The advantages of a pension mortgage
A pension mortgage combines the tax advantages of a pension with the tax relief available on mortgage interest to create a very tax efficient way to buy property.
Tax relief on interest payments
Interest paid on mortgages may be used to reduce your tax bill. The table below outlines the various types of mortgage and the tax relief available.
| Mortgage type | Tax relief available from 1st January 2002 | Rate of relief |
|---|---|---|
| Rented Residential Property | Relief on full interest payment | Marginal 42% |
| Domestic Mortgage 1st time buyer |
Relief on full interest payment for first 5 yrs to max of: 6,350 for married couple or widow(er) 3,175 for single person |
Standard 20% |
| Domestic Mortgage not 1st time buyer |
Relief on full interest payment to max of: 5,080 for married couple or widow(er) 2,540 for single person |
Standard 20% |
| Commercial Mortgage | Relief on full interest payment | Marginal 42% |
In the case of commercial mortgages and rented residential property, interest is usually fully allowed against tax. These types of investments are particularly suited to a pension mortgage as the tax relief is maximised. The chart below shows the actual tax relief available on a commercial mortgage taken out using both an annuity mortgage and a pension mortgage. Under the annuity mortgage you pay less interest each year, and therefore receive less tax relief. In the pension mortgage interest is paid on the total loan for the term of the mortgage and you receive the maximum tax relief possible for the term of your loan.
Maximising Tax Relief
Note: Assumes interest of 6% on loan of e500,000 over 15 years.
Tax relief on pension contributions
Personal contributions paid to a pension plan qualify for tax relief at your marginal tax rate. This has the effect of substantially reducing the cost of the pension.
For example:
| Monthly pension contribution | 1,000 |
| Tax relief @ 42%* | (420) |
| Total net monthly cost | 580 |
| * If you pay tax at the 20% rate your tax relief will be 200 and your total net cost will be 800. | |
Pension premiums paid by a company on behalf of a director are deducted as an expense against corporation tax.
Tax free investment growth
Pension contributions are invested in funds which grow tax free. This means that your pension fund should grow at a faster rate than money invested in an ordinary savings account for example, where you have to pay tax of 20% on any interest.
Tax free cash at retirement
If you are self-employed, or are a director with more than 5% shareholding in your company you can take up to 25% of your retirement fund in cash, tax free.