Remortgage to interest only with pension as repayment

EnterUserName

I have been considering options and wondered about the above.

Pros - save 40% + 2% tax, plus another 13.8% ER NIC uplift. It would also encourage me to save 4x outstanding amount, more than I would likely stuff into a pension otherwise

Cons - Legislation risk (removal of HRT relief, tinkering with access, removal of TFC), investment risk and paying interest on the full amount for full term...

Have I missed anything?

Are these contracts still available (it looks like they are)?

LTV would be circa 50%, residential (only) mortgage. Term at least 20 years.

Comments welcome!

dunstonh

Cons - Legislation risk (removal of HRT relief, tinkering with access, removal of TFC), investment risk and paying interest on the full amount for full term...

Removal of TFC is highly unlikely.  its one of the least costs to the Treasury in the provision of pensions.  Things like salary sacrifice, tax free status of the investments and tax relief are massively higher.   Salary sacrifice is the thing on the radar.   Cameron gave up on removing it as it was more complicated than initially thought (knock on effects to company directors of own companies for example).  Then Brexit came along and dominated the political agenda with everything else pretty much side-lined.  However, a quieter parliament period could see that come back into play again.

Plus, TFC is capped. Previously it was capped at 25% of the Lifetime allowance but now it has a monetary cap and there is no provision for indexation.  It will remain at that figure unless a budget changes it.

Have I missed anything?

It was a fad in the late 80s but fell away as people miscalculated the real cost.  They assumed too high target growth rates and failed to taken into account falling tax (and therefore reduced tax relief).

Minimum pension age is 10 years less than state pension. So, access is rising from 55 to 57 in 2028 and will go to 58 when the state pension goes to 68.  Does that still work with your 20 year period?

Are these contracts still available (it looks like they are)?

Individual pensions would be used.  It would be possible to use a workplace scheme but employers may not allow you to divert the required contribution from your income.

Lenders are unlikely to go for it though.  There will be some that will but you choice is going to be restricted and that may result in higher mortgage costs.

EnterUserName

Yeah thanks, that is what I was expecting to hear. The cons probably outweigh the pros.

It was mainly the thought of recovering some of that tax

kingstreet

Here's the Halifax criteria entry for interest-only with pension plan as repayment method;-

Pension

There is a minimum income requirement for this repayment plan to be available:

• Sole or joint applicants have a combined income of £50,000 or more
• The income requirement is calculated on the total of Basic, Overtime, Bonus and Commission for employed applicants or the latest year's income for self-employed customers.

The amount of this repayment vehicle which can be used is assessed by:

• Copy of latest pension statement dated within the last 12 months
• The pension must have a minimum projected total fund value of £400,000 of which a maximum 15% of this amount will be used to support Interest Only lending
• Where a projected total fund value does not show on the pension statement e.g. on a final salary pension if the projected lump sum is at least £100,000 up to 60% of a projected lump sum value can be used
• Where a statement gives a range of projected values the middle of three figures or the lower of two would be used
• Pensions belonging to the same person can be combined to reach the £400,000 or £100,000 levels but pensions held by joint applicants cannot be combined to meet these levels
• Pension contributions should be collected under ‘Total monthly payment towards Investment Vehicles' and will be used within affordability calculations
• It is important the customer understands the need to maintain the pension contributions
• Lending Into Retirement - the term of any Interest Only lending must not exceed the lower of the Anticipated Retirement Age or Maximum Working Age where Pension is being used as a Repayment Plan. The term can run up to 364 days past the lower of the ARA / MWA.

EnterUserName

Thanks Kingstreet - that's helpful.

Interesting they only allow 15% - not the full 25%.

Repayment mortgage it is then

dunstonh

Interesting they only allow 15% - not the full 25%.

People usually have other needs for capital as well.

Plus, another negative.  Blowing your tax free cash on a pre-retirement liability means you won't have the tax free cash (or a much reduced amount) to use in retirement.      For example, one of most popular drawdown methods is phased UFPLS.  This method allows you to draw your income as 75% taxable and 25% tax free.   Giving you a net effective tax rate of 15% above your personal allowance.   That can result in a greater tax free amount being extracted from your pension over your lifetime than taking it up front.