Anyone using pension small pots to pay for Uni?

[autumnhasbroken]

I am 55 and youngest is heading to uni next year. I have read the rules about the pension small pots - if I am correct you can have up to 3 pots up to £10K, and withdraw them without impacting on your lifetime allowance etc, as long as you withdraw all within a 12 month period.

At tax relief of 25%, than any money you contribute would automatically benefit from a 25% uplift. Of course it would increase income in the year it is drawn and I can see if you were in a situation where you were close to a tax threshold it wouldn't make sense, but otherwise seems a no brainer.

My plan is to contribute 3 x 5K over this year to 3 x separate SIPPs. Take out 1 in September of next year (possibly topping up to as close to 10K as poss just before), then the next 2 the August of year after - different tax year but within 12 months to spread out the additional income.

Are there any flaws in this - am I missing something?

I don’t intend on touching any pension pota for uni - they can take loans as they only pay a small amount back when they are work anyway and a lot of peoples are written off after so many years as so many people don’t reach the thresholds.
my eldest wants to do an apprenticeship anyway but if the younger 2 wanted uni no way would I be doing this -
not with the cost of living. I don’t want to be a poor pensioner!

Thanks - this would be money I had earmarked for uni and not my "normal" pensions if you like. I agree it is not sensible to dip into pensions - it is more using this vehicle due to the tax advantage and won't impact my other pension conributions.

If there are no HMRC provisions to prevent this sort of thing as abuse there should be. Tax relief on pensions is there to incentivise provision for one's old age. Not as a boost to gifts for kids.

How do you propose the cash in the SIPPs be invested?

What can go up might also go down!!

I mean it’s all personal choice isn’t it?

im hoping all mine want to do an apprenticeship in some ways. Uni is so expenses and some of the courses they are there so few hours aswell - I am sure some courses could be done over 2 years and not 3 (not all of them but a large amount certainly could!)

It's a bit of an effort I think you'd end up about £1500 in profit if you put 30k in. Although you'd need to make sure you didn't go over.

net contrib - 24000
tax relief - 6000
25% tax free - 7500
Remaining taxed at 20% - 18000
Total withdrawal after tax - 25500

No such thing as lifetime allowance now.

Also I don't know what the rules are on lump sum recycling but be careful you don't breach those.

I very much have encouraged DD not to go to uni but unfortunately her chosen path requires a 4 year degree. I want to support her as much as possible and it is always a difficult balance between our needs and our kids, but the idea of 80K plus debt hanging over her is horrible. I have some savings already but have prioritised paying for older kids to date and got them through with no loans.

I know the repayment is low, but the debt grows substantially to begin with and to me that tips the balance in that favour vs other things.

It seems a good idea albeit a lot of work setting it all up. I hope your DC is appreciative of your efforts.

I am likely to be a higher rate tax payer this year, and lower next year. Which I think makes a difference too - can adjust this to some extent as I have own business plus PAYE income.

I don't think the small pots rules would incur any recycling issues, but that is worth checking out thanks.

She will be eventually I am sure. V proud of my eldest who is now independent financially at the age of 21!

They don’t only pay a small amount back. My loan totalled £47,000 when I left. Based on the amounts I currently pay back when my loan is cancelled I will have actually paid £76,000 back. Of course it appears to need clearing because it’s growing in interest faster than I can pay it (currently stands at £67,000 after 10 years of repayments.

I will have paid way more than I borrowed even as someone who doesn’t clear it.

Probably worth the effort then! Wish I were over 55.

@autumnhasbroken you've fallen into a trap if you let '£80k debt' bother you.

Unlike proper debt it's not a situation where a bit of misfortune and a couple of misjusgements can have have the whole sum suddenly due an payable with bailiffs at the door.

For reasons I can never follow instead of just setting up an honest graduate tax this country has people go through a convoluted process with loans that are then 'repaid' by what amounts to a graduate tax.

Just accept she'll pay n% of earnings over £y until the loan is paid off. Or more likely written off.

What's the career with a four yar degree? Teaching? Nursing?

Neither are likely to pay enough to see the loan cleared.

Assuming as you are already 55 you won't get caught by the age change. One risk is negative investment growth but assume you would minimise this by using cash like funds. Would 2 x £7500 be easier? You would need fee free or low fee providers although the tax gain would cover this.

Be interested to know if it works.

Indeed, given the much predicted crash that is definitely a risk unless keeping in cash. I think the platforms such as AJBell are incredibly low cost and would be easier to access. And yes as already 55 won't get caught by the age change.

I have thought about this a lot and the answer is not clear to me. From what I have seen of younger colleagues it really bites as they are getting to the point when having kids, buying houses etc. The new loans are not paid off for 40 years. They all moan about their debt increasing or at least not going down much.

To some extent this is all pie in the sky over such a long timeframe, and there is a real argument to take the money now. None of us know whether that will be a good decision or not. Slightly hedging bets by aiming to give more than minimum parental contribution but will not cover completely due to longer timeframes and greater expense compared to other kids.

I completely agree that a graduate tax for all would be far, far, fairer and level the playing field for those who have parents less able to contribute.

If I had a singleton I would definitely be keener to look at career trajectory. Unfortunately with eldest likely to have a higher paying trajectory and a higher household income at the point he started, we have taken the decision to treat all equally - which means could be seen as less fair as will all get the same amount, but not end up with the same debt.

If you earn well with your own business, OP, you need to be aware that if you dip into your pension pot it will trigger the Money Purchase Annual Allowance (MPAA).

"Annual Allowance" is a complete misnomer, because what it means is that from this point on your annual allowance for defined contribution pension savings drops from £60,000 down to £10,000 per tax year. FOR EVER. Irreversible.

They should have this in neon lights everywhere, but even my accountant was not aware of the impact.

Ask me how I know 😖

Something else you could have a think about is timing, OP. We are in the position where we could pay tuition up front, but after a lot of careful consideration (and spreadsheets) we've taken the decision not to, and for DC to take loans instead. Our plan is to keep the money invested in our names, and then to re-evaluate when they graduate.

At that point they will have a better idea of their likely career trajectory and future plans, and we can make a decision with them about whether it makes most sense to clear the loan, put the money towards a house deposit for them, fund further training etc.

There are so many unknowns when they are only 18, but you only get the option to take the loan once per year. This way we keep our options open, and the interest accrued over the course of their degree will be largely offset by the returns from keeping it invested.

This is where the "small pots rule" is the exception. As long as the pots are up to 10K, you are allowed to take up to 3 within a 12 month period. Otherwise I completely agree it would be foolish to dip into normal pensions, see for example

https://pension-helper.co.uk/guides/retirement-planning/small-pension-pots-rule/

That is very interesting, I hadn't thought of the offsetting of gains vs interest whilst they are studying. I will look at this as an alternative option.

We decided not to pay their tuition upfront too and on similar reasoning. Ds was very close to dropping out and failing his first year, he wanted to change to an easier course, it was his money he was playing with, which sharpened his incentive and made him decide to buckle down and do his upmost to pass and he did - it was actually the making of him.

Some kids wouldn't care about the money but he did - he didn't want to have another £9k to pay off. There was one unexpected upside. Us not paying the fees upfront and watching him piss about, allowed me to mentally take a step back for the situation and just support him through it - he had no one to fight against - no pressure from us, he did it all on his own steam.

We'll pay off the student loans in a couple of years - both our kids are on their way to having good careers, but I really do believe that money is a good motivator for many people and parents paying for everything upfront because they can afford it and it makes them feel nice, as many parents seem to be do on MN, isn't always for the best.

Yeah I used one to pay for DS to get through his Masters.

I think it's an interesting idea, I think you have to be careful of a couple of things.

1. pension recycling rules

2. you remain below the 40% tax threshold once you've taken out 2 pensions worth £20k otherwise the 40% tax could wipe out any gain.

3. pension rule changes after you've put money in. If the govt decides it's going to add NI at 8% to your pension withdrawals you could make a loss

My husband is 55 too and considering putting a huge amount from his ISAs into his pension for the 40% tax rebate.

Pension recycling rules don't impact this as op is not using pension to fund the small pots as far as I can tell. And she's not going to use the small pots to fund her current pension - as long as payments into that remain consistent and the source is clear, she'll be ok.

I've not seen any indication that the govt plans to add NI to pension, so that's just scaremongering.

I think it's a good idea.

I don't have kids but I am deliberately intending to have three small pots to take before drawing pension so I can still pay in via my job and self employed income.