A substantial proportion of the 150,000 individuals with pension-backed mortgages may struggle to repay their loans by the required date, according to an investigation by BBC Radio 4’s Money Box programme.
The concern stems from two market conditions. In the mid-1980s to the early 1990s, pensions were sold on an assumption of growth rates from 8% to 13%. This is no longer a sustainable rate as investment returns are much reduced. As a result, the final fund’s tax-free cash sum may not be sufficient to repay the mortgage. Annuity rates have also fallen, so the new pensioner may also suffer a great deal by having a smaller annuity.
It is the individual’s responsibility to check the performance of their investments. However, the fear is that many may have no idea that they are no longer on course to pay off their mortgage.
Steve Hoare, managing director of Homeloan Partnership, said this was a worrying situation.
He said: ‘I have never liked pension mortgages and have always thought the fund would be needed for retirement, rather than paying off a mortgage. But they were tax efficient, which was their appeal. With the growth problems we have had recently ‘ we may see the same problems that we saw with endowments ‘ it is another mis-selling scandal waiting to happen.’
However, it is difficult for each lender to know how much of their mortgage book would be exposed to pensions as a repayment vehicle.
Eddie Smith, director of business development, at Verso, said: ‘All our mortgages are sold by intermediaries. We do not deal directly with the public, our customer is the broker, although clearly there is a customer behind them.
‘Like most lenders we do not assign any repayment vehicles, or ask what they are, be it an endowment or pension. What we do, which is all we can do, is make sure, in terms of the offer, that the borrower has had full independent financial advice. People should take regular advice on an annual basis. If their broker is worth their salt, they should be seen on a regular basis and this is laid out in our literature.’
But not everybody is so concerned that this will turn into an industry headache.
Mike Boles, director of Savills Private Finance, said: ‘I would suspect that a lot of pension mortgages sold may have changed their repayment vehicle by now. I doubt there are that many of them out there. Over the last five years or so there has been a lot of conversion to other investment vehicles.’