Why should you pay extra commission to the life companies?

Required Reading


Why should you pay extra commission to the life companies?

Of course, this would make life difficult for you whatever sort of mortgage you've got; but there are a couple of extra points to be borne in mind with a pension mortgage which could make it especially nasty.

Firstly, unlike mortgage interest and life assurance premiums, which you pay net of the applicable rate of tax relief, pension premiums are paid gross; you receive the benefit in the shape of less tax to pay at the end of your financial year. For many self-employed people, this could mean a delay of up to 14 to 20 months. Simply in terms of cash flow, then, this could be a problem.

Secondly, you have to remember that there are limits to the amounts that you can put into pension plans: not more than 17.5% of your net relevant earnings. In most cases, this is going to be ample. But circumstances could theoretically arise where your income is not high enough to give you the allowance you need for the premiums you have to pay.

In other words, suppose you have to pay pension premiums of £1200 a month in connection with your mortgage. If for any reason your net income drops below £113,700 in any one year, then you're in trouble. Your pension premium will then exceed 17.5 % of your earnings and, although you can continue paying your premiums in, you won't get tax relief on the excess and that portion of your pension that relates to them will be taxed as unearned, rather than earned, income.

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Drwabacks of having a mortgage

The drawbacks

You should have guessed they were coming! There are limitations to this way of going about things, and you should certainly think carefully before you proceed. The following questions are the ones that you will need to ask in order to play devil's advocate with yourself before deciding.

1 What about your old age?

Although you are allowed to change part of your pension savings for a cash sum, you're not forced to; if you do, it will mean a lower pension than you would otherwise have had.

Are you satisfied that you will still have enough to live on if you commit part of your pension savings, in advance, to paying off the mortgage?

What makes this question even more pertinent . . .... see: Drwabacks of having a mortgage

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