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Pension mortgages.
Normally a borrower will use a personal pension to repay a mortgage, but if it is acceptable to a building society the tax free lump sum from an occupational scheme could be used if it is likely to be sufficient to repay the loan.
With a personal pension, 25% of the value of the fund at retirement age can be taken as a tax free lump sum, and it is this sum which must be used to repay the mortgage.
The lender will generally expect the insurance company to assume modest growth in the value of the fund and take only 80% of the reversionary bonus on a traditional with profits contract into account and no terminal bonus.
Pension Mortgage Key points.
At retirement, if bonuses have been better than expected there should be a surplus of tax free cash for the borrower. In addition, a retirement pension has been funded for.
The restriction is that the borrower has used part of his pension contribution to pay for the mortgage and as a result this limits the amount of pension that can be funded.
Benefits can’t be taken from a personal pension until the age of 50, so the mortgage must run at least up to this age so that the fund is available to repay the mortgage capital.
Level term assurance for a sum equal to the amount of the loan, and for the same term, must run alongside the pension policy to provide benefit in the event of the borrower’s death.
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