Question: I recently visited a financial adviser who, during our talk about investments, suggested what he called a 'pension mortgage' for my wife and me. Will it kill two birds with one stone, or is there anything remotely unusual or suspect about it? Jonathan Wright, Southampton
Answer: Separately, a pension and mortgage can be two of the finest financial products you'll ever buy; in the same breath, they can spell disaster. A pension mortgage works exactly like a regular 'interest-only' home loan, but with a twist. Instead of repaying monthly interest and investing in an equity ISA to build up a sum to pay off the capital value of your property, a sum each month is put into a personal pension. Aided by the tax break afforded all pension plans, you then aim to build up enough of a retirement pot to allow you to withdraw 25 per cent of this cash – tax-free – as a lump sum to pay for your property. As for the rest of your pension cash, it is then is used to buy an annuity – or income for life – when you retire.
The flaws are fatally clear. Like endowments before them, whether you can buy your home after 25 years depends entirely on whether the stock-market performance is robust enough. Second, you need to put aside enormous sums of cash to amass a pension pot big enough to pay for both a house and a retirement sum.
"To be frank, you need an extremely large pension pot to come close to being able to pay off your mortgage with just 25 per cent of what you've saved in a tax-free lump sum," warns David Hollingworth at broker London & Country. "These are very niche mortgages that had their time in the sun during the 1980s and early 1990s, in the go-go years of the stock market."
Yo-yoing markets and falling annuity rates have put paid to such pretensions. So unless you're a sophisticated and experienced investor, it's probably best to steer well clear.