Can I buy a house with my pension instead of a mortgage?
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I am in my late fifties and plan to continue working until I reach my state retirement age which is age 67. I have a personal pension currently worth £400,000. My wife and I would like to move to a house on the coast this year. We would be looking to spend a bit more than our current house is worth, so I was thinking about taking the tax-free cash from my pension to save us having to take out a larger mortgage. Is that a good idea?
Phil Beck of Smith & Pinching responds:
You normally have the right to draw up to a quarter of your fund as a tax-free pension commencement lump sum anytime after you reach the minimum retirement age, which is currently age 55 but is due to go up to age 57 in April 2028. The lump sum would certainly help you buy a more expensive house. However, it’s important to remember that the cash you draw from your pension will reduce the future income you may be able to get in retirement.
I appreciate that a lower income in retirement could, in your circumstances, be potentially offset by lower mortgage payments if you borrow less, so there are some complex calculations to do here to ensure you give yourself the best outcome for your retirement.
In fact, you can withdraw more than the tax-free lump sum from your pension savings, if you want to, but anything beyond 25pc of the value of your fund would be taxed as income in the year that you take it. However, taking more than the initial lump sum triggers a change in the amount that you can contribute to your pension fund each year after that point, so may limit your ability to save further into your pension between now and your retirement. It’s vital to plan carefully if this is a route that you might want to consider.
I strongly urge you to get some independent financial advice at this stage to ensure that the actions you take now don’t compromise your planning for the future. An adviser can use lifetime cashflow planning software to create projections under different scenarios, so that you can see the possible outcomes of the options available to you.
Any opinions expressed do not constitute advice. The value of your investment can go down as well as up and you may get back less than the amount invested. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk