House Buying Vs Pension

GeorgiaMW

Hi Guys,

Wondered what you all think. We have some money (probably about 1/2 of what we'd need for a deposit on the new help to buy scheme, I'm sure we could ask generous relatives to help us with the rest) saved in a pension scheme through my husband's PREVIOUS company. We're really struggling to afford to get on the property ladder because we simply cannot save anything. We're currently living inside our means but after years of being stupid with money and only just in the past 6 months decided to cut up the credit cards and budget carefully, we are still paying off debts with whatever we have left over every month. So far doing REALLY well, we've reduced our overdraft by half and thus our interest payments, we've paid off all our purchase credit (sofa, fridge, wedding rings, tv etc) and we're now living within our means. So I'm VERY proud of me and hubby. However, we've nothing left over to save.

Hubby doesn't have a pension scheme at his new work by the way and I have no pension at all.

I was wondering if financially it would be a wiser decision to invest the pension pot we do have in a deposit for a house or if it's better sitting gathering dust (no interest being earnt) in a pension scheme? We don't know when/if hubby will move to a job where he has a pension. That's unlikely as he's very happy where he is and looks set to progress up through the company quite nicely. I am self-employed with a brand new business and a mum so I'm unlikely to be contributing anytime soon. He COULD get a pension with his work but ONLY if it really takes off. He's in a new and small division of a large company and he's fairly high up already (1 step down from the director) so when the business grows, as part of the team responsible for that, I think he would be in a strong position to ask for a pension scheme as part of his contract. But that's all big ifs and whens.

Perhaps it might even be better to withdraw the pension and use it to wipe off the debt altogether? Or just put it into an account which has interest?!

I'm not sure what to do for the best but as it's not earning interest, we're unlikely to be paying into it again anytime soon and we have debts which are costing us a lot in interest, it seems STUPID to have it just sitting there. We could invest in property with it, we'd be looking at a family house now (4 bed) so the pension might come when we downsize into a traditional retirement property (bungalow).

What do you all think?

Thanks!

CLAPTON

in general you can't withdraw money from a pension scheme until you are 55

R_P_W

You can't just cash in a pension! I assume his pension pot is invested?

princeofpounds

Firstly, no-one can give you the right answer. Because that would involve being clairvoyant about the future.

Secondly, well done for getting disciplined about your finances. It's probably a hassle day-to-day, but it solves one area of major stresses in your life.

I don't know where you get the idea that investing in a pension would lead to the money 'gathering dust'. Money in a pension is invested in financial products like shares and bonds, not necessarily sitting gathering interest in a bank account.

It's also fairly unusual that a large company would employ people and not provide a pension scheme of some sort - not necessarily a generous one, but something. After all, by law large companies will have to start auto-enrolling people soon (seen all the adverts around saying 'I'm in'?).

Personally, if I were him I'd be making it a priority to ask for one and/or find out what the company is planning, although it matters most the more tax you pay.

As for whether it's better to look at housing or pension, that's a tricky question that requires more or less a full understanding of your life plans, job prospects and so on, plus that crystal ball I talked about.

Both have certain tax advantages. The principle advantage of pensions is that they help you defer, and probably reduce, tax. If you pay a lot of a tax now, you can put salary before tax into the pension. When you then draw your pension many years later, you will likely be paying a lower tax rate. The other major advantage is that you can often get your employer to match your contributions to a certain level.

This can be very powerful. If you pay 30% tax and get matching contributions, putting £100 of net pay into a pension means £285 in the fund.

A property is bought from net pay (these days) but your principal residence will be exempt from capital gains tax and the 'income' of not having to pay rent is a tax-free income.

Both vehicles are often counted outside of benefits considerations, in case you run into a hard patch.

I think it is very reassuring to go into retirement owning your own home rather than renting. That's simply down to security of tenure being so poor on AST contracts, nothing against renting itself. You don't want to face moving house when you are old. If you lived in a council house, it would probably be less worrysome.

Financially real estate may not be the smarter decision - houses are not cheap right now. But for me that security of tenure is relly important.

But the important thing is that you make some kind of provision. And really you should be doing both. Living on the state pension will not be fun even if you aren't paying a mortgage, and it will arrive late in your life.

GeorgiaMW

Thanks Prince. I think we've been burnt so much by LLs doing unfair things like breaking contracts (agents charging £250 to RENEW the contract when in the contract it said £30), LLs raising rent, wanting us out and only giving us a month's notice that I now HATE renting. When you have a child, that kind of insecurity is not fun.

Yes, I saw those adverts and knew what it was all about. Came into effect in April, correct? His company is not big enough to qualify yet but they have set things in place for when they are or when the powers that be change the rules to include smaller companies too.

We COULD still be paying into it from his NET wage but that gives us nothing except a bigger pension pot.

And as for the other comments, yes we can withdraw the money. It's ours by right and we can have it whenever we like. We'd lose his ex company's contributions which as Prince says would reduce it by about half if we withdraw it before he's 55 so in that respect you're right. I was weighing up which would be better financially. Withdrawing the money now WOULD lose us half but by paying off the debts/buying a house COULD mean we'd save that money back much quicker.

As to the comment about it being an investment scheme, yes it is and it does grow (ridiculously slowly) but no where near as quickly as investing in housing would make it grow.

Houses are only going to get more expensive so by buying now we could be saving ourselves money/making money down the line. Everywhere I look I am told in 5 or 6 years time houses will increase in price again and I'm thinking "we'll never get on the property ladder if we leave it till then!"

I just keep coming back to ML's mantra "use savings to pay off debts" and he's right. Financially these days, interest on debt far outweighs interest you can earn on savings so you may as well pay off debt using savings then use the money saved from interest payments to reboot your savings!

Thanks for your constructive help guys. Hasn't really resolved the issue but I appreciate the sounding board!

Mr_Moo_2

Tread very carefully around the pension issue - not enough info here to establish what you can and can't do but with virtually all qualifying pension schemes you can't get the money out early, and/or there are punitive tax penalties if you do. Might be worth popping over to the Pensions forum and re-posting your query if you're keen to explore options around this?

princeofpounds

It is almost certainly not worth losing those company contributions.

As to the comment about it being an investment scheme, yes it is and it does grow (ridiculously slowly) but no where near as quickly as investing in housing would make it grow.

Houses are only going to get more expensive so by buying now we could be saving ourselves money/making money down the line. Everywhere I look I am told in 5 or 6 years time houses will increase in price again and I'm thinking "we'll never get on the property ladder if we leave it till then!"

I'm afraid that's a load of nonsense. It doesn't surprise me as a lot of nonsense is talked about property investing. Probably because prior to the crisis we 'enjoyed' the biggest two-decade bull market in housing in British history.

A type of asset cannot indefinitely grow faster than all other classes of assets. If it could, then within a few short decades housing would swallow up 99.9% of the economy. It's a mathematical absurdity.

As for the pension, it grows as quickly or as slowly as the assets in it grow. Those assets can even be property-linked! If it is not growing as expected then you are either invested in totally inappropriate instruments, or just as likely you have the wrong expectations of how investments work.

Yorkie1

GeorgiaMW wrote: »

And as for the other comments, yes we can withdraw the money. It's ours by right and we can have it whenever we like. We'd lose his ex company's contributions which as Prince says would reduce it by about half if we withdraw it before he's 55 so in that respect you're right. I was weighing up which would be better financially. Withdrawing the money now WOULD lose us half but by paying off the debts/buying a house COULD mean we'd save that money back much quicker.

Have you taken specific financial advice on withdrawing the capital from the pension scheme? There are very specific rules about when this can happen before 55 - and simply asserting that it's yours by right and that you could use the money elsewhere, isn't sufficient.

Have a look at this thread for starters:
https://forums.moneysavingexpert.com/discussion/3447527

AlexMac

I have less of a concern than others above about withdrawing hubby's (presumably fairly small) pension pot to help buy a home, as I don't trust the pension providers who can gobble up 50% of your contributions in fees over a lifetime -
(http://www.pensionstheft.org/)
and as I don't trust the Pensions Minister to deliver on his May 2103 promise to cap these fees -
(http://www.telegraph.co.uk/finance/personalfinance/pensions/10050526/Cap-on-pension-fund-fees-to-help-savers.html )
any more than I feel the government has got a grip on Bankers. Sorry to sound cynical.

I really admire you for the way you're beginning to face the future and for getting your act together and redressing a possibly dodgy past credit history. And although it's true that we'll probably never again see the crazy house price inflation of the late 20th Century and early 'noughties', prices have now crept back to their 2007 peak in many regions, so there is some optimism that they won't crash savagely again as they did in 1986-7 and 2008-9. Which make it a good idea to buy - I'd trust bricks over bankers any time - altho' the two are intertwined. And you have to live somewhere!

So- do what you feel is right. I'm one of the old-fart baby-boomers who got lucky and really benefited from the house-price explosion; stepping up the ladder, even tho' I didn't buy until well into my late 30's. If I'd bought earlier I'd be a millionaire! But it's your call. Best wishes

[Deleted User]

GeorgiaMW wrote: »

And as for the other comments, yes we can withdraw the money. It's ours by right and we can have it whenever we like. We'd lose his ex company's contributions which as Prince says would reduce it by about half if we withdraw it before he's 55 so in that respect you're right. I was weighing up which would be better financially. Withdrawing the money now WOULD lose us half but by paying off the debts/buying a house COULD mean we'd save that money back much quicker.

You can't withdraw money from a pension before 55 and any schemes that exist to do so are not legal and have heavy tax implications.

The only way you can get back your contributions is if you cancel the pension completely and any contributions (less employer contributions, tax contributions) will be returned to you however this is only possible if the pension was under 2 years old. If the pension is under 2 years old and your husband wasn't putting much in the returns are going to be minuscule... the reason pensions are good is the tax and employer contributions, unless your husband was contributing thousands per month you're going to get back pennies!

Cancelling a pension is one of the worst financial decisions you can make, if you're already on the way to repairing your financial situation why sacrifice your financial future for a short-term boost?

Pensions are invested and generate returns, sure if the pension is only ~£20k it's not going to make you rich but it's going to be £20k at retirement you wouldn't have otherwise. The moment you cancel a pension you're setting a personal precedent, you're committing yourself to not caring too much about retirement...

[Deleted User]

Further to my previous post, here are the circumstances in which you can withdraw a pension:

Pension Cancellation

As mentioned above, you can cancel a pension and have contributions refunded to you within a specific time frame, this varies dependent on scheme used, can be up to 2 years normally.

Repaying tax if your pension contributions are refunded
You can usually only get your pension contributions refunded if you withdraw from an occupational or public service pension scheme within two years of starting payments. Certain events might shorten the time limit. For refunds made up to the end of the 2009-10 tax year, tax is deducted at 20 per cent for refunds of up to £10,800 and at 40 per cent on any excess above this. For refunds made in the 2010-11 tax year and later years, tax is deducted at 20 per cent for refunds of up to £20,000 and at 50 per cent on any excess above this. The scheme administrator deducts the tax before making the refund.

Source: http://www.hmrc.gov.uk/incometax/relief-pension.htm

You need to check the scheme specifics to find out if your husband is eligible for this.

Serious ill-health

If you have a terminal illness and have under a year to live you can withdraw the entire value of your pensions tax free, although this may be less with some schemes:

Serious ill health - taking your pension as a lump sum
If you're seriously ill you may be able to take all your pension pot as a lump sum if all the following conditions apply:

• you're not expected to live for longer than a year and your scheme administrator has evidence from a doctor confirming this
• you've not yet started to get your pension
• you've not used up all your lifetime allowance

This lump sum is known as a serious ill health lump sum.
The amount of lump sum you'll get depends on your pension scheme rules.

Source: http://www.hmrc.gov.uk/pensionschemes/ill-health.htm

That's it!

Regarding Pension "liberation" schemes

These are not a legitimate option, I'm highlighting them because lots of people seem to think they're a genuine option, they are not.

How penalties for pension liberation can hit your retirement:
You have a pension worth £60,000. You are approached by a representative of a pension liberation scheme who assures you there is a loophole enabling you to release your pension and turn it into cash.
You are told that 20pc of your pension transfer – £12,000 – has to be deducted as commission. You receive a loan from the scheme of £48,000.
HMRC contacts you about an unauthorised payments charge due on your liberated pension. The charge is 55pc of the amount liberated, totalling £33,000. You are required to pay £33,000 from the £48,000 you have received, leaving only £15,000. In addition, you may also be liable to penalties and interest on the unauthorised payments.
You now have no pension. If you had not opted for a pension liberation scheme you could have taken £15,000 from the pension as a tax-free cash lump sum from age 55 onwards and drawn an income from the remaining £45,000.

Source: http://www.telegraph.co.uk/finance/personalfinance/pensions/9796676/Pension-at-45-Warning-on-early-access-schemes.html

If your husband is not in either of those very specific situations it is categorically impossible for him to access his pension. The fact that it is "your money" has absolutely no bearing on the situation.