Repayment Options
Pension mortgages
| Advantages | Disadvantages
Advantages Of Pension Mortgages
Just as a pension is the most tax-efficient way of saving,
it is also the most tax-efficient method of paying back
your mortgage. The premiums you pay into your personal pension
plan are subject to tax relief at your highest rate of tax.
This makes use of a pension plan particularly cheap for
a higher rate taxpayer, as they will receive tax-relief
at 40% on their pension contributions.
Furthermore, as well as tax relief on interest paid to
the lender, you get some tax-relief on pension related life
insurance, which means that you can make further savings
by arranging your life cover in conjunction with your mortgage.
The underlying pension fund is also tax-efficient, as it
is not taxed on its investment income or on the capital
gains it makes when selling the investments held by the
fund in order to replace them with new shares or other financial
instruments. This tax efficiency should lead to a higher
return on your investment than the same contributions into
an ISA or endowment.
There is nothing stopping you from contributing more than
your required level of repayment, as long as you are within
your overall pension contribution limits. This can leave
you with a cash surplus left over from your mortgage repayment
at retirement. You can make these additional voluntary contributions
when it suits you financially, but there may be a minimum
limit on the size of the extra payment.
You can also be left with a cash surplus on retirement
if your pension fund outperforms the level assumed at the
start of the plan. Long periods of low interest rates can
increase the likelihood of this happening, as a greater
portion of your monthly payment will go towards your pension
contribution and less will go towards meeting your interest
payments.
