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What is a Pension Mortgage?
Legislation allows a pension fund to provide up to 25% of its value as a tax free lump sum, it is this which is used to repay your mortgage. The remainder must be used to provide an income in retirement. Tax relief is allowed on pension contributions, so depending on your tax rate a £100 contribution will only cost £80 for a basic rate tax payer or £60 for a higher rate tax payer

What do pension mortgages cost?
This depends on the amount of tax free cash required and the amount you are prepared to save or, indeed, allowed to save since there are limits. Assume you have a mortgage of £100,000. You can take tax free cash of 25% of the pension fund, so you need to amass a pension pot of £400,000 (25% of £400,000 = £100,000). Your age and therefore the number of years to retirement is going to determine how much must be saved to achieve this. Older people have to contribute much more than younger people because there is less time for the money invested to grow.
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There are different types of pension, which should I choose?
Your employer may offer a pension scheme. These types of pensions tend to be known as 'Money Purchase' or 'Final Salary'. If you have the opportunity to join a final salary scheme then normally you should do so as the benefits are usually excellent. A money purchase scheme is similar to a private pension which we will discuss later - if your employer makes a contribution then Money Purchase schemes will almost certainly be better value than private pensions. Both schemes normally come with life cover.

If you do not have access to a company pension then you should consider a private pension. The most common, and usually suitable for the majority of people, are called Stakeholder Pensions. These have low charges and the flexibility to make changes later.

Non-tax payers can contribute up to £3,500pa and still get tax relief (therefore only costs £2,800 - that's £700pa for free!). Beyond £3,500pa tax relief is available at your highest rate, although higher rate tax payers claim the difference between basic rate tax and higher rate tax through their tax return. There is no minimum age for saving into a pension plan. The earliest age at which you can take your pension is currently 50 but this is set to rise to age 55. The maximum age at which you must take your pension is 75.

Even if you decide that a pension mortgage is not right for you, you should still be considering pensions as the primary method for saving for retirement.

Mortgages-Online is an Independent Financial Adviser and can help you choose your pension provider.