Is my pension mortgage a rip-off?

MONEY Q&A

In 1991, I was 26 and took out a pension mortgage on the advice of an insurance company representative. I am now concerned about whether this was good advice. I have yet to come across anyone who has a similar mortgage. I have completed a form for the pensions mis-selling review.

SP, Bristol

Pension mortgages are sold as a tax-saving wheeze. You pay interest to the mortgage lender and make a separate payment into a personal pension plan. When you cash in the pension at retirement, you can take 25 per cent of your fund as a tax-free lump sum and must use the rest to buy an annuity income. With a personal plan linked to a mortgage, you use the lump sum to pay off the mortgage.

Personal pension plans have two tax advantages over the more common interest- only endowment policy mortgage. First, you get tax relief on your contributions. Secondly, your money is invested in a tax-free fund. So once you have deducted the contribution that you would in any case make to a personal plan, the net monthly cost of an interest-only pension mortgage should be less than an endowment mortgage. That's the theory. But tax is not the only point to consider.

Did you, back in 1991, have the chance to join an employer's pension scheme? Employer's schemes are generally reckoned to give better value for money. Regardless of your past options, is there a possibility you might change jobs in future and you may then be able to join an employer's pension scheme? If so, you may want to stop your personal pension and you would have to find another way to pay off your mortgage.

Many regular premium pension plans, especially those linked to mortgages and sold to people in their twenties, are inflexible. All sorts of unpredictable and unexpected things could happen in the three or four decades before you retire - in your personal life, in investment conditions, in changing tax rules. Two examples: already the Government has removed the tax advantage enjoyed by pension funds on share dividends. In a future Budget, the Chancellor could scrap higher-rate income tax relief on pension contributions.

When you retire, you may need every penny of your pension fund to buy an income. Or you may want to take a tax-free lump sum for a once-in-a- lifetime, round-the-world trip. You may regret being committed to using your pension fund to pay off your mortgage.

A typical mortgage is 25 years. Yours will be longer, so you will pay a lot more interest.

If your financial circumstances permit, give serious consideration to converting your mortgage to a repayment-type loan (one where you pay off the capital as you go along). If your existing lender won't do this, consider remortgaging with another lender. Meanwhile, maintain your personal pension plan premiums, if a personal pension plan is still your best option (taking account of what your employer offers) and of the financial penalties (often very harsh) should you cease contributions to the plan.

Many people dislike having debts and are keen to get rid of their mortgages as quickly as possible. Repayment loans are psychologically better for many people.

Misleading forms

I had two Woolwich accounts- Direct Access and Prime Gold. I tried to transfer pounds 2,000 from the latter to the former but a transfer was made in the opposite direction. The transfer form is very unclear. I have now closed both accounts, despite having been a customer for 25 years. I don't want to blame individuals - I think the system is wrong.

MM, Hampshire

You filled out a Woolwich Direct "instruction form, direct access account". At first glance it appears to be a clear, well laid-out form. But a closer examination reveals a serious flaw.

You put in your account name and number at the top of the form. You then put details of your other account (and the sum to be transferred) in a section called Transfer Authority. This section says: "If you wish to transfer funds from or to (our italics) an existing Woolwich account, please complete this section and return in the enclosed envelope." But the form fails to ask you the "from which account, to which account?" question.

Yours is the only complaint received about this form, a spokeswoman for Woolwich said. But she added: "We acknowledge that perhaps it is not as clear as it could be. The form is being reviewed and the wording will be changed." That sounds promising.

If anyone else has a complaint about confusing forms, please write in. Maybe other organisations will be as responsive as the Woolwich.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail i.berwick@independent.co.uk. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters. We accept no legal responsibility for advice given.