Pension Mortgages - Greg Vaughan

Pension Mortgages

The pension mortgage disaster…

The biggest mis-selling scandal not to receive public attention is the practice of linking a pension to a mortgage.

The theory is the tax-free lump sum from the personal pension can be used to repay the mortgage loan when it becomes due, with the balance of the retirement fund going towards providing a regular pension. A good theory, but a disaster in practice as most personal pensions have suffered dismal performance.

If you were sold a pension mortgage, please contact me or read more below about claiming compensation…

The pension mortgage nightmare…

Not only were pension linked mortgages a technical breach of Inland Revenue rules (which state that a pension policy’s sole purpose should be to provide retirement benefits), an alarming number of these plans are unlikely to ever produce a high enough tax-free lump sum with which to repay the loan. The current value of the average shortfall is between £12,000 and £15,000 and is destined to grow bigger the longer the mortgage remains on this basis.


Pension mortgage no longer in force…

You may still have lost out by having one at all, even if you have since made changes to your mortgage.

I particularly want to hear from people that have already replaced their pension mortgage, as most don’t know they may be due compensation.  If you would have been better off with a different mortgage type, you are entitled to claim your losses back. You do not need your pension mortgage to be still running to be eligible for compensation.

Claiming compensation – the problem…

As personal pensions have generally not performed as well as the firms that sold them said they would, many people will not receive high enough lump sums to repay their mortgages. Many will have to sell their homes and move to something smaller and cheaper just to cover the shortfall and repay the debt.

However, the financial services industry regulator, the Financial Conduct Authority (FCA), won’t let you take your personal pension provider to task about poor investment performance. The FCA says firms are not to blame when investment returns are constrained by wider economic factors (such as falling stock markets and low interest rates) that are beyond their control.

In many ways, this is a similar crisis to that currently facing endowment mortgages, which most people will have heard about due to the media attention accorded to it. Strangely, not much coverage has been given to personal pension mortgages, although shortfalls are likely to be even bigger. This is because only a quarter of the policy’s value – the lump sum – can be used to off-set the mortgage debt; in contrast to an endowment where the whole maturity value is paid as cash. This problem really is going to be a disaster for many, many people.

The solution…

The first step in the process is to find out whether you were a victim of mis-selling. The term mis-selling is a common one within the financial services industry and it basically means that the sales process did not follow all the selling rules laid down by the industry regulator.

Insurance companies, brokers and the banks and building societies that sold most of the personal pension mortgages currently in force had to follow complex selling rules in each sale, but crucially many firms either did not understand them or were simply careless and made mistakes.

If you can demonstrate to the firm that the sales process didn’t follow the rules, then the company that sold your pension-linked mortgage will not be able to argue that it did everything necessary to make sure such an arrangement was suitable for you. And if it cannot do that then your policy will automatically be deemed to have been mis-sold, and this is the key to winning compensation. Only in the event of a mis-sale is the firm duty bound under Financial Conduct Authority rules to check if you have suffered a financial loss, and to pay you compensation if so. In the vast majority of cases such “loss assessments” confirm that compensation is due.

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