Both a personal pension mortgage plan and a stakeholder pension have two benefits - a tax-free lump sum available when the pension starts, and a retirement income.
The lump sum, usually up to 25% of the accumulated funds, is an ideal way to pay off a mortgage.
Again, during the term of the mortgage, part of each monthly repayment pays interest on the loan with the rest contributing towards the investment vehicle.
However, because only 25% is available as a cash lump sum when the pension starts paying out, to pay the mortgage off the lump sum must equal the outstanding capital.
And in order to achieve that, the total return expected from the investment fund must be four times that amount (because only a quarter can be converted into cash). Understand?
Naturally, the level of monthly repayments will reflect the return required to achieve such a retirement goal. Having said that, however, a fairly decent pension should result!
Other points in favour - tax relief on the mortgage repayments because they take the form of pension contributions; faster fund growth because such contributions are not subject to tax on capital gains.
On the negative side - the lump sum is not available until age 50 (so the term of the mortgage must run until then); the mortgage cannot be paid off early; and separate life assurance is required on top.
