Topic 22: Other repayment vehicles for interest-only mortgages

Question 1

Tell me about ISA mortgages

How do they differ to endowment mortgages (IE where an endowment is the chosen repayment vehicle)

Answer 1

An ISA mortgage is simply just where an ISA is used to save money to repay an interest only mortgage

Like an endowment mortgage, only the interest due on the loan is paid to the lender during the term – the entire capital remains outstanding throughout
the term

Unlike endowments where life cover is included, separate life cover is needed to repay the loan should the borrower die before the end of the term.

Question 2

What are innovative finance ISAs?

Answer 2

A type of investment ISA that involves investment in peer‑to‑peer lending platforms

Question 3

What underlying investments are allowed for stocks and share ISA’s?

Answer 3

Equities
Corporate Bonds
Gilts
Life Assurance
Investment Trusts
Unit Trusts
Open Ended Investment Companies (OEIC’s)

Question 4

What does it mean if your ISA is flexible?

Answer 4

The ISA holder can withdraw cash held in the account and then re‑invest it back into the same account in the same tax year without the re‑investment counting as part of that tax year’s ISA contribution allowance.

Question 5

How long do those with help to buy ISAs have to use the scheme to purchase a property?

Answer 5

Holders then have until November 2030 to buy a property and claim the bonus

They were discontinued in 30 November
2019

Question 6

For lifetime ISAs at what earliest point in the property buying process can the funds be used?

What if the sale falls through?

How does this differ to help to buy ISA’s?

Answer 6

The funds can be released to provide a deposit at exchange of contracts.

If the sale falls through, the money can be repaid to the account without affecting the year’s
contribution limit

For help to buy ISA’s the government bonus is paid to the buyer’s conveyancer ready for completion, subject to a deadline of 1 December 2030. This contrasts with the Lifetime ISA, where the bonus can be paid at
exchange of contracts to form part of the deposit

Question 7

What happens if the lifetime ISA holder dies?

Answer 7

If the investor dies before withdrawing the fund,
the ISA wrapper is removed and the fund becomes part of their estate.

No withdrawal penalty would be applied (ie, they receive the government bonus) , and a surviving spouse could claim the additional permitted subscription (

Question 8

What is a ‘Continuing ISA’?

Answer 8

This refers to what happens upon death of an ISA holder.

Upon death ISA funds continue to retain tax advantages until the earlier of:

-Completion of administration of the deceased’s estate

-Closure of the ISA

-Three years from the date of death

During this period, the ISA is referred to as a ‘continuing account of a deceased investor’, often abbreviated to a ‘continuing ISA’

Question 9

The surviving spouse or civil partner of an ISA holder can claim an ‘additional permitted subscription’ (APS)

Tell me about this

Answer 9

This allows their own ISA allowance to be increased by the higher of the value of the deceased’s ISA fund at the time of their death or its value when the allowance is claimed.

The APS allowance must be claimed by the surviving spouse:
Before 3 years after the date of death OR 180 days after administration of the estate is complete

As a result of a successful claim, their
own ISA allowance for the relevant tax year will be increased by the APS.

IMPORTANT: This additional allowance applies
only to a spouse or civil partner

Question 10

Who is eligible for Additional Permitted Subscription (APS) ?

Answer 10

The SURVIVING spouse or civil partner only

Question 11

It is possible to use unit trusts and open‑ended investment companies (OEICs)
as mortgage repayment vehicles

True or false?

Answer 11

True

However, since both these vehicles can be
held within an ISA, it is more tax efficient, and more common, for them to be used as part of an ISA repayment ‘package’ as a stocks and shares ISA
permitted investment

Question 12

What are unit trusts?

Answer 12

Unit trusts are pooled (or collective) investments created under trust deed, with investments made via regular payments or single lump sums.

They are open‑ended, which means that there is no limit on the number of units or shares that can be issued.

Unit trust funds are managed by a fund
manager

Unit trust subject to charges, the principal of these being the initial charge and the annual management charge

Taxation of unit trusts depends on the nature of the underlying investments (ie, is it an equity trust where income is treated as dividends, or a fixed income trust where income is treated as savings

It is classed as fixed interest if 60% or more of the underlying assets are fixed interest securities. Classed as an equity trust if less than 60%.

The fund itself is exempt from capital gains tax, but the investor’s gains on disposal are subject to capital gains tax

Must be authorised by the FCA

Question 13

What are Open Ended Investment Companies?

Answer 13

OEICs are pooled (or collective) investments, with investments made via regular payments or single lump sums.

OEIC’s are limited companies

It is open‑ended, which means that there is no limit on the number of shares that can be issued.

OEIC fund is managed by the authorised corporate director (ACD). The ACD can create shares to meet demand and must buy back shares from investors who want to cash in their investment

Taxation of OEICs depends on the nature of the underlying investments in the exact same way as unit trusts

OEICs are subject to charges, the principal of these being the initial charge and the annual management charge as well as a dilution levy in applicable cases

Must be authorised by the FCA. The OEIC is Overseen by a depository (a bank) who is also authorised by the FCA

Question 14

What is a defined benefit pension scheme also known as?

Answer 14

A final salary scheme

Question 15

What is the most an individual can contribute to their pension fund in a given tax year whilst still receiving tax reliefs?

Answer 15

The most that an individual can contribute to pensions in a tax year and receive tax relief on the full amount is £3,600 or their earned income if higher

Question 16

An individual’s employer can pay into an employee’s pension and receive tax relief

How do they do this?

Answer 16

By claiming it as a business expense

Question 17

Contributions to an occupational pension scheme are paid through the ‘net pay’ arrangement

Tell me about this

Answer 17

Contributions are deducted from gross pay before tax

Question 18

A tapered annual allowance applies to someone who has both threshold income exceeding a certain limit AND adjusted income exceeding a certain limit

What is threshold and adjusted income?
What does the tapering cause?

Answer 18

threshold income is total
income less personal gross contributions to registered pension schemes

adjusted income is total
income plus any employer contributions to a registered pension scheme

If you have exceeded both limits above you receive a tapered annual allowance:

This causes the following:

The taper reduces the annual allowance by £1 for every £2 of adjustable income above the threshold income limit, subject to a specified minimum
annual allowance

Question 19

What is the Money purchase annual allowance?

Answer 19

Once a pension plan holder starts to take benefits using flexi‑access drawdown or uncrystallised pension fund lump sum arrangements (see section 22.3.2), the money purchase annual allowance applies

This means that a much smaller annual amount contributed into a defined‑contribution (eg personal pension) scheme each year will lead to a tax charge . OBVS NOT GOOD SO PEOPLE SHOULD SPEAK TO ADVISORS BEFORE DOING THIS

Question 20

WHAT IS THE LIFETIME ALLOWANCE?

Answer 20

The lifetime allowance (LTA) is the maximum amount that can be held in pension funds by an individual at the point when they take benefits

If the fund exceeds the LTA on taking the benefits, there is a 55% tax charge ON THE EXCESS if taken as a lump sum, or 25 per cent if it is taken as income

Question 21

There are three options for those wishing to take their pension benefits?

What are they?

Answer 21

• uncrystallised funds pension lump sum;
• flexi‑access drawdown;
• annuity

Question 22

Tell me about the uncrystallised funds pension lump sum

Answer 22

It is one of the options to withdraw your pension benefits

The planholder can take the entire fund as a single lump sum or a series of smaller lump sums. 25% of each lump sum is tax‑free, with the remainder added to the planholder’s income for that tax year and subject to income tax depending on what bracket the pension benefit causes them to fall into

For example, if they receive salary at the basic rate and the pension benefits make them fall into higher rate, those benefits will be taxed at a higher rate

This means it is not an efficient way to pay off a mortgage

Question 23

Tell me about the Flexi-access drawdown

Answer 23

The planholder can take 25 per cent of the fund as a tax‑free lump sum (PCLS) and then take an income (known as ‘drawdown’) from the balance of the fund.

The income is taxable in the same way as earned income. The income can be stopped and started as required and there is no minimum or maximum
amount required. This is good because you can change the amount of income you receive each year which can improve tax treatment (remember it is FLEXIBLE = ‘FLEXI ACCESS’)

The income is taken directly from the fund, which remains Invested (making it a more risky option)

It is also possible to take the full 25 per cent tax‑free cash at the start and delay taking the income until a later date.

In terms of mortgage repayment, this is likely to be the most efficient method of providing the required lump sum

Question 24

Tell me about Annuity

Answer 24

The planholder can take the tax‑free cash and then use the balance of the fund to purchase an annuity.

The annuity will provide an income for life, and can be:
„ fixed; or
„ escalating by a set percentage each year or with inflation; or
„ investment‑linked (with‑profits and unit‑linked).

It is also possible to arrange an annuity that provides a reducing income (designed for those who need extra income earlier in retirement), or one that
runs for a defined term rather than for life.

Question 25

What are joint life annuities

Answer 25

Joint‑life annuities continue to pay a spouse or dependant an income on the death of the annuity holder, typically between 50 and 100 per cent of the
original annuitant’s income for the rest of their life

Question 26

In relation to pensions what happens upon death of the plan holder?

Answer 26

If a planholder dies before the age of 75:

the remaining fund can pass to their
chosen beneficiaries (who do not have to be dependants).

Beneficiaries can then take the fund as a lump sum, take income withdrawals or buy an annuity – all tax‑free.

Income from joint life and guaranteed annuities that started payment on or after 6 April 2015 is tax‑free when paid to the survivor or a beneficiary. However, those that were in payment before 6 April 2015 are taxed as the beneficiary’s income.

Death at or after age 75:

If the individual dies after reaching the age of 75, beneficiaries can take the fund as a lump sum, take income withdrawals or buy an annuity – all of these
will be taxed at the beneficiary’s marginal tax rate.

Income from joint life and guaranteed annuities will be taxed at the survivor or beneficiary’s marginal
rate

Question 27

What is a plan holder in relation to pensions?

Answer 27

Simply the individual who holds or owns a pension plan

Question 29

What are the advantages/disadvantages of pension mortgages?

Answer 29

Question 30

What are the advantages/disadvantages of pension mortgages?

Answer 30

Question 31

The bonus on a Lifetime ISA is calculated as a percentage of contributions made before the investor’s:

50th birthday.

60th birthday.

property is purchased

Answer 31

A

Question 32

Which option when taking benefits would provide the most tax-efficient way for Jason to take cash from his pension plan to pay off the mortgage?

Uncrystallised funds pension lump sum (UFPLS).

Flexi-access drawdown

Answer 32

Flexi-access drawdown

flexi-access drawdown would allow Jason to take up to 25% of his pension fund tax free. He could leave the balance of the fund invested but would not have to take any income, which would avoid further tax until he needed income in retirement. UFPLS would enable Jason to take a lump sum to pay off the mortgage, but only the first 25% of the cash would be tax free, with the balance taxed as income.

Question 33

Nichelle’s annual earnings are £5,000 below the pension annual allowance and her employer is prepared to make a contribution to a personal pension. What is the maximum that Nichelle can contribute personally without facing any tax complications? An amount:

up to her earnings.

up to the annual allowance.

as much as she likes as long as her employer does not contribute

Answer 33

B

Nichelle can make personal contributions up to her earned income without any tax implications. Her employer can contribute the balance up to the annual allowance without incurring any penalties for Nichelle

Question 34

A personal pension planholder dies at the age of 76, having not taken any benefits from his pension fund. Which of the following is true?

The fund will be subject to inheritance tax but his beneficiaries will pay no tax on any lump sums or income taken from the balance of the fund.

The fund will not be subject to inheritance tax, but his beneficiaries will pay income tax on any lump sums or income they take from the fund.

The fund will not be subject to inheritance tax and any lump sums or income his beneficiaries take from the fund will be tax free.

Answer 34

The fund will not be subject to inheritance tax, but his beneficiaries will pay income tax on any lump sums or income they take from the fund.

WHY: Benefits from a pension fund are not subject to inheritance tax. If the planholder dies on or after their 75th birthday, any benefits taken by their beneficiaries will be subject to income tax at their marginal rate

Question 35

A Help to Buy ISA saver will need a minimum of £1,600 in the account to earn a bonus. True or false?

Answer 35

TRUE

Question 36

tanya is self-employed and wants to make a pension contribution that exceeds her earned income for the year by £5,000, but is below the annual allowance. The excess will be subject to a tax penalty. True or false?

True
False

Answer 36

False.

The maximum Tanya can pay in and gain tax relief is equal to her earned income, or the annual allowance if her income exceeds the allowance. If she pays in more than that, she will not receive tax relief on the excess but there will not be a penalty. REMEBER THIS