Topic 22: Other repayment vehicles for interest-only mortgages

Question 1

What is an Individual Savings Account (ISA)?

Answer 1

A tax-efficient savings vehicle with all income and gains exempt from income tax and capital gains tax. There are limits to the amount that can be invested each tax year, as set out in the Budget.

Question 2

What is a Stocks and shares ISA?

Answer 2

An ISA that can hold shares, unit trusts, open-ended investment companies (OEICs), investment trusts and bonds. These are the ISAs most suitable as a repayment vehicle for interest-only mortgages, although they don’t offer any performance or growth guarantees so carry an element of risk.

Question 3

What is a Cash ISA?

Answer 3

An ISA that is invested in cash or money market investments. While cash ISAs are more or less risk-free, they do not offer capital growth and so are not suitable for interest-only mortgage repayment.

Question 4

What is a Help to Buy ISA?

Answer 4

A form of cash ISA and a government initiative to help first-time buyers aged 16 or over to build up money for a deposit. The government pays a bonus of 25% of the amount saved (subject to limits) when the saver buys their first property. This product has now closed for new applicants.

Question 5

What is a Lifetime ISA?

Answer 5

A government initiative to help individuals aged between 18 and 39 save for retirement or to buy their first property. Investment can be in cash or stocks and shares, and the government will pay a 25% bonus on contributions made up to the age of 50 (subject to limits). The bonus can be claimed from the earlier of age 60 or when they buy their first house.

Question 6

What is a Unit Trust?

Answer 6

Open-ended pooled investment set up under a trust deed and offering a wide range of funds. Investors buy units in the fund, with each unit representing an equal share of the fund value.

Question 7

What is a Open-ended investment company (OEIC)?

Answer 7

Similar to a unit trust in operation, but set up as a company (not a trust) and offers shares to investors instead of units. Each share represents an equal share of the fund value.

Question 8

What is a Fund Manager?

Answer 8

Manages a unit trust fund, makes investments and values the fund.

Question 9

What is a Authorised corporate director (ACD)?

Answer 9

Manages an OEIC and has similar responsibilities to a unit trust fund manager.

Question 10

What is Pension tax relief?

Answer 10

Those contributing to a pension receive tax relief on personal contributions up to the higher of a set amount or their UK earned income each year. An individual can contribute more than that amount but will not receive tax relief on the excess.

Question 11

What is Annual allowance?

Answer 11

If an individual also receives pension contributions from their employer, the combined contributions from employee and employer cannot exceed the annual allowance in any year. Any amount over the annual allowance is added to the employee’s income and taxed. This tax penalty does not apply if only the employee contributes; they just don’t receive tax relief on the excess.

Question 12

What is Tapered annual allowance?

Answer 12

If an individual has threshold income and adjusted income exceeding certain limits, the annual allowance is reduced by £1 for every £2 of income above that figure, subject to a minimum annual allowance.

Question 13

What is Money purchase annual allowance?

Answer 13

If an individual has already started taking pension benefits using flexi-access drawdown or the uncrystallised pension lump sum option, their annual allowance is reduced to a much lower figure.

Question 14

What is Lifetime allowance?

Answer 14

The maximum amount an individual can hold in pension funds when they start to take benefits. If the individual has more than the lifetime allowance in the fund, they will be subject to a tax charge when they take benefits

Question 15

What is Crystallisation?

Answer 15

The technical term used when a pension planholder takes any benefits from their pension.

Question 16

What is Uncrystallised funds pension lump sum (UFPLS)?

Answer 16

A pension holder can withdraw their entire fund in one go, or take a series of smaller lump sums using the UFPLS option. The first 25% of each withdrawal is tax-free, with the balance taxed as income.

Question 17

What is Drawdown?

Answer 17

Some or all of the planholder’s money remains invested and they take money out as and when they need to. This provides flexibility and control, but there is the risk that investments could go down, and in some cases there is the risk that the individual will run out of money early.

Question 18

What is Flexi-access drawdown?

Answer 18

Pension holder can take up to 25% of their fund as a tax-free lump sum, and leave the balance invested to provide a taxable income. Once they take the cash, the holder can take as much income as they wish, or defer doing so for as long as they wish. It is also possible to take part of the fund as and when required.

Question 19

What is Annuity?

Answer 19

A lifetime income in exchange for some or all of the pension fund. The benefit is a guaranteed income for life, although rates tend to be low, and the money used to buy the annuity is lost from the fund. It is possible to provide a continuing income for a spouse or dependant.

Question 20

What is Pension death benefits?

Answer 20

If a personal pension planholder dies before taking all of their pension fund, it can be passed on to their chosen beneficiaries. Pension funds are free from inheritance tax. If the planholder dies before the age of 75, the beneficiaries can take the funds as income or cash, both of which will be tax-free. If they die aged 75 or over, benefits taken will be taxed at the beneficiary’s marginal tax rate