mortgage but am now thinking it makes sense to take out a new mortgage and invest that in a pension. Can I do that even if I’m maxing out pension contributions from work? (40k a year).
You’ll be capped at £40k but you may be able to make use of unused allowances from the last 3 tax years.
Can you do a video explaining the correlation between interest rates & pension returns please. You briefly mentioned it in this video higher rates negatively affecting pensions but didn’t explain why. Good video again.
I cover that here : czcams.com/video/RM9iPrRWGi0/video.html
@@JamesShack Amazing thanks. 🙂
There were pension mortgages sold 30 years ago , like endowments as long as payments are kept up and investments do ok then always a good option. If difficult times come and people just pay the interest only part Not so good ..
In the right hands with investments that don’t fall and enough life insurance cover , well then a good idea . Pay your money take your chance
As a fellow adviser I wanted to rip this video apart but I’m pleased to say I can’t. ❤ pensions. Great strategy for some people.
Great Video once again, very informative. Did I hear correctly you can use your ISA money ( be it stocks & shares ISA) to pay into your pension, in my case my SIPP. wasn't sure if that was allowed as ' relevant earnings'.
It’s not relevant earnings. But you could max salary sacrifice and then live off your ISAs. Or use them to make one off conts so long as you have the relevant earnings to cover it.
Some challenges to consider:
1) What happens if you die prior to paying off. Leaving partner with an unpaid mortgage.
2) What happens if you loose your job or downsize your job at 55 when you had intended to have paid off - You then cannot afford to put as much in pension.
Also be great to share the model sheet for others to play around with, I love this concept too.
If you die before the age of 75 your spouse, or whoever you chose, inherits your pension as a tax free lump sum. So they would be in a better position then had you paid off the mortgage.
A loss of income at any points affects each scenario in the same way. After 55 both scenarios would simply have less going into the pension. If you experienced a loss of income prior to 55 you are arguably in a better position with the pension because you can stop contributing whenever you want. But with a mortgage you can’t stop paying it.
I was thinking of making a sheet but modifying it from one that I understand to one that anyone could understand was going to take longer than I had!
Yes, assumes good health and employment at least at the same levels. Shit happens.
Did you stress test the returns? For example how do you model a 20% sell off and then average returns after that? Great video by the way! Keep up the good work!
That won't affect it much, unless the 20% crash is right before retirement but you could always delay.
@@JamesShack Oh yeah, just the minor detail of delaying your long awaited retirement and all the implications this has. Great idea.
Stress testing at the worst times is the right way to go - ask how they would react and feel even it is feels unlikely or bad luck now. Even 20% sell off can be conservative depending on where the assets are invested.
Other downsides:
- you’ve said it already but in a slightly different way - with the LTA you will have less to save in your pension for your actual retirement needs.
- this strategy will also need to be reviewed and ensure that the client does not get a false sense of security for their retirement. They still need to save for it!
@@cubeh8331 I meant delay paying off the mortgage, you would not necessarily have to delay retirement so long as you have saved independently for that - which is what this plan suggests.
Great video James.
Thanks Mark!
Fantastic advice, does the same theory apply to someone who is self employed with a private pension only?
Hi James
Wondering what your thoughts on this are now the lifetime allowance is being abolished?
Also I’m a Scottish resident and will soon have earnings in the 45% tax bracket so this is starting to look very appealing
Interesting concept that i will look into further.only thing that comes to mind is on many mortgages dont you have to pay a fee for paying of mortgage outside of the normal payments. So for instance when you draw down at 57 would there be large fees to pay of mortgage in a non standard monthly amount
I suggest the answer to your client’s Q “why don’t more people do this?” is that the Endowment Mortgage scandal put a lot of individuals & lenders off this sort of strategy. Nothing fundamentally wrong with Endowment Mortgages; but they were miss-sold to people who didn’t understand the risks.
This has the same objective as an Endowment mortgage, but is executed entirely differently. Total control, transparency and the benefits of tax relief.
This strategy uses your home as collateral (a mortgage is a form of an asset-backed loan) to arbitrate the difference between the interest-only interest rate (e.g. 4%) vs market index returns (e.g. 6-8%) inside a pension tax wrapper (utilising the 25% lump sum). Fine in theory, just a problem when your loan term comes to an end and the market crashes (e.g. if it ended during the 50%+ crash during 2020).
This is similar to the BTL strategy, where rental yields of 6-8% is similar to the above - on one hand it's possibly taxable, but on the other hand you can sell and move virtually at any time instead of waiting to 57+.
The endowment mortgage boom in the 1990s didn't end well, with a misselling issue caused by investments falling short.
I did something similar with an investment property here in Ireland. Interest only, profits into pension thus reducing capital gains
Did putting the rental profits into your pension mean you didn’t pay tax on the rental profits?
@@anthonymclaren1332 no
Food for thought! I've been overpaying on the mortgage and there's no way I'm remortgaging any time soon as I have 3.5 years left at 1.8%. But maybe those over payments could be invested into a pension instead 🤔
Spot on!
This is my strategy too - IO mortgage, and maxing out the pension contributions.
A couple of thoughts:
- availability of IO mortgages is quite limited, and particularly challenging if you are looking to extend the term into later life
- there are other costs (mortgage application fees etc) to add
- proximity to 55 / pension access age. There's a lot of uncertainty around how pensions tax rules might shift over the next years, and clearly it's a challenge if you are trying to predict many years into the future (eg change to LTA, tax relief etc)
- cash flexibility. It's generally easier to vary your pension contribution in time of financial challenge, than it would be to reduce a mortgage payment. This means that an IO approach would give more flexibility than a repayment one
- as you note, the marginal tax rates on relief and when you access the pension make a huge impact. Clearly HR tax, or marginal around the £100-£125k income level, can give huge benefit, presuming you aim to be a BR taxpayer in retirement.
Thanks Kevin, your points are valid.
- IO mortgages normally need £100k household income.
- The risk is that pension rules change (again) which is why doing a bit of both doesn't hurt.
- Agreed on the cashflow point.
- 60% tax relief and 45% (for £125k+ now) is a much bigger benefit.
Great video. My only observation is people put too much focus on the LTA - this is a 'first world' problem.😂 Hopefully, most of the £1m will be made up of capital gains - not real money so paying tax should not be an issue. Just focus on maximising your pension. It is also a great way to transfer wealth to your children. Also, repayment mortgages are generally 'front loaded' - meaning the early years are focused on paying the interest as opposed to the capital.
Indeed, there are ways you can mange the LTA anyway. And for those receiving >45% tax relief it can still be a viable option.
Interest only mortages are extremely hard to get these days ( thanks FCA always looking out for the consumer in ways they don't want)
The FCA don't make money out of you. The Financial Advisers, fund managers and pension companies are the ones that do even when you lose money, they always get their fees. The FCA require every financial adviser/company that is part of their organisation to look at every scenario going forward and how wrong it can go. What happens in job loss, death, health etc situations going down the line. Your money is stuck in that pension till say 57 and you are 45-50 years of age. You are in shit street for those 7 years and you havnt paid a penny off that mortgage. The FCA are there to protect us hopefully on false promises. Always remember the government will not let you get out of any sticky situation until 55-57 and there is threats of raising it even higher to get your pension money out early. James is wrong with this one, he is not looking at every scenario of your money being stuck. It is a fantastic plan if everything goes 100% I agree with that but there is a real world out there where changes of circumstances are high to even thinking of a risk like this.
Yep, imagine becoming unemployable aged 50 and having a massive pension pot and little to no income. If you are a basic rate tax payer and with interest rates rising it’s making more and more sense to pay off the mortgage. All scenarios need to be weighed up.
@@danteburritar2822yeah pay. The mortgage off and then buy a property, and if you fall on hard times after 50 then sell it, but at least you have no mortgage.
I think this is a good option, my thoughts - interest rate mortgages are difficult to get for first time buyers unless you have assets (eg stocks) which are greater than the mortgage amount. Another option and the option I am looking at is to extend your mortgage term to the max length eg 40yrs rather than 25yrs and use the excess money to divert money into your pension which can be later used to pay off the mortgage.
If you're a FTB you probably want to be able to access the money for up-sizing so an ISA would make more sense. This is more for your final home.
Yes, that would be doing a bit of both.
@@drebin3806 Indeed.
Depends on interest rate rental from my rental house which own outright but added to mortgage on house live in it covers my whole mortgage and no tax on interest either like a rental would
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Makes sense although assumes a smooth profile of market growth. In reality there will be ups and downs. Need a Monte Carlo simulation to really stress test probability of success.
Hi James.. Insightful and great video.. It tends to make you think out of the box and provide a intriguing perspective to maximize your return.. Have a question though about how tax is calculated.
The pension pot size is £376519. £94k is tax free, so remaining amount in the pot is £282389.25 .. The tax on this amount comes out to be £112,035.16.. In the video you mentioned it is £37k.. So little confused how £37k is derived as tax ?
£94k tax free. So we need another £56 k to clear the mortgage. £56,000/0.6 (the tax rate) = £93k or in other words, £93k taxed at 40% (£37k tax) leaves you with £56k .
Would an alternative strategy, for someone younger (I'm 27) with a mortgage and a S&S LISA, to move to an interest only mortgage. Then, with the money saved from not having to repay the principle on the mortgage, investing that in the LISA, benefitting from the 25% govt bonus plus any gains from investments, repaying the mortgage in full when the LISA matures at age 60? Would this avoid the tax issues with drawing down a large lump sum from the pension pot to pay off the mortgage?
I guess one thing to consider is in pension strategy one would exhaust the 25% lump sum in paying the mortgage. The best strategy I would say would be repayment with a longer mortgage term and let the surplus go into pension.
Exactly what i did 👍 retired and mortgage free now 😊
Good insight...thank you
In your comparison where withdrawing from pension looks favourable to pay off mortgage - is it right that you included the tax free element of the pension withdrawal there because that benefit would also be available to you when you retire even if you didn't use pension to pay off mortgage and if you did do that you'd then have to pay more tax on your pension withdrawals during retirement - so in short it makes that option look better than it should do?
Great video James
Thank you!