Unit 6:22 Alternative Mortgage Repayment Methods

Question 1

ISA specs

Answer 1

• UK taxpayers can deposit up to £20K earning tax-free interest
• UK residency required for eligibility
• Must be 16+ for cash ISAs
• Must be 18+ for stocks and shares ISAs
  -no JOINT ISAs
• Annual cash withdrawals from flexible ISAs can be replenished within same tax year
• Existing cash balances can be transferred between ISA providers or different types of ISAs

Question 2

Help to Buy ISA details

Answer 2

• Can be used for property purchases up to £450,000 in London,
• and £250,000 elsewhere
• Monthly deposit limits: up to £1,200 in first month, then £1-£200 monthly thereafter
• Government adds 25% bonus on savings (maximum £3,000 per person)
• Withdrawals permitted anytime without penalty, but bonus only buying a property
• Must use before 2030

Question 3

Lifetime ISA

Answer 3

• Available to individuals aged 18-39 (can only contribute till 50) for saving toward first house or retirement
• Up to £4,000 can be paid in annually (counts toward overall £20,000 ISA allowance)
• Government provides 25% bonus on annual deposits (4k yearly max £1,000 bonus)
• Can be used alongside other ISAs including stocks and shares ISAs

Question 4

Lifetime ISA penalty

Answer 4

• Withdrawals for purposes other than first home purchase or retirement (age 60+) incur a 25% penalty
• This penalty applies to both the original savings and the government bonus
• Can lose more than just the government bonus
• Designed to discourage use of Lifetime ISA for short-term savings

Question 5

ISA advantages and disadvantages

Answer 5

• Advantages: No income/capital gains tax liability, flexible withdrawals, potential for early mortgage repayment if investments perform well
• Disadvantages: No guarantee of fully repaying mortgage, no life cover included
• Fund value could affect eligibility for means-tested benefits
• Consider using in conjunction with other repayment methods for security

Question 6

Tax on investment returns

Answer 6

• Investments primarily in company shares pay dividends subject to income tax at the dividend rate corresponding to your income tax band
• Investments mostly in cash and fixed interest (bonds, GILTs & annuities) have tax deducted at source
• Tax treatment varies depending on the investment type and your personal tax circumstances

Question 7

Pension as a mortgage repayment vehicle

Answer 7

• 25% tax-free lump sum from pension at age 55 can be used to pay off mortgage
• Maximum withdrawal amount limited by Lifetime Allowance (£1,073,100)
• Equates to maximum potential mortgage repayment of £268,275
• Consider tax implications and impact on retirement income before utilizing

Question 8

Pension benefits access

Answer 8

• From 2028, minimum pension access age will be set at ten years below State Pension Age (increasing to 57)
• When State Pension Age increases to 67 in 2028, minimum pension access age will increase accordingly
• Options for accessing pension include: flexi-access drawdown, annuity, or Uncrystallised Funds Pension Lump Sum (UFPLS)

Question 9

Flexi-access drawdown (FAD)

Answer 9

• Allows planholder to take 25% of fund as tax-free lump sum, then draw income (“drawdown”) from remaining balance
• Income is taken directly from the fund, which stays invested in chosen assets
• Provides flexibility to adjust withdrawal amounts based on changing needs
• Subject to income tax at the individual’s marginal rate

Question 10

Annuity

Answer 10

• Planholder can take tax-free cash then use remaining fund to purchase an annuity providing income for life
• Annuity types include: fixed (same amount), escalating (increases annually by set percentage), inflation-linked, or investment-linked
• Provides guaranteed income security regardless of longevity
• Once purchased, typically cannot be altered or exchanged

Question 11

Uncrystallised Funds Pension Lump Sum (UFPLS)

Answer 11

• Each withdrawal is split: 25% tax-free, 75% taxed at your income tax rate
• Advantages: spreads tax-free allowance across multiple withdrawals; maintains investment growth; simpler setup than drawdown
• Suitable for those wanting occasional access without committing to drawdown or annuity
• Provides flexibility to adjust withdrawal timing based on personal circumstances and tax planning

Question 12

Home Reversion

Answer 12

• Sell all or part of your property while retaining the right to live there rent-free
• Receive lump sum or regular payments in exchange for selling a share of your home’s value
• No interest accumulates as this is not a loan but a sale of equity
• Provider gets agreed percentage of property value when sold after death or moving to care
• Typically offers lower amounts compared to property value (30-60%

Question 13

Lifetime Mortgage

Answer 13

• Loan secured against your home that doesn’t require monthly repayments
• Interest compounds (rolls up) over time, significantly increasing the final debt
• Can include drawdown options to access money in stages as needed
• Full ownership of property remains with borrower
• Options for inheritance protection or to guarantee equity percentage
• Can include interest payment options to reduce final debt