Pension plans - How do they pay my mortgage?

dunstonh

Question:

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

Answer: Yes.

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

No different from normal pensions and normal interest only mortgage.

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

The lump sum value of the fund is paid out and can be used to clear the mortgage.

...b) I die during retirement?

Depends on how you arrange your retirement income and what options you choose. Of course, the mortgage will be gone then so that side of it doesnt matter.

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

Normal pension rules apply. Age 50 (55 from 2010) onwards allows you 25% of the value as a one off withdrawal.

Pension mortgages were a good idea for certain people but were largely poorly executed in the past. They are the sort of thing if arranged professionally (i.e. decent fund spread, kept under review) can end up being very good ways of repaying the mortgage and boosting your retirement income. Problem is that they let low skilled advisers and tied agents do it using substandard products and investments and it largely killed it off.

Under MiFID rules you would find advisers only offering it to experienced and knowledgeable investors (and higher rate taxpayers as they get the biggest benefit). It isnt for the inexperienced individual.

With working/childrens tax credits, it is possible for a higher rate taxpayer to get close to 73% effective tax relief on pensions. So, in those cases, financially it is highly beneficial to have a pension mortgage due to the levels of effective relief.

Basic rate taxpayers are not suited to pension mortgages as the relief at 20% (from Apr 08) is just not enough in my opinion.

Eds comments about charges are misplaced and taken out of context. Over 30 years (ignoring inflation) you probably pay Tesco £40k in charges (profit above cost of food).

Any recurring retail charge you project forward into the future is going to sound bigger after a period of time. However, you need to look at what you are getting. 10% p.a. after 1.5% charge. Or 7% after 0.5% charge or in a bank at 5% with no implicit charge (but profit hidden from you). Everything has charges. So, you look at the year in isolation on a mono charged contract. 1-1.5% p.a. annual management charge is fine and normal.

EdInvestor

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.

GG's no fool - he likes to check the facts. . Pensions are OK if you are getting free money from your employer and especially if you are also a high rate taxpayer who will be on basic rate in retirement - though you still need to check the tax situation at retirement re age allowance, higher rate bands etc or you could lose out.

With the change in the A-day rules where the ISA is the "use it or lose it" allowance - and is now extended indefinitely same status as pensions - and the pension can be accessed with big sums later in life, a pension for many people is not a priority (buy house first!)

But my reply was really about pension mortgages, which IMHO were an even worse product than endowments and are now thankfully completely obsolete.I make no apology if I've turned GG away from those.