Pensions as a source of funds

Required Reading


Pensions as a source of funds

As with endowment policies, the lender has to make assumptions as to how fast the pension plan will grow. In the case of 'with-profits' pension plans, most societies will accept between 80% and 100% of the current reversionary bonus, but will ignore the terminal bonus. With unit-linked policies (which societies are, for some reason, more willing to accept than they are unit-linked endowment policies) they assume a rate of growth of between 7.5% and 10% a year.

The whole concept of pension mortgages is only two or three years old; building societies are still really at the stage of dipping their toes into the water here, and many are still deciding on a case-by-case basis rather than having general guidelines applicable to all. With perseverance, however, you should be able to arrange a pension mortgage where the terms are reasonable and with a pension plan that is acceptable both to you and to the lender.

Pension mortgages for directors and executives

Pension mortgage plans can also be taken out by company directors and some higher-paid executives through an 'executive pension plan'. The rules on the amounts that can be put into a pension plan (and qualify for tax relief) and the amounts that can be taken out again, at retirement as a cash sum, are different: the principle, however, remains exactly the same.

The company (and, if he wishes, the individual) may pay in sufficient premiums each year to produce a pension at retirement of up to two-thirds final salary, assuming the individual has worked there for 10 years (the pension is lower for lesser periods of service) . And, out of that pension, he may choose to take as a cash sum an amount equal to one and a half times his final salary -assuming, this time, that he has had at least 20 years' service with that company with, again, a lower amount for a shorter period.

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Calculating the amount available

Some building societies are currently restricting loans on this basis to 'professional people' in their thirties or older. Although this might seem unfair at first sight, the point to be made (which is often obscured by the building societies themselves, in their 'mass market' approach to business) is that no one has a 'right' to a mortgage loan and the societies have to assess the credit risk in each case.

With a pension mortgage in particular, the society is granting an interest-only loan for anything up to 30 or 35 years. Although they have the 'comfort' of the fact that you are also undertaking a pension plan, they cannot have the legal security of it, as pension plans are non-assignable.

The lower age limit is presumably because . . .... see: Calculating the amount available

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