Self Employed Pension Fund

[gg66]

Self Employed & Pension Mortgages

Hi,

I'm 32,self employed and work from my home office. Being self employed, my income varies and it's not as straight forward getting a mortgage. I'm getting a mortgage of 200,000 to renovate and extend a small cottage. I have a Tracker offered from Ulster Bank and was going to go ahead with it until I learned of Pension mortgages.

From what I'e gathered on other threads, I know that the principle of how they work is that I get an interest only mortgage and then pay the capital repayments into a pension fund. Capital repayment is then made to the Bank at the end of the mortgage term. This would allow me to make tax free contributions to a pension fund during the term of the mortgage and then pay tax free lump sum in capital repayment to the bank as long as its no more than 25% of the accumulated pension fund.

Does the description above sound right or am I missing something? Can anyone advise me on the Tax benefits of using such a pension Mortgage option over the tracker I was considering. Are there any drawbacks? Can I pay off the mortgage interest in a shorter term lowering the interest? what banks offer it?

I'd be very grateful for any pointers, thanks in advance!

GG

 

[CCOVICH]

With regard to these type of pensions (SSAPs I believe they are called) you cannot have any interest in the property in question, i.e. it cannot be your own house (PPR or holiday home). There is a section on this type of scheme in the First Active Investors Handbook.

 

[ClubMan]

A pension mortgage is not necessarily an SSAP. You can have a pension mortgage (a combination of an interest only mortgage with a pension fund which will go towards clearing the principal borrowed once the mortgage term is up) without having an SSAP. In some cases it may be better to shop around separately for the interest only mortgage and the pension to cover the mortgage (and provide for your normal retirement income/lump sum needs) separately, if possible, rather than buying a bundled product (which may have higher charges than might otherwise be possible) from a lender.

 

[CCOVICH]

Ok, sorry for any confusion caused to the original poster.

 

[ClubMan]

Re: Self Employed & Pension Mortgages

You don't make it clear if the property in mind is your PPR (Principal Private Residence) or an investment property or a potential office space.

Does the description above sound right or am I missing something?

I think that your description is more or less correct. One thing that I've never fully understood is the timing of the repayment of the capital via the pension fund. For example, if a 30 year old with a target retirement date of 60 took out a pension mortgage does this mean that they would have to stick to a 30 year interest only term unless they manage to accumulate funds (e.g. through savings, investments or the business) to clear the mortgage sooner?

Can anyone advise me on the Tax benefits of using such a pension Mortgage option over the tracker I was considering.

I think that the main benefit is the tax relief that the pension contributions and growth generated benefit from as you mentioned earlier. For investors an interest only mortgage may be desirable since 100% of the mortgage interest can be offset as an allowable expense against rental income. For owner occupiers the normal mortgage interest tax relief limits apply.

Are there any drawbacks?

Two drawback with interest only (including pension and endowment mortgages) are that (a) you pay more interest over the term of the mortgage compared to an annuity/repayment mortgage and (b) there is always the risk that the investment fund (e.g. pension or endowment) will not perform to the level required to pay off the mortgage on time and/or will not generate the expected additional lump sum. This "shortfall" problem has arisen over recent years with many endowment mortgages which have not performed to the initial expectations/projections. In contrast with an annuity mortgage you are guaranteed to pay off the capital within the term specified since you are paying off both interest and capital (in the early years mostly interest and a little capital but eventually mostly capital with a little interest).

Can I pay off the mortgage interest in a shorter term lowering the interest?

No - unlike an annuity mortgage acclerating repayments does not reduce the effective term or interest costs. Presumably you can make lump sum capital repayments to reduce the outstanding balance and thus the interest charged but ordinarily you are only making interest repayments and since the capital is not reducing the interest bill remains fixed (unless interest rates change).

what banks offer it?

Not sure - sorry. Maybe ask your accountant, a broker or just ring around independently. Taking out a pension mortgage based on expectations of how your business will perform in the future is a big decision so you should really get independent, professional advice on the matter.

 

[WizardDr]

CCOVICH has however, pointed out the real way into the property market for purchase of non owner occupied properties, think this is still restricted to proprietray directors, and dont know why the ole PRSA has not got this angle. (Dozy Journalists: please note).

As regards the Pesnion backed Mortgage for PPR: Problem for the Financial Institution is that it cannot be assigned. They do them but expect the fund to be twice that of borrwoing. Main downside is that while (correctly) you can extract 25% tax feee at retirement age, you are in effect earmarking the fund. There is obviously a 'cash flow' advantage as regards the capital payments; there is a marginal aspect on interest relief.

Main argument for doing it is if you had to choose between either capital repayments on mortgage OR putting the cash into the Pension. If the cashflow is able to do both then do both.

 

[gg66]

Thanks everyone for your responses,

The property will be my Principle Private Residence. I've only come across the Pension Mortgage option late in the day as I need to get the Mortgage approved to get the builders in ASAP. How easy or difficult would it be to change from atracker to a pension mortgage say after one year? (potentially with a different provider)

Also, The property is also in a rural renewal area which means I can claim TFAs on the amount spent on refurbishment over the first 10 years. With this in mind I had intended paying any tax saved to reduce the capital on the mortgage or else to a pension fund if I was going for a pension mortgage. Is this the best approach?

I'll need to do some research on my own in terms of shortening the term of repayment (thus reducing the interest), providers etc. I'll post back here when I have more info.

Thanks again,

GG

 

[Munsterdude]

Thanks everyone for your responses,

The property will be my Principle Private Residence. I've only come across the Pension Mortgage option late in the day as I need to get the Mortgage approved to get the builders in ASAP. How easy or difficult would it be to change from atracker to a pension mortgage say after one year? (potentially with a different provider)

Also, The property is also in a rural renewal area which means I can claim TFAs on the amount spent on refurbishment over the first 10 years. With this in mind I had intended paying any tax saved to reduce the capital on the mortgage or else to a pension fund if I was going for a pension mortgage. Is this the best approach?

I'll need to do some research on my own in terms of shortening the term of repayment (thus reducing the interest), providers etc. I'll post back here when I have more info.

Thanks again,

GG

Few points:
1) Cant be on your PDH - unless a portion of the house is your office - then a portion of the total mortgage can be turned into a pension mortgage
2) The mortgage part of the pension mortgage is just an interest only mortgage, with the term matching the term of your pension - there would be no difficulty in transferring it to a pension mortgage at some point in the future.
3) If you go the pension mortgage route - you cant reduce the term at all! The point being that the term of the mortgage has to match the pension. The mortage is to be paid off on retirement, when you recieve the proceeds of the pension.
Munsterdude

 

[gg66]

Thanks Munsterdude,

Few points:
1) Cant be on your PDH - unless a portion of the house is your office - then a portion of the total mortgage can be turned into a pension mortgage

PDH? sorry what's that? I'm not sure what you mean by this. Any enlightenment would be appreciated.

3) If you go the pension mortgage route - you cant reduce the term at all! The point being that the term of the mortgage has to match the pension. The mortage is to be paid off on retirement, when you recieve the proceeds of the pension.

So whats the general consensus on Pension Mortgages? On the face of it it seems beficial to be able to put money into your pension fund and earn interest (hopefully) and then pay off the mortgage capital balance with a lump sum payment. However if the payment period for interest can't be reduced it would be quite high interest. I realise the answer to this depends on my very specific circumstances but is there a general opinion o whether its a runner or not.

Thanks,

GG

 

[Munsterdude]

Thanks Munsterdude,



PDH? sorry what's that? I'm not sure what you mean by this. Any enlightenment would be appreciated.



GG

Sorry! your private dwelling house (your main residence)
In relation to consensus on pension mortgages - well, opinions do vary. I am a fan of them, because they offer a legitimate way to pay for a property efffectivly gross of tax (both corporation tax, and personal tax)

I am not sure what you mean in relation to interest rates and term - you seem to be saying the longer the term, the higher the interest rates that apply. This isnt the case. For example, at the moment, the better interest rates applying to Residential Investment properties is around 3.1% - this is for the term of the loan. Are you mixing up total repayment and interest? Obviously, the longer the term of a loan, the more you repay (compounding). Does this help?

 

[EddieT]

Hi, I am self-employed as well and about to move house. I have no choice but to take on a big mortgage so I went to "independent financial advisor". They recommended taking an interest-only mortgage and then a separate executive pension to cover the mortgage (he never mentioned a pension linked mortgage). The figures seem to add up based on 6% annual growth over 30 years. Questions are though: (1) are the charges higher than for a normal pension? (2) is this really the most tax effective way of purchasing the house? (3) what happens if I am forced back into a permanent position? (4) presumably the pension must be big enough so that 25% actually cover the mortgage? as this is the most I can get out at as a lump sum at the end of the 30 years? ......and I have to have this all done soon as time is running out.

Signed:

Nervous, confused and non-trusting (this is why I am resigned to posting this note on an Internet newsgroup, to a complete bunch of strangers)

 

[Betsy Og]

Signed:

Nervous, confused and non-trusting (this is why I am resigned to posting this note on an Internet newsgroup, to a complete bunch of strangers)

I havent even read this topic or know too much re the area but if I felt like the above I definitely wouldnt be going into it. The mantra must be "If you want a quick answer its NO" - never go into something you dont fully understand.

 

[Munsterdude]

Hi, I am self-employed as well and about to move house. I have no choice but to take on a big mortgage so I went to "independent financial advisor". They recommended taking an interest-only mortgage and then a separate executive pension to cover the mortgage (he never mentioned a pension linked mortgage). The figures seem to add up based on 6% annual growth over 30 years. Questions are though: (1) are the charges higher than for a normal pension? (2) is this really the most tax effective way of purchasing the house? (3) what happens if I am forced back into a permanent position? (4) presumably the pension must be big enough so that 25% actually cover the mortgage? as this is the most I can get out at as a lump sum at the end of the 30 years? ......and I have to have this all done soon as time is running out.

Signed:

Nervous, confused and non-trusting (this is why I am resigned to posting this note on an Internet newsgroup, to a complete bunch of strangers)

Eddie - I think your independant financial advisor is trying to sell you an endowment mortgage. Not 100% sure of that, as I dont know if you are buying an investment property, or is the house you are purchasing for you to live in yourself?

 

[EddieT]

I havent even read this topic or know too much re the area but if I felt like the above I definitely wouldnt be going into it. The mantra must be "If you want a quick answer its NO" - never go into something you dont fully understand.

Thanks Betsy Og,

Here is total deal:

The business is only a vehicle for me getting paid so keeping cash in it is not important. I have access to cash elsewhere if something goes wrong. So the advisor wants to put an interest-only loan in place for the timebeing. When we have stablised our outgoings then place any excess cash from the business into a pension fund. There should be more than enough going into the pension fund to clear the mortgage based on the projections. However he has told me that we can revert to an annunity mortgage at any time. He reckons that the first three years will be the hardest so that is the time to keep the mortgage payments down as much as possible. Also running with an interest only mortgage will give us room if the interest rates go up a few points. He believes then that when things stablise I should start to take less in wages and pump more into the pension.

It makes a lot of sense as I don't have any other loans or credit cards and the income from the business is steadily growing.

To be honest I'm probably not that worried but more looking for someone who knows if there are any problems with this type of arrangement. I know that crippling myself with a large mortgage from day one is a far less inviting option than a tax efficient method of equalising the expenditure over 30 years. I intend to reach retirement in this house and it will require no more structural changes to meet our space requirements so what he is proposing appears to make perfect sense. In 30 years the family will be gone so we will probably sell the house and down-size anyway!

EddieT

 

[EddieT]

Eddie - I think your independant financial advisor is trying to sell you an endowment mortgage. Not 100% sure of that, as I dont know if you are buying an investment property, or is the house you are purchasing for you to live in yourself?

Thanks Munsterdude,

This is our primary residence. It is deinitely not an endowment mortgage. Endowment mortgages are based on after-tax earnings only. Part of the payment is made to cover the interest and the balance is tucked away by the insurance company into a savings plan which it "HOPES" will amount to more than the outstanding property value when it matures. My advisor is using pension contributions which are not subject to tax and therefore the gross amount is invested.

As you can see I have been investigating this matter and have come across a great book and website dedicated to the Irish market www.moneydoctor.ie The book is definitely worth getting.

EddieT