Standard Life have said that taking out a low interest loan to fund a pension payment could provide a client with free income, and believe that a combination of higher-rate relief, tax free cash and pension fund withdrawal could mean that people could pay off the debt while increasing their retirement funds.
They believe that a £78,000 loan which is paid into a pension would be increased to £100,000 with basic tax relief, and additional higher rate tax relief of 18% and tax free cash of 25% added together would give a £43,000 withdrawal, reducing the borrowing from £78,000 to £35,000.
Standard Life have also said that maximum Government Actuary Department drawdown limits could be used to pay off the loan, in this example, within 7 to 8 years, leaving a pension pot of £40,000 to £50,000 virtually for free.
Our view
This is looming on very dangerous ground. Borrowing money to fund a pension, whilst the numbers work if you pay on time, human nature is that people use the funds for something else and then end up paying much more in debt interest.
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