Can I Use My £250,000 Pension to Buy a House? And Is It Smart?

In ThisIsMoney, a reader asks about withdrawing their pension to help buy a house.

  1. 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.
  2. 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.
  3. 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.
  4. 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).
  5. 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!
  6. 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.
  7. 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.
  8. 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.