In ThisIsMoney, a reader asks about withdrawing their pension to help buy a house.
- Background: They have a pension with the National Grid, which is currently valued at around £250,000. Now, they’re thinking about cashing it out to buy property.
- What’s Special About A Pension?
- It’s not just a pot of money. When you’re old enough to claim it, it promises to give you a regular income.
- It adjusts annually with inflation so it won’t lose its real value.
- If you pass away before your spouse, they’ll get some of this pension.
- Can I Simply Transfer Out This Pension?
- Not immediately. If your pension is worth £30,000 or more, the law insists you get financial advice first.
- Financial advisors are required to assume that moving your pension money is generally not the best idea unless there’s a very specific reason that fits your unique situation.
- Let’s Assume I Go Through With It…
- If you decide to transfer, your £250,000 would be moved into a type of pension pot.
- But, you can’t buy a house directly from this pot. You have to withdraw the money first (assuming you’re 55 or older).
- But There’s a Tax Catch:
- You can take out 25% (£62,500) tax-free.
- The rest? It’s considered income for that year and will be taxed. If you took out the whole amount, you’d face nearly £70,000 in taxes! This means you’d only have around £180,000 left for the property.
- If you earn over £125,000 in a year, you’ll start paying taxes from the first penny you earn. Ouch!
- Thinking About Buying a Second Home?
- The government stamp duty (a tax on property purchases) is higher for second homes.
- For a property costing around £180,000, you’d owe about £6,500 in stamp duty. Plus, there are legal fees.
- Putting All Eggs in One Basket:
- If you pour all your retirement savings into one property, you’re banking a lot on that investment.
- Considering renting it out? The money you make will be taxed, and there could be times when it’s empty. Managing tenants could also become a hassle as you age.
- Hoping for a profit by selling later? The property market is unpredictable. Plus, if it’s not your primary home, you’ll owe more taxes on any profit.
- What About Your Retirement?
- Let’s say you live in the property. When you retire, you’ll only have the state pension, which might be under £9,000 a year.
- You might think about selling your home and moving to a smaller one to have some extra money during retirement. But finding the perfect smaller, affordable home might be harder than you think.
In a Nutshell: Moving your pension to buy property isn’t straightforward. You’re trading a steady, guaranteed income for the unpredictable property market. It’s essential to weigh the pros and cons and perhaps get expert financial advice before making such a significant decision.