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Pension Mortgages

Pension Mortgages
Published:  22 Feb at 7 PM
A pension mortgage is not suitable for everyone. They are highly tax-efficient and life assurance cover is usually compulsory. With pension mortgages, an interest-only loan is taken out.

The money which is being paid into a personal pension scheme, or an employers pension scheme can be paid as part of the pension mortgage. The tax-free lump sum which is payable upon retirement to an individual is used to pay off the mortgage. The holder of the pension policy can then draw a pension from the fund. Advice is always recommended to be sought from a qualified financial before using such a pension. It is usually used by the self employed.

One of the major tax advantages of a pension mortgage is that the payments into the pension plan qualify for tax relief at the basic rate on payment. Those currently paying 40% or 50% tax may claim higher rate tax relief on pension contribution. A term assurance life cover policy can be linked to the plan, this will also qualify for tax relief at the top rate on top of the premiums.

If you joins a pension scheme at work then become unemployed, you may no londer be eligible to make contributions to the scheme. This is one of the major disadvantages to this type of mortgage. In order to pay off the mortgage, it is advisable to consider other means of raising the capital to pay off the capital. The main difficulty is that this arrangement is attempting to use a financial tool to meet two objectives. The arrangement means that you are trying to pay off a mortgage as well as providing an income at retirement. The pension plan arrangement reduces the opportunities to build up retirement income.

An advantage of this form of saving is that if the pension plan built up exceeds the amount to repay the capital of the mortgage, then there will be surplus capital accrued. Some of the pension plan arrangements are tax-efficient. On the other hand, a disadvantage of these pension mortgages is that a shortfall could occur if the proceeds of the repayment vehicle do not achieve the amount expected then other funds must be found to compensate. The policy fund should be checked regularly and other investment should be made if the fund appears to be falling short. Financial penalties may be incurred if the plan is cashed early. The initial agreement will provide for this eventuality.

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