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Temporarily opting out of pension?

Discussion in 'Personal' started by defenceagainstthedarkarts, Jan 13, 2020.

  1. defenceagainstthedarkarts

    defenceagainstthedarkarts Occasional commenter

    I know a few on here are pretty clever with these sorts of things.

    Here is my situation. I own a property (outright) and there is a tenant in there. I’ve tried to sell this house before with minimal interest - I love it but it’s a niche taste. However, it’s never short of people wanting to rent it from me.

    it isn't commutable from current workplace.

    I want to buy and get a mortgage but obviously I need to raise a deposit as quickly as possible, so I’m considering opting out of my pension for twelve months then opting back in. Is this doable?
    Thanks!
     
  2. needabreak

    needabreak Star commenter

    Can't you mortgage the rented property maybe interest only to raise some capital?
     
    jubilee likes this.
  3. defenceagainstthedarkarts

    defenceagainstthedarkarts Occasional commenter

    Well, I’m reluctant to do so as that would add various stipulations as to who I can rent the property to.
     
  4. phatsals

    phatsals Established commenter

    Yes it is but think carefully. For example you will lose the tax relief, you may not be saving as much as you think. In terms of borrowing against the house, it would raise issues for a second mortgage against a new property but you could at 'buy to let' mortgages.

    In terms of TP, There is nothing at all to stop you opting out then back again when it suits you.
     
    emerald52 likes this.
  5. jubilee

    jubilee Star commenter

    needabreak is right. Take out a Buy-to-let mortgage on the rental property. Your salary will have little to nothing to do with it. They will use the rental income as a guide on the maximum to lend you. You could just borrow what you need for a deposit in a private mortgage (based on your salary). That residential mortgage should have a lower interest rate than the buy-to-ket one.
    Let's say that you pay £100 per month in TPS deductions. By opting out of the pension you will not be £100 better off in take home pay. The £100 is free of tax when paid into the pension. You will pay tax at your highest rate (20% or 40%) if you opt out, leaving £80 or £60.
    I suspect that you would live to regret taking a year out of your pension. You would lose annual pension for every year of your TPS retirement.
     
  6. Jesmond12

    Jesmond12 Star commenter

    As someone who did that back in 2004 all I will say is DONT UNDER ANY CIRCUMSTANCES DO IT.

    I was having financial problems and needed as much income as possible.

    Now that I am retired I am having to do supply work to cover my outgoings.
     
    border_walker and MAGAorMIGA like this.
  7. jubilee

    jubilee Star commenter

    Bear in mind that buying a second property now involves paying 3%extra in Stamp Duty. That was brought in just a few years ago
     
    needabreak likes this.
  8. WB

    WB Occasional commenter

    Once you've had the extra money you might find it hard to take the cut in monthly income when you go back to paying in
    There'll always be a reason why 'a few more months' without paying in is a good idea. You may never start paying in again.
     
    border_walker and Jesmond12 like this.
  9. defenceagainstthedarkarts

    defenceagainstthedarkarts Occasional commenter

    Well, I think I would. But neither of my parents got to draw their pensions much or at all in one case. It just makes sense to try to raise the money now.
     
  10. oldsomeman

    oldsomeman Star commenter

    I once opted out for a year due to misselling practises of an insurance company.
    As it was proved their fault for supplying misinformation they had to pay back in for the year I lost of TP.
    That cost was some £100,000 as I saw the figures. No, I didn't know why it cost so much, but that was what they had to pay the TP.
    Please do not opt-out and the growth return is possibly far better than you might get elsewhere and you lose a lot opting out.
     
    emerald52 likes this.
  11. needabreak

    needabreak Star commenter

    I'm not sure about the stipulations as the property is already rented and you own it so you are using your equity to liquidate some of your assets, the lender would lend for example to repair or refurbish the property, all they care about is that the value when sold will cover their lending and that you can make the payments, it's certainly preferable to reducing your pension contribution as others have said and don't forget we are living longer, often longer than our parents did with very different lifestyles. That said, this is not financial advice, it might be useful to seek independent financial advice.
     
    mothorchid likes this.
  12. diddydave

    diddydave Established commenter

    I will leave the should you/shouldn't you question to one side until later...

    Yes you can...but you may not 'save' that much, certainly deposits on houses around here would need a lot!

    How much will you gain...depending on your salary the pension contribution is between 7.4% and 11.7%
    https://www.teacherspensions.co.uk/.../contributions/calculating-contributions.aspx

    The 'in-your-pocket gain' will be less as the tax authorities will take 20%-40% of the contribution that you get back by opting out.

    If you earn:
    £25,000 your contribution is 7.4% but as it's taxed you'd get about 5.9% or £1180 in a year.
    £30,000 your contribution is 8.6% but as it's taxed you'd get about 6.9% or £2064 in a year.
    £35,000 your contribution is 8.6% but as it's taxed you'd get about 6.9% or £2408 in a year.
    £40,000 your contribution is 9.6% but as it's taxed you'd get about 7.7% or £3072 in a year.
    £45,000 your contribution is 10.2% but as it's taxed you'd get about 8.2% or £3672 in a year.
    £50,000 your contribution is 10.2% but as it's taxed you'd get about 6.1% or £3060 in a year.
    £55,000 your contribution is 10.2% but as it's taxed you'd get about 6.1% or £3366 in a year.
    £60,000 your contribution is 11.3% but as it's taxed you'd get about 6.8% or £4068 in a year.
    £65,000 your contribution is 11.3% but as it's taxed you'd get about 6.8% or £4407 in a year.
    £70,000 your contribution is 11.3% but as it's taxed you'd get about 6.8% or £4746 in a year.

    For ease of comparison, if you earn £57,000 then by taking a year out of the pension your pension has lost out on £1000 per year...which next year would have been worth £1016, the year after £1033...in 5 years worth £1082....in 10 years worth £1172...in 20 years worth £1373...in 25 years worth £1487...(these are in today's money as they will also be adjusted for inflation)

    Someone earning £55k would get a one-off amount of £3366 but would lose a lifetime of the amounts above from their pension. So whilst opting out for a pay boost may seem tempting it's not something I would contemplate advising anyone to do.

    (I do advise everyone to look seriously at their pension as there can be circumstances where taking just one month out can lead to a higher pension but that's a different conversation)
     
    needabreak, letap and emerald52 like this.
  13. letap

    letap Occasional commenter

    Adding to Diddydave's excellent post above - each £1000 per pension is in reality valued at a multiple of 25 - thus £25000 for a £1000 a year pension.
     
  14. jubilee

    jubilee Star commenter

    Also bear in mind that pension payments keep you longer on 20% tax. You might earn enough taxable pay to start paying 40% tax if you opt out of the TPS. For sone, that could also mean losing entitlement to child benefit (what used to be called Family Allowance)/
    The pension has too much to recommend it to be rejected lightly
     
    needabreak and border_walker like this.
  15. oldsomeman

    oldsomeman Star commenter

    plus if you suffer death in service as a TP holder your partner is entitlesdto some of your pension.
     
  16. mothorchid

    mothorchid Star commenter

    I'm not sure why you say a BTL mortgage would not allow you to rent to certain people. Maybe the landlord insurance might say that, but then you just change to a different insurer, or slightly up the premiums if you want to rent to students, OAPs or those on benefits.
    I would be very uneasy myself about opting out of TPS.
     

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