Self-employed? You too deserve a proper pension

Self-employed people represent around 15% of the total UK workforce*. If you are one of those 4.9 million workers, it is important to think about your future pension needs and start saving as early as possible. If not, you could find yourself unable to retire at the age you want to because you simply don’t have enough to live on.

Self-employment – a popular choice

Being self-employed certainly has its benefits. It allows you to be your own boss, build a portfolio career with multiple income streams and maybe work flexible hours. This way of working appeals to many, as it allows them to balance work and family life more effectively. In fact, in the second quarter of 2019, 213,000 workers changed status from employed to self-employed, although the net increase in total self-employed was about 15,000. While the freedom of being self-employed is definitely an advantage, you could be missing out on workplace benefits enjoyed by employees, such as a workplace pension scheme. 

Neglecting the pension pot

A majority of self-employed people are aware of the importance of saving for retirement, according to recent research by consultancy ComRes on behalf of the Association of Independent Professionals and the Self-Employed. However, the research indicated that only about 31% of the self-employed are paying into a pension whilst 67% are concerned about their levels of saving for retirement**. 

So, how much should you save?

’As much as you can reasonably afford in your personal situation’ is the short answer. A substantial six-figure pension pot would be required alongside someone’s state pension to fund a comfortable retirement income via pension drawdown. Projections of pension income under drawdown and whether a pot of given size would provide income for life depend on a range of personal circumstances and other factors that your adviser would take into account. Some of these apply also if you are taking out an annuity, but this product is structured to provide assured income for the rest of your life. Options for inflation linking or an ongoing (lower) pension income for a surviving spouse are also available but would cost more for a given initial annuity income level.  

Among the factors to be considered when estimating how much someone can expect to receive when they retire, are:

  • How much is paid into a scheme
  • How well the investments perform
  • The length of the investment term
  • Associated charges
  • Age at retirement
  • How the benefits are taken

Whilst the investments in a drawdown pension pot may rise in market value and dividend income may increase before and after retirement, both value and income may also fall, with the pot’s post-retirement value also dependent on the size and duration of annual amounts drawn. The terms of an annuity, based on rates at the time, are agreed when it is purchased and for someone in poor health an enhanced annuity income may be available. Discussing your needs and circumstances with a qualified adviser will help to ensure that projected or quoted benefits are as realistic as possible, to enable an informed decision about the path to choose when you start taking your well-earned pension. 

Take advantage of tax breaks

The government initiative of auto-enrolling all eligible employed workers into a workplace pension scheme has helped this group to fund their retirement, but auto-enrolment is closed to self-employed people, who can find it harder to adopt a regular saving habit. There are certain tax breaks that self-employed can benefit from, including tax relief on their personal pension contributions. Tax relief is paid on contributions at up to the highest rate of tax you pay, so for 20% basic rate taxpayers paying a contribution of £80, the government will add an extra £20 in tax relief. 

Higher rate taxpayers can claim further relief at 20% (21% in Scotland) through their Self Assessment tax return, to the extent that earnings taxed at the higher rate are sufficient to permit this. Although you can save as much of your annual income as you like into your personal pension, the amount on which tax relief can be claimed is limited, the annual allowance for 2019/20 being £40,000. You can carry over any unused annual allowance for up to three years. (Some pension pots may also be impacted by the lifetime allowance, currently £1,055,000.)

Don’t rely on the state pension alone

Currently, the full state pension is £168.60 per week, and to qualify for it you need to have made 35 years’ worth of National Insurance contributions. If you haven’t paid for the requisite number of years, you can pay voluntary contributions. You should also remember that the age at which you can start claiming your state pension is rising month-by-month; it is currently about 65½ and due to reach 66 in October 2020, 67 by 2028 and 68 by 2039. So, not only is a state pension alone insufficient to fund a comfortable retirement, you will probably not be eligible to receive it until you are approaching your seventies.

Planning for the future

Being self-employed, you may think that your income is too unpredictable to commit to a regular savings plan or contribute to a pension. Indeed, it is true that your finances are likely to be more complex than someone in employment. This is all the more reason to consult a regulated financial adviser, who will be able to make recommendations based on your individual situation and income stream. It is likely that you will be advised to start saving into a personal pension, which will allow you to choose from a range of suitable funds. This should be seen as a long-term investment to help prevent your income falling off a cliff when you eventually stop working. 

 

*Office for National Statistics,
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/labourmarketeconomiccommentary/september2019

**IPSE
https://www.ipse.co.uk/policy/policy-research/latest-publications/support/saving-for-later-life.html

Turned 60 and worried about your pension?

The good news is that you still have time to sort things out Here is a check list of what you need to do to ensure you get as much income in retirement as you can.

Check your retirement age

When you first started work you probably expected to retire at 60. Now you are unlikely to get your state pension until you turn 66. Why not use the government’s online facility at www.gov.uk/state-pension-age to find when you will be entitled to receive the state pension?

Will you get the full state pension?

Have you had a career break, for instance to raise a family or maybe you were out of work for a while, or worked abroad? Were you one of the many people who opted out of SERPs in the 1980s and 1990s? If so, you should check whether or not you will get the full state pension. The pension is based on your National Insurance contributions and in some cases it is possible to top these up. Go to the check your state pension website at www.gov.uk/check-state-pension to find out how much you will get.

Do you have pensions from previous employers?

Have you worked for more than one employer? If you have, then you are likely to be a member of more than one pension scheme. Dig out the paperwork and contact the pension scheme to find out how much you are likely to be entitled to and when. It is worthwhile also finding out what the transfer value is.

Do all your pensions give you a guaranteed amount?

Public sector pensions generally give you a guaranteed income for the rest of your life when you retire. These are known as defined benefits pensions. Private sector pensions generally provide you with a pot of money and it is up to you how you use it to generate the income you need for the rest of your life. These are known as defined contribution pensions as they are based on the amount that has accumulated in the pot over time.

Will your pension income be enough?

If you have had a career break for whatever reason, or if you have not made additional contributions into your pension, you may find that the total amount of income you will receive from your various pensions is not enough for you to live the life you envisage once you stop work.

How to get more income

Well, you could consider working longer, and delay taking your pensions. Maybe you have savings you can use to generate more income. What about your home? If you have a spare room you could rent that out, but that may not be the kind of retirement you envisaged. Maybe you could downsize, but moving home is expensive and you need to be sure that it would give you the extra cash you need. If you own your home you may be eligible for what is known as a lifetime mortgage.

Consult a professional financial adviser

If all this sounds a bit complicated, then talk to a professional financial adviser. 

The value of your investments, and the income you receive from them, can go down as well as up. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

 

How to make your savings work harder

Whatever you are saving for – the deposit on your first home, your wedding or to help your children through university – it is important to put your money in a plan that gives it the potential to grow.

It’s all very well putting money aside, but where precisely are you going to put it? A standard deposit account may seem like the safe option, but with interest rates at all-time lows, your money will grow painfully slowly and could end up being worth less in real terms once you take inflation into account. Here we explain how you can make your savings work harder for you.

The whole point of saving money is to make it work hard, so that even a small amount each month has the chance to grow into a sizeable amount over time, so you can make your dream come true.

With money on standard cash accounts still lower than inflation, unless you take action your savings will end up shrinking in real terms. Assuming this trend continues, you will be able to buy less with your savings in, say, seven years’ time than you can now.

Giving your savings the potential to grow

Putting your savings into stock market investments is more likely to be a sensible choice if you are saving for the longer term, for instance five or more years, and gives you the potential for capital growth and income or interest. However, unless you have plenty of spare time and the detailed knowledge required to research appropriate investments, you should ask a professional financial adviser to recommend suitable funds. 

Reducing risk

Stock market investments are inherently risky – the value of stocks, shares and funds can go down as well as up – but there are ways of reducing risk.

One is by not buying individual stocks, shares, bonds or other types of investments directly. Most people put their money into one or more investment funds that then invest the pool of investors’ money across a broad range of types of investments. This ensures that you do not have all your eggs in one basket.

Another is by choosing investment funds that are managed in a way that suits your attitude to risk. Some people are more willing or can afford to take more risk than others. Your financial adviser will help you work out your risk profile and can then recommend investment funds that match it. Your risk profile may change with your age and circumstances. Your financial adviser will review it with you regularly.

How much might you have missed out on?

if you had stashed away £50,000 in a savings account earning the UK base rate in 2009 today you would have £52,510. With inflation higher than the base rate for most of that time, you would have become poorer in real terms. 

If instead you had put your £50,000 in UK equities, you would now have something in the region of £133,553.

Give your savings the potential to grow

You may decide that the market looks too risky to invest. But in a world where inflation is higher than savings rates, taking no risk is risky too. The best thing to do is to consult a professional financial adviser who can recommend funds that match your attitude to risk while giving your money the potential to work harder for you.

The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you put in. 

Source: FE Analytics 27 August 2019.

Time to give your personal finances a mid-life MOT?

As you get older your priorities change, and the way your personal finances are organised needs to change too. It’s time to give your financial planning an MOT.

Do you know how many pensions you have? And how much they are worth? Maybe you would like to help your children buy their first home but are not sure of the best way of doing this. And, with retirement just over the horizon, you may be worried that you won’t have enough income when you retire. 

Giving your personal finances a thorough overhaul can help you resolve these and other concerns and the best way of doing this is to consult a professional financial adviser. 

How we helped Mr Johnson get back on track

Mr Johnson*, an engineer in his early 50s, is divorced with two children. Last May he decided to book an appointment with one of our advisers. “Although I enjoy my job and want to continue working for as long as I can, I wanted to know that when I do eventually retire I will be OK financially. I wasn’t sure when I would get my state pension and had pensions from previous employers I had neglected, in addition to my pension from the utility company where I now work. Plus, I had a few random savings accounts that I had opened years ago and which didn’t seem to have increased in value.”

Jane, his financial adviser, asked Mr Johnson about his income and expenditure now, whether he was likely to inherit any money, plans for his retirement and other things, including whether he would like to help his children financially. 

“Mr Johnson is fortunate in that he will have paid off his mortgage in five years’ time. However, he has agreed to help his son with the cost of going through medical school and his outgoings will increase. I started by tracing Mr Johnson’s previous pensions. It turned out that he had three small pension pots from employers early on in his career, in addition to that of his current employer. It made sense to put them into a single fund, with the money invested for long-term growth in line with Mr Johnson’s risk profile.

Using savings to boost income

“His savings accounts were cash ISAs earning next-to-no interest, despite it being paid tax-free. We decided to keep three months’ worth of expenditure in the account paying the most interest as emergency money. We transferred the balance to a fund that generates regular tax-free income, in order to help pay for his son’s training. He can stop taking the income if he no longer needs it, for instance when he finishes paying off his mortgage, or if he inherits money from his parents.”

Ways of paying for long-term care for Mr Johnson’s parents

“I also asked Mr Johnson whether he would like me to review his parents’ finances and explain how they may be able to pay for long-term care (if it is needed) without having to sell their home or deplete their modest savings. He hadn’t realised that this might be possible. He mentioned this to his brother and parents who agreed that it would be a good idea at least to understand the options.”

I now know I can manage

Mr Johnson is happy that his finances are now arranged in a way that suits him. “Jane was fantastic. She listened and understood my concerns. I now know I can manage to help my son through his long training. And looking further ahead, my pensions should give me enough to live on without having to worry. Anything I end up getting from my parents will be a bonus.”

* We have changed real names to preserve anonymity. All financial details reflect the circumstances of the client.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Life-changing events and your finances

We know it’s a cliché but life is a journey and your circumstances and priorities change. Major changes tend to have financial consequences. Here we highlight some of them.

You will probably go through a number of life-changing events over the years, hopefully mostly for the better, although few of us get through without some unhappy ones. We inevitably get caught up in the emotions and practical issues these events throw at us. But major changes tend to have financial consequences. So when something significant happens, make sure you check your finances and make any adjustments required.

Getting married or living together

The good news is that living together is generally cheaper than living alone. Things to review at this exciting time include your Will, pensions and investments, together with life and critical illness insurance. Review your joint income and expenditure and agree a plan. You may find that jointly you have more spare cash. Time to start planning to make your dreams happen! 

Bringing up children

Your income may fall and your outgoings will certainly increase – for around 18 years or so. You will want to provide your family with financial security so it is important to review your Will, make sure you have enough life assurance to protect the family’s finances, particularly important if you are taking a career break and losing valuable benefits) and maybe start saving for school or university fees.

Death of a partner or parent

This is a difficult time, when it is important to consider the financial impact of the death on remaining family members, ensuring they are financially secure and that money is invested appropriately and tax-efficiently.

Promotion or changing jobs

If your salary has increased, do you now have surplus income? If so what would you like to use it for? Saving towards a deposit on your first home (or helping your children on to the property ladder)? Paying for your (or your children’s) wedding? Boosting your pension provision? Making overpayments in your mortgage? The amount going into your pension each month will also have increased. Could you be in danger of exceeding your Lifetime Allowance, the maximum amount that you can hold in your pension without having to pay additional tax when you access it?

If you have changed employer, what are the implications for your pension scheme and other employee benefits? Does your new employer offer the same (or better) benefits as your previous one? If not, consider whether you should replace them.

Divorce or separation

Making sensible financial decisions during this highly emotional time can help you get back on a sound financial footing and protect the interests of any children. Should you sell the family home or buy out your partner and take out a new mortgage? Can you split or share your pensions or do you need to set up a new pension? What about any joint investments? Do you need to protect your new lifestyle and that of your children?

Talk to a professional financial adviser

When something in your life changes financial issues are often the last thing on your mind. Yet consulting a professional financial adviser can help ensure that you make the most of your money, whatever the change to your circumstances.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority.

Why do I need income protection cover?

Even if you have savings, you might find it a strain financially if you were absent from work for an extended period due to illness or injury. While a short amount of time may be doable for some, mortgage costs, household bills and general everyday living expenses will quickly mount up if you’re not receiving a salary, depleting those hard-earned savings. In these situations, having income protection cover is extremely valuable, taking away money stress so you can concentrate on getting back on your feet.

What does income protection insurance do?

Whether you’re the family’s main earner, self-employed, or receive limited sick pay from your employer, you can benefit from income protection cover. If you are unable to work due to injury or illness, and sometimes forced unemployment, you may be able to claim under your income protection policy to keep yourself going. 

What kinds of policies are there?

There are many reasons why you might be unable to work, and likewise a wide range of policies to suit all eventualities. With a guaranteed policy, your premium remains the same regardless of the length of the policy term. It would only change if you decided to increase your cover. While this type of policy might initially be more expensive, it can be more cost-effective long-term. 

Another popular type of policy is a reviewable policy, where the premium will change in line with your age and medical advances. This kind of policy may be cheaper than a guaranteed one at the outset, but here the premium has the potential to increase over time.

What payout can I expect?

The amount of insurance you require depends on your personal circumstances and the level of cover will vary for every individual. It’s important to be realistic about the level of cover you need, only insure for a sum that is likely to pay out. Usually, you can insure for about two-thirds of the earnings you would have received after tax from your job, as it will not include any state benefits you can claim. Income from these policies is typically tax-free and you would have to provide evidence of your pre-claim level of earnings.  

When you begin the policy, you select the deferred period; this will depend on your circumstances. You would normally have to wait at least four weeks before payouts start, but you can choose to defer payments for longer (for example, if you receive sick pay from your employer). Some providers offer immediate cover. The policy will then continue to pay out either until you return to work, or the policy expires. 

Policies can also be short or long-term. Long-term policies have more expensive premiums, as they are designed to pay out potentially for the remainder of your working lifetime if you become so ill you can never return to work. While short-term income protection will only provide cover for a limited period (normally between six and 12 months). 

Why should I seek financial advice?

With so many options available, it might be difficult to choose which type of policy is most appropriate for you on your own. This is where an adviser is able to help. To find the level of cover you need, you’ll also need to consider what other monthly financial commitments you have, such as mortgage payments or credit card debt.

Nobody wants to put their family through financial hardship should the worst happen, which is why it is critical to get the right cover.

If you’d like to discuss the most appropriate type and level of income cover for you, just get in touch and we’ll guide you through finding the option most suited to your financial circumstances.

Retirement – Pensions Freedoms

Since the introduction of pension reforms in April 2015, retirees have had much greater flexibility to spend and invest their pension pots as they wish. However, this means being faced with important decisions, both in the run-up to retirement and afterwards, that will affect our standard of living and financial outlook for years to come. An assessment of the reforms by the Financial Conduct Authority (FCA) found that, as the pensions market is evolving, it could be to the detriment of some retirees who don’t take regulated advice when converting their savings into a retirement income. Some are simply relying on their pension provider for guidance and may end up in the provider’s default option, while others are making a poor investment choice, such as withdrawing cash from the pension pot and putting it into a low return cash fund, where it runs the risk of being eroded by inflation.

Investment choices after retirement

With the freedom to take drawdown from your pension pot, comes the problem of where to reinvest the money. It is important to diversify by investing in a range of assets to prevent you from being over-exposed in one area, whilst at the same time being able to take advantage of rising markets when they happen. There are many different assets to invest in, which include cash, corporate bonds, equities and property. Alternatively, unit trusts or investment trusts give you the opportunity to invest in a portfolio of stocks and shares with one single investment. An adviser can develop a smart investment strategy to structure your wealth in such a way as to meet both your current needs and future goals. 

Engage in your pension decisions

The FCA research revealed that up to a third of consumers enter drawdown without taking advice and another third are not even aware of where their money is invested. Working with an adviser will enable you to engage fully in your pension decisions and understand how your funds are invested.

Work with an adviser you can trust

The importance of a good relationship with a financial adviser can’t be overstated. Even when you have made the decision about where to invest your money, your circumstances may change and you might need help reviewing your strategy. Being completely comfortable in your understanding of how your pension funds are being managed and that they will last you for however long you live, are key to a long and happy retirement.

An ongoing venture

You may have retired from work, but reviewing your personal finances and ongoing wealth management will continue throughout your retirement. With the aid of a financial adviser it’s possible to develop comprehensive solutions with the goal of further prosperity and security in your retirement.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. Taking income or withdrawals in excess of fund growth may result in the fund running out quicker than expected. Inflation will reduce how much your income is worth over the years.

Identifying your investment goals

What do you want your wealth to achieve for you? Most of us will have a variety of financial goals aimed to help us at different points in our lives. Having a strategy which takes these goals as a starting point, allows you to save more effectively and should help take the worry out of your money management.

Are your goals achievable?

Rather than simply viewing investing as getting the best possible return on your money at an unspecified date, goal-based investing aims to help people meet their personal and lifestyle aims, whatever they may be, in a straightforward and simple way. It helps you to see your investment journey more clearly, from buying a home to retirement, allowing you to identify the necessary steps and to understand how much you need to save to achieve them.

Thinking short-term and long-term

In order to adopt this approach, you need to think both short and long-term. Here are some examples of the goals that will typically feature in a lifetime plan: 

  • As a short-term goal, younger people are likely to want to save for a deposit to buy a home. This might include products offering the best interest rate, with the lowest risk, such as the Help-to-Buy ISA, or a cash version of the Lifetime ISA, both of which attract a 25% bonus from the government.
  • Starting a family might be the next expense and for this you may want to look at medium-term investments such as five-year bonds and seek out products which suit in terms of interest rate and ease of access.
  • An emergency fund can be needed at any time of your life and the requirement for immediate access makes traditional savings accounts or interest-paying current accounts an option.
  • It is never too early to start saving for your retirement and this is where the products you choose can become more complex. There are many ways to save, not least of which is your pension and the government-introduced auto-enrolment pension has helped many people into a workplace pension for the first time. But this should only be the start of your plan, you may want to think about additional saving into a pension scheme, specialist investments, or buy-to-let property. You will need to think how these investments are structured and what amount of risk you are prepared to accept – you may want your pension fund in safer investments in later years as protection from short-term volatility. There are many options and the route you take can have a significant impact on the quality of your retirement years.
  • Raising a family is a long and expensive journey and investing in fixed-term bonds can provide lumps of cash at appropriate points along the way. You may want to take advantage of your £20,000 per year tax-free ISA allowance or invest in a buy-to-let property which could double-up as accommodation for your child while at university.
  • If you’re a parent, you will want to look at how to manage Inheritance Tax to allow your children to inherit as much as possible from you. 

Working with an adviser

This may all seem complex, but with the help of a financial adviser it can start to make a lot of sense. Being clear about your goals and the time horizons in which you want to achieve them, is the first step in the process.  By gathering this personal information, a financial adviser can help you define the right level of savings, your attitude to risk and the most appropriate mix of funds to meet each of your needs, while providing a rational and disciplined investment approach to help you through market volatility. Your goals are likely to change over time, so it makes sense to have regular reviews of your investments to ensure they continue to meet your needs.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Developing a savings habit

It is a comfort to know that, should the unexpected happen, you have some money put aside to get yourself out of a short-term dilemma. It may be your car, your washing machine, your pet or your own health that requires an immediate amount of money spent on it. Whatever it is, it’s important to have a financial buffer and developing proper savings techniques will not only help you to build up a fighting fund for short-term emergencies, but will also encourage you to save regularly as much as you can afford, giving you the benefit of financial security and independence for the longer term.

Not everyone has the same financial goals and your idea of what you can save each month may be on a different scale to someone else. The fundamentals stay the same and here are a few basic rules to consider.

Encouraging saving

Even if the amount you are able to save each month is small, it is still important and if the saving is seen as part of a larger financial goal, it can be easier to find the motivation. A recent report from the BBC showed that technology can play a role in encouraging us all to save. Apps load-up pictures of savings goals, like a car, or a first home, to your mobile phone. Then, as you save more towards your goal, the image becomes clearer. If you withdraw money, the picture starts to disappear. Prize-based savings such as Premium Bonds can also make saving money more tangible.

Your pension

The number of UK workers saving into a pension scheme has increased since the government introduced auto-enrolment to workplace pension schemes. Saving for retirement is now much easier and as a result, pension scheme membership has been steadily nudged up to over ten million people. 

The minimum contribution to a workplace pension has recently gone up from 5% to 8% of your salary. You may be lucky and find that your employer has decided to pay the whole 8%. Legally however, they only need pay 3%, leaving you to pay the remaining 5%. While this is all good news, it is unlikely that contributions at this level will be enough to fund your ideal retirement, especially if you joined the scheme later in your career. You should not be lulled into thinking that your future prosperity is assured, but look at other ways to save and invest for your future.

If you are a member of a workplace pension scheme, it is worth checking whether your employer will match any increased contributions that you make. Contribution matching can help you build retirement benefits in your pot at a faster rate.

Paying off debts

Your priority might be to pay off your debts before you can think about saving and many people are deciding to do this while interest rates remain low. You may also consider that, conversely, low interest rates make saving less rewarding but don’t use this as an excuse to avoid saving altogether.  

Other ways to save

Whatever stage you are at in your career, it is worth developing a financial plan to which you can refer and adjust as your income changes. Making it a routine to check the plan, makes saving a part of your regular home admin and seeing the amount grow may even encourage you to save more. As your savings become more complex, you may want to consider working with a financial adviser who will be able to discuss your financial goals with you, suggest ways of broadening or protecting your investments and revisit your plan with you over the months and years. 

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. 

Is there a trend for longer term mortgage deals?

Choosing the length of time it will take you to pay off your mortgage is sometimes overlooked. Typically, our attention is focused on the type of mortgage: should you go for a repayment or interest only deal? A fixed rate or a variable rate? But deciding on the length, or term as it is known, is an important part of your budgeting.

How to choose your mortgage term

Traditionally mortgages have been for 25 years and that is still the standard term in the UK, but long term mortgages of up to 40 years are becoming popular and are readily available. This trend can be explained by the significant rise in house prices in recent years, which have not been matched by growth in wages. This means, particularly for first time buyers, it is hard to meet the affordability requirements demanded by lenders, so a mortgage of a longer term and with reduced monthly repayments can be a good option.

The benefits of a long term repayment mortgage are that the monthly payments are cheaper and interest rate rises will have less effect. However, the downside is that by the end of the term, the amount of interest that you will have paid will be far greater because the loan is repaid over a longer period. It will also take longer to build up equity in your property.

Who can take out a long term mortgage?

These longer term deals have come about to make monthly mortgage payments more affordable for first-time buyers, generally people in their twenties or thirties. Lenders usually want the term to end before you reach retirement, or their maximum age, so older borrowers can find it difficult to find a lender. It may be possible if you can show that your retirement income will be sufficient to make the payments for the duration of the term.

It is worth checking if your lender allows you to make overpayments without penalties, so that if you receive a windfall or if you are able to afford more each month, you can pay this off and reduce the length of the loan. This flexibility can be very useful over the life of these longer terms.

Our Lighthouse mortgage advisers can work alongside you to calculate how your monthly payments would vary with different terms. They will look at the impact on the overall cost of the loan. They will consider any potential changes in your circumstances and help you find a lender with a deal to suit your situation. As your mortgage approaches its final years we can advise if you can reduce the term, so that you’ll pay less interest and become mortgage free sooner.

Buying a home is a significant milestone and exploring all your options before you choose a mortgage provider and suitable product makes good sense.

Important Information: Your home may be repossessed if you do not keep up repayments on your mortgage.