A pension mortgage is an interest only mortgage
with an additional investment plan in the form of a personal
pension. A personal pension is a stockmarket based investment
that benefits from tax relief and tax free growth. A pension
pays a tax free lump sum and a monthly taxed income on retirement.
The lump sum is normally used to pay off the mortgage.
Pros
and cons of a pension mortgage
Advantages Pension contributions benefit from up to 40%
tax relief for higher rate tax payers.
Disadvantages Your debt remains constant throughout the
mortgage period. You have no guarantee that you will have
sufficient funds to pay off the mortgage at the end of the
repayment period, as the pension fund could perform below
expectations. (By monitoring your pension fund's performance,
you could make additional contributions during the repayment
period if you felt it was under performing.) The lump sum
cannot be used for other purposes. You therefore need to
ensure that your level of pension contributions are sufficient
enough to maintain your required standard of living during
retirement. The mortgage period may be longer than 25 years,
depending on your age. You will still need to meet interest
rate payments throughout this period. The tax situation
regarding pensions is open to unforseable changes.
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