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Pep Mortgage Puzzle

I ended last week&#39s article on the note that the reduction in ultimate fund value, say, of a Pep caused by the eventual inability to reclaim ACT credits could have a significantly important impact on those who are funding for a particular amount to be produced to repay an interest-only mortgage.

Commentators have, even this early, been making some noises about a special case being made for a reprieve in respect of Peps being used to repay a mortgage.

In this context, some are concerned with regard to a cap on overall investment that may be made and some are concerned purely with the reduced tax attraction.

The problem with making a special case for Peps used for mortgage repayment is determining just which Peps would qualify for such special treatment. The Pep, unlike a collateral life insurance policy such as an endowment, is not and cannot be assigned to the lender.

There is no obligation on the borrower to use Pep proceeds to repay the mortgage.

Of course, it would be possible to not permit anybody with an endowment mortgage to qualify for special treatment in respect of any Pep that they have but that would leave open for special treatment any investor who has an inter est-only mortgage and a Pep. Clearly, a little more thought needs to be given to this area.

With regard to the validity of using a Pep as the repayment vehicle for an interest-only mortgage, one clearly has to take into account the reduced tax attraction of a Pep in det ermining the contribution necessary to produce the funds required at the appropriate time.

Anybody contemplating an interest-only Pep-repayable mortgage clearly needs to take into account the uncertainty surrounding the future of Peps and the potential shape of their replacement together with any cap on investment in tax-favoured vehicles which is likely to be imposed.

The bottom line to all this may well mean that one ought to budget for a higher amount to be allocated to provide for capital repayment.

It is, I think, reasonable to assume that the tax treatment of Individual Savings Accounts will not be as favourable as the treatment of Peps or Tessas has been in the past.

The Government has a limited amount of "tax incentive" to spend and it is, as I have mentioned in past articles, keen to secure the greatest payback for its expenditure.

It is this fact that has apparently caused the issue of higher-rate tax relief on pension contributions to once again be raised.

As was the case for private medical insurance, Peps and Tessas, there is apparently a strong feeling that giving relief to higher-rate taxpayers at the highest rate is not the best way to spend scarce tax resources. The perceived wisdom is that those people would have invested in pensions or saved for the long term (as appropriate) without the incentive.

The quite clear aim of the second-tier pensions review and the new deal for long-term savings is to encourage sav ing by those who currently do not save or who do not save very much.

Having mentioned second- tier pensions, it will be interesting to see what emerges on this front.

For example, just where does second-tier end and completely open private pensions start?

Aside from this perplexing question, some element of compulsion appears to be gaining momentum but, in respect of any such compulsory contribution (from employer, employee or both), it is expected that there will be some scheme of accreditation for providers and products would have to provide substantially safety-oriented or guaranteed funds with low charges to qualify as second-tier or stakeholder pensions.

Presumably, no such conditions will need to be satisfied in respect of third-tier pensions.

I will continue my look at this subject next week.


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