Pension plans - How do they pay my mortgage?

Gorgeous_George

I note on another thread that Pension Plans are the most tax-efficient way to save to pay off my mortgage.

What I'd like to know are:
1) What are the costs?
2) What happens to the pot of gold if:
...a) I die before retirement?
...b) I die during retirement?
3) If I need a lump sum at any time, can I get it?

GG

EdInvestor

I think you're on the wrong board GG.

Gorgeous_George

Sorted



GG

Retired_I.F.A.

No your not. A pension linked mortgage is the most effecient way to repay a mortgage and the question is under the mortgages heading.

GG It's not for everyone though and involves a fair bit of explaining far too much to go into on a message board. Seek out an I.F.A. in your area and go talk to him/her.

EdInvestor

Oh all right;) The principal of the pension mortgage is that when you retire (age 50/55 onwards) you take benefits including a 25% tax free cash lump sum and this pays off the mortgage.

Gorgeous_George wrote: »

What I'd like to know are:
1) What are the costs?

Charges these days on pensions are much lower than in the past (and better than endowments) but will still gobble up 25-30% of your fund over 25 years (as will fund charges in ISAs to be fair).

2) What happens to the pot of gold if:
...a) I die before retirement?

It goes to your beneficiaries in full tax free.

...b) I die during retirement?

Depends on whether you take an annuity or income drawdown with the remaining 75%.The former, it's gone forever.The latter, if you die before 75 beneficiary gets the money back in cash minus 35% tax. After 75 beneficiary can still have an income but capital has more or less gone forever.

3) If I need a lump sum at any time, can I get it?

No.

Gorgeous_George

Retired_I.F.A. wrote: »

No your not. A pension linked mortgage is the most effecient way to repay a mortgage and the question is under the mortgages heading.

Originally, I never mentioned mortgages and the question was solely one on pensions. Ed pointed that out and I amended the title and content to include a a mortgage related element.

Ed's answer seems perfectly adequate and serves to confirm that a pension plan is not for me. 25% tax free and 25 - 30% in charges tell me that it is the salesman that benefits most and for little, if any, risk.

I think I'll set up as a pensions salesman if my current job goes belly up.



GG

Retired_I.F.A.

Ed Investor talks a load of crap. 25-30% my !!!!!

GG This is why you need professional advice not that of an idiot with nothing better to do than post crap like that all day long. The woman ought to have a financial health waning tattooed on her forehead.

Gorgeous_George

Martin's_rules wrote:

Pls be nice to all MoneySavers. There's no such thing as a stupid question, and even if you disagree courtesy helps.

What %age should I expect to pay?

GG

Retired_I.F.A.

Put it like this:

If you were showed you a way that for every £1 you saved the taxman added 67p to it and the £1.67 then grew virtually all tax free for the next x number of years and then you took it all out as a tax free lump sum would you really care that about 1% p/a of the growth that fund made over the years went in charges for managing the investment and the advice you recieved?

EdInvestor

Retired_I.F.A. wrote: »

Put it like this:

If you were showed you a way that for every £1 you saved the taxman added 67p to it and the £1.67 then grew virtually all tax free for the next x number of years and then you took it all out as a tax free lump sum would you really care that about 1% p/a of the growth that fund made over the years went in charges for managing the investment and the advice you recieved?

But that's not what happens, is it? Only 25% of the final fund is taken out as a tax free lump sum: the other 75% is taken by the insurance company and partly paid out as a taxable income, at which point the tax relief is clawed back. This income these days is similar to interest on cash. But in the case of the pension (now an annuity), the capital is lost forever .:(

So yes, I would really care that an amount equivalent to more than the tax relief is taken in charges and commission :mad:I'd have thought most people would regard this as quite extortionate in fact - if they knew.


Detals of charges and how they are extracted here in the Pension Commission's report:

http://www.pensionscommission.org.uk/publications/2004/annrep/chapters/ch6.pdf

See page 14 onwards for details of where the money goes.

Retired_I.F.A.

But this is not what happens is it?

Oh but it is yes for some people.

Ed, your no fool but what you are doing is very very foolish.

By giving GG basic answers to his original question and ignoring all else in less than one minute you've switched him off from pensions possibly forever. He may not even be back to look at this thread and from his last post it'd be of no surprise to anyone. Its statements like that that may well seriously reduce GG's retirement income down to the means tested state benefits.

GG obviously does not know much about pensions, that’s not his fault but the fault of our education system what’s taught in schools has little use in the real world and when it comes to understanding money and taxation there’s not a school-leaver in the country who has ever understood his first payslip. It's akin to what my driving instructor told me the day I passed my test: "You’re now legal on the road mate but it's from now that you’re going to really learn how to drive."

The whole purpose behind the financial services act was to ensure folks are no longer duped into buying contracts that are not suitable for their particular situation and to do this a fact find is absolutely essential even for a kid who has left school yesterday and is effectively a blank page. Completing a fact find rarely takes less than an hour and the blank page school-leaver even longer as you have to educate him about risk/reward for a couple of hours before you can even answer the one question on all fact finds by law: i.e. What is your attitude to risk" Then it's down to the expertise of the advisor who at least has passed the FPC exams.

Ones life expectancy gets longer and longer as the continued improvements and discoveries in science keep us all alive longer however our working lives don’t grow at such a rate nor does anyone want them to. Throughout life the majority of us strive to gain money but the one thing is inevitable there will come a time when instead of earning a living and saving capital a complete turn around happens and we retire. Very very few of us at that time will be concerned with capital but we all will be in need of income and for possibly the next 40 years. Unable to gain that income from working it can only come from capital and there is not now or ever been a better tool to accumulate that capital than a pension plan. Contributions gain tax relief at up to the top tier of income tax one pays and are invested in tax exempt funds, a major benefit you Ed just ignored in your quest to belittle pension plans. This tax relief has been available for donkey’s years and there's not one political party who has ever said they'd do away with it. There is no other plan that gives relief like this. Okay there’s ISA'S they too grow tax free but they are a tempory thing with a limited shelf life and when that life ends who knows.

Locking ones money up unable to access it till retirement is a fantastic benefit it's for your retirement not for a new car or a second honeymoon whatever. Yes you can change your mind and cease saving but that which you have saved will continue to grow in the tax exempt plan and be there when you need it not when your whims desire it.

Come the day you retire that's it your pay-packet is history and there are a growing number of ways to convert that capital to the most important requirement you'll have: income. Unfortunately it's taxable income, oh dear what a shame you've had tax relief you've had tax exempt growth and you've now got to pay some tax on the income. What do you expect? Without tax on income be it from earnings or savings this country would have vat on everything at 50% or so. On the good side though you will still have the tax exempt allowance and it's most likely you will be a basic rate taxpayer as you have no income from earnings.

Again yes you can currently strip out capital tax free as income from an ISA but its existence in the future is about as secure as a paper padlock and will never be in the same league as a pension plan yet alone a contender.

Going back to my statement that all the fund can be had from a pension plan tax free yes it's possible and quite legal and acceptable. Admittedly it's not possible for everyone as it depends on ones situation but even if it is limited to 25% of the fund as it is for many that 25% is the relief the government give on contributions so effectively with a basic pension linked mortgage the government will buy the house you just pay interest on the amount borrowed and save in tax exempt funds for your biggest financial need of your life. Hopefully and probably (as no one knows the future bar Dr Who) those funds grow at a rate higher than the rate charged on the mortgage thus making capital repayments on the mortgage mathematically the wrong decision.


As for charges aka the reduction in yield they are just one factor of many in the selection process. Some of the best pension plans have a reduction in yield as high as 5% p/a and on a like for like contribution comparison can blow the return of a 1% RIY stakeholder to pieces as it's the actual net growth that counts not the charges.

If your still with us GG go seek out an I.F.A. you may be one of those that fit into the group I described you may not but you need professional advice relevant to your needs and wants.

LOL seeing as I feel like I’ve wrote a speech (not wrote so much since I last wrote a reason why letter) I’ll finish with a quote from was it George Bernard Shaw ? ..

“There are two things in life that are inevitable, taxation and death”

He forgot to add .. Pension Plans are essential