How do pension loans work?
A pension loan is exactly what it implies it is a loan made against the value of your pension over an agreed period of time. It is different from any other loan in the sense that they are no monthly repayments or interest charges however at the end of the agreed term you will have to pay the initial loan value plus a percentage of the investment growth. You should also note that should the investment actually decrease you will only have to pay a percentage of the initial loan back.
How the process works is that if you have a UK pension with at least £20,000 in the fund it will be transferred into a self-investment pension plan or more commonly known as a SIPP.
The process although simple will be required to be done by an independent financial adviser.
Once the value has been determined a list of the UK-based equities will be provided for you to make a decision on where to transfer the pension. Once you have made a selection and the transfer has been completed you will be forwarded pension loan documents along with the terms and condition of the pension loan. Once the original documents have been received back and the industry standard 14 day cooling off period has lapsed the pension loan will be deposited directly into your bank account.
All pension loans that have been agreed usually stipulate that you will not surrender the initial value of the SIPP or you will have to repay the full loan amount plus all interest charges.
In summary it is quite a complicated process however an independent financial adviser will know which option is best for you.