Pension + Loan or ARF + Cash

D

Dave Byrne

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I'm >50 and have a pension with a previous employer. I'm in need of a cash sum and I'm trying to figure out would it be better to borrow the money or to convert the pension to cash + an ARF. So I'd love an equation which proved out the better option, i.e. the cost of borrowing the money saved by taking the cash out of the pension V the appreciation of the pension if I don't touch it. There is also the likelihood that if I borrow the money, there will be pension contributions foregone over the loan paydown period.

Am I making sense?
 
OK, so I went ahead and borrowed the money (a small mortgage) and didn't touch the pension. I guess I just had this sense that cashing in your pension to release funds was fundamentally a bad idea and a mortgage is the cheapest money you can borrow.

So last week I got my accountant to draft my 2024 tax returns (I'm PAYE but have rental income) and wondered how I was going to put aside another 12k this year to pay my tax bill in Oct (with my spanking new mortgage in place). Then my idea from above came back to nag me so I ran the numbers (hopefully correctly).

The 25% cash release could pay off my small mortgage as well as topping up / maximizing my pension contributions for 2024. The lack of the mortgage would also allow me to contribute more to my pension going forward. It worked out that I would ultimately regain the (25%) pension value lost with my increased contributions (a very small difference either way) by the time I hit 60, but I would also reduce my 2024 tax bill as well as leaving me with a little more disposable income.

So, if I'm right, transferring the pension to an ARF + cash would leave me c.32k to the good. My aim is to retire at 60 so I'm not too concerned about the need to start drawing down the ARF from that age.

Cashing in now means I won't have the option to do so at a later date, if say, I lost my job, but my thinking is, paying off the mortgage insulates me somewhat from such a financial shock. Or alternatively, I won't have the option to cash in should an investment opportunity come my way but I'm relatively risk adverse and such opportunities don't come knocking thus far.

So what am I asking
- can anyone see any flaws in my thinking?
- should and ARF perform as well as a (ex-employee) pension?
 
Dave Byrne said:
So last week I got my accountant to draft my 2024 tax returns (I'm PAYE but have rental income) and wondered how I was going to put aside another 12k this year to pay my tax bill in Oct (with my spanking new mortgage in place).
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You borrowed (to pay your tax bill?) last year and you're in the same position again of having to borrow or tap into your pension to pay your tax bill later this year? This doesn't sound sustainable. @Brendan Burgess's advice above seems appropriate:
Brendan Burgess said:
Sell the rental.
Pay off your mortgages and loans.
Max your pension contributions every year from now until you retire.
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Is the rental property isn't even covering the tax liabilities then it's a bad investment. Even if it is it may still be an inappropriate investment for your needs/situation.

But it seems to be a common trait here for some people to try to justify rental property investment and hang onto the property for dear life even when it's obviously not an appropriate investment for their needs.
 
Thanks for the replies

Some clarifications, I didn't borrow to pay my tax bill, I took out a small mortgage to help renovate my house. I've been paying tax on my rental property for 15 years. The difference this year is that I've now got a mortgage & a tax bill and was thinking of cashing in the pension to pay off the mortgage, increase my pension contributions (to the maximum), reduce my current tax bill and leave me with a little more disposable income.

As a stand alone investment, the rental property is a positive investment factoring in rent less tax plus capital appreciation so I don't have an appetite to sell that.
 
Dave Byrne said:
As a stand alone investment, the rental property is a positive investment factoring in rent less tax plus capital appreciation so I don't have an appetite to sell that.
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Between your home and this investment property you seem to be very concentrated in one asset class and geographic region which is an arguably unnecessarily risky investment strategy. I don't know if you have other investments apart from your pension but if you had then presumably you could liquidate some of them to pay your tax bill. Seems to me that holding an investment property may not be the most appropriate investment for your specific situation and needs.
 
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