Pension Mortgages
The main advantage of a pension mortgage is that it is very tax efficient. Under current legislation you will receive tax relief on your pension premiums at your highest marginal tax rate.
Assessing the Disadvantages
There are at least three disadvantages.
Future eligibility
Pension mortgages can only be funded from a personal pension policy. These are usually taken out by the self-employed or by those whose employer does not provide a company pension scheme. If at some future time you decided to become a member of a company pension scheme, you would have to cease making payments into your personal pension plan and make alternative arrangements to repay your mortgage.
Affordability
A pension mortgage will cost more than an endowment mortgage or a repayment mortgage. The reason for this is that under current legislation only one-quarter of a pension fund can be taken on retirement as a cash lump sum. The remainder must be used to purchase an annuity (this may change in the future). The mortgage can only be repaid from the cash lump sum. Thus in order to fund a pension mortgage of £100,000, you would need to build a pension fund of £400,000.
Income in retirement
Many people feel that the whole of their pension should be used to fund their retirement. By using one-third of your pension fund to repay a mortgage you will significantly reduce you income when you retire.
Investment Return
If you do decide to take out an endowment mortgage or a pension mortgage, it is extremely important to choose a provider with good investment performance. More than 100 life assurance companies compete to offer endowment and pension products in the UK market and their performance varies greatly.
The decision regarding which repayment method is best for you is a complex one. It is essential to take advice from a suitably qualified professional before making a final decision.
