Pension Policies
The Basics
Most pension plans have the option at maturity
to withdraw a percentage of the fund as tax-free
cash. The idea behind the pension mortgage option
is to link the amount of this lump sum to the
amount borrowed. Owing to the fact that pension
plans have certain built in tax advantages they
generally have the potential to achieve greater
overall returns than an endowment policy might
be expected to achieve.
Advantages
The tax advantages a pension policy has make this
type of mortgage the most tax efficient available.
There is potential for higher returns than endowments.
This is an excellent option for the self employed.
Disadvantages
It is highly debatable as to whether or not it
is wise to use a proportion of your retirement
savings to pay off your mortgage. There are strict
limits on the amount that can be taken as a tax-free
lump sum, which can lead to a shortfall in certain
circumstances. A separate life policy will be
required in most cases. The money may only be
drawn from a pension policy when the policyholder
reaches retirement age. This can lead to an individual
paying interest on a mortgage for in excess of
25 years, which is generally an unnecessary expense.
Frequently individuals will move from job to job
requiring alterations to be made to their retirement
planning which may adversely affect their mortgage
planning.
Suitability
A pension policy linked mortgage is the most suitable
option in a number of circumstances the most common
being those identified below:
- This option is only really suitable for a
small minority of people
- Ideally suited to the self-employed
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