Pensions as a repayment vehicle

SomeUser

Does anyone know the criteria that lenders may require?

Given my age (33), I've got fairly substantial pensions savings. I'm also a (corporate & trustee) pensions consultant. I'm confident about pensions given that I advise companies about their arrangements for employees. And with the nature of our business, my occupational scheme is excellent - generous contributions, well governed, ridiculously cheap charges etc. I've been with the company for 7 years, so long-standing employee not looking to change jobs.

I bought my flat having less than 70% LTV and it will be closer to 50% when I remortgage.

I'm interested in whether I could use my pension as a savings vehicle once I've finished transferring my DB pension (I don't advise that people do this without taking financial advice!!) to my DC savings.

Currently the total amount going into my pension is about 80% of what I'm paying for my mortgage. I'm happy to increase this if at the end of my fixed rate deal I could go for interest only (even if interest rates rise)

Can anyone give me an indication of lending criteria? I've read that it may be necessary to have a pension of at least the value of your mortgage. Is that correct?

dimbo61

Pension mortgages came and went very quickly same way as endowments
You are only 33 why are you on Interest Only ?
Look at offset mortgages and keep your great pension for early retirement

SomeUser

I'm currently on repayment, but would switch to IO at the end of my fixed term in 18 months.

It's a pensions mortgage is a no brainer for me with the main reason being tax relief. I'd much rather stay in the 20% income tax bracket and put any excess into a pension that I can access tax free, but I'm also very aware of the investment side of things and risks hence the investment profile of my ISA (instant access if absolutely required) being different to my pension (longer term savings).

Thrugelmir

dimbo61 wrote: »

Pension mortgages came and went very quickly same way as endowments

I recall the same conversation some decades ago. Maybe suitable for some people but not the majority.

kidmugsy

Max tax-efficient pension pot currently permitted £1.25M.

Therefore max Tax-Free Lump Sum approx £300k.

How big is your mortgage loan?

SomeUser

Mortgage approx £110k

dimbo61

Well you need to speak to a mortgage broker and see if any lenders do Pension mortgages.
Most lenders are also moving away from Interest Only mortgages.

hugheskevi

Given you are only 33 you might be nervous about the Lifetime Allowance, given it shows no signs of increasing under any party and some (Lib Dems in particular) seem very keen to reduce it further.

Personally I'm finding that at age 36 with a fair amount in a few pension arrangements that I'm a little hesitant to commit more to pensions given the complete uncertainty over the long-term uprating and consequent fiscal drag. The limit of £1.25m isn't much to fit in 20 years of inflation, maybe another cut or two to the limit, income for retirement and a mortgage repayment as well. Fortunately I have a decent DB pension with a protected pension age of 50, so in the event the Lifetime Allowance does come into play early commencement of benefits and consequent actuarial reduction should suffice to reduce Lifetime Allowance usage. With a minimum pension age of 58 there is less scope for early commencement.

As to lending criteria, having played around a bit with various plans involving mortgages and pensions over the last 5-10 years I found it easiest to simply choose repayment with a long repayment term, following by additional borrowing when changing mortgage. I look after the pension myself completely separate to the mortgage and there is no need to worry the mortgage provider about repayment plans.

It may well be the case that more structured products might emerge from April 2015 given the new decumulation regime will be so friendly to pension mortgages. It might also be worth noting that it is also likely to be several years before you are committed to the pension mortgage strategy, as it is only once pensions reach a level above which they provide more future income than needed that the strategy becomes locked-in to (in the sense of being inefficient if they strategy is changed). Before then, simply redirecting future saving form extra pension saving to other things enables changes of strategy with no loss of efficiency.

SomeUser

Great post, hugheskevi.

Yes, I've been thinking about the LTA and I think it will be very interesting to see what happens. When it was £1.8m, it tended to be only execs that were hitting it. These days more and more middle execs are hitting the limits, but we're still in a realm where many people retiring have some form of DB pension savings. DC savers haven't been around long enough to start hitting the limits in vast quantities of numbers, plus there's not enough people with that level of DC savings to shout about how little that gives them and not enough thought to the flat versus increasing annuity choices and understanding what it means in real terms. Given the gold plated nature of DB, it's not such a big deal with them hitting the LTA but when DC happens, I think it'll be big.

The time will come when people who have average DC savings, and have been saving since they started working, will start hitting the LTA en masse, and they'll be outcry.

But who knows?! I like your thinking on long terms and additional borrowing instead of being restricted

Your_Hero

SomeUser wrote: »

I'm currently on repayment, but would switch to IO at the end of my fixed term in 18 months.

It's a pensions mortgage is a no brainer for me with the main reason being tax relief. I'd much rather stay in the 20% income tax bracket and put any excess into a pension that I can access tax free, but I'm also very aware of the investment side of things and risks hence the investment profile of my ISA (instant access if absolutely required) being different to my pension (longer term savings).

I understand you've got good knowledge on pensions and believe in the benefits which is good to see. But to use it as a repayment vehicle seems odd, particularly for someone aged 33 and a fairly small mortgage of £110k. You could easily pay that off within a short term (given your decent level of income, stable job etc.) but instead you choose to extend this until you can access your pension which will be most likely at age 57/58 at the earliest which is 24-25 years away. Although you would be receiving tax relief on your pension contribution, you are losing out because of the extended interest repayments.

I understand you are not asking for an opinion on this and sound pretty set in using your pension as a repayment vehicle but i would suggest it is better to simply stick to a straight capital and interest repayment and use your pension for retirement. Once the mortgage is fully repaid you could divert the monthly savings into your pension.

SomeUser

I appreciate your comments - whilst I can do better in savings than I pay in interest, I would rather keep the mortgage, but it's not for the feint hearted and a requirement of the mortgage is that I can make overpayments. If I can't earn better interest on savings than I pay on the mortgage, paying off the mortgage is a no-brainer, but unless or until that happens, I prefer to borrow and invest (keeping completely aware of the risks).