Downsize to fund pension?

bluephoenix

Hi Everyone,

It's a while since I've been on this forum. Thanks to all the great advice I received last time I was here my finances are looking pretty good.

However it is now becoming apparent that my pension provision is pretty inadequate, so I'm hoping you have some pearls of wisdom for me

The Good News
- No debts
- Mortgage-free
- Emergency fund for 4 months

The Not So Good News
- 43 years old
- Pension (SIPP/ISA) of £71k
- Self-employed and currently have very low earnings (mainly because I need the flexibility to look after my kids)

The outgoings on my current house are fairly low but a large amount of capital is tied up in it. I am wondering whether it is a good idea to downsize now (while the kids are still at home) to top up my pension savings?

If I downsize or move to a cheaper area I think I would be able to release in the region of £200K equity. My worry is that selling up would be a big upheaval for the kids and the move could be a mistake in reality. On the other hand, it seems crazy to have most of my money tied up in my house.

Any thoughts or suggestions appreciated.

xylophone

At some point over the next few years the children will not need constant supervision so you will have the opportunity for higher earnings?

CBX1985

Interesting point. If it a major upheaval that you don't want to make, doesn't it make sense to downsize when you reach retirement age and your children have left home? You would still be able to use the left over at that time to fund retirement and unless you think your house's value will fall/not keep pace with inflation, it would not detriment you in any way.

I don't see the logic in moving home now to put capital into pensions/investments. I don't think having capital tied up in a home - not property investment - could be described as crazy.

bluephoenix

Xylophone - Yes, you are right I will have the opportunity to earn more and it is something I need to seriously look at

CBX1985 - The reason I am thinking about moving now rather than when the kids are gone is so that I can put down roots somewhere else. The longer I stay here the harder it will be to wrench myself away but maybe I'm worrying unnecessarily.

justme111

Why do you think your pension provision is inadequate? How much do you think you will need a year when retired and what this number is based on ?

bluephoenix

Good question justme 111.

I'm assuming that I will need an income of around £20K pa.

This means I need a savings/pension pot of approx. £398K on the basis:
- I retire at 67
- Don't take a lump sum
(according to the HL pension calculator)
- I would need to make monthly contributions of £1000 to hit this target.

If I imagine I will get the full state pension of £8K (not sure this will happen) I would need a pension pot of £232K and would need to make monthly contributions of £465. This is more realistic.

I suppose I have a dream of retiring before 67!

justme111

Why do you think you would need 20 000?
If you do not get full SP you would still likely get most of it, why don't you find out?
Do you realise that the numbers in your calculator are designed by the looks of it to keep the capital while you have an option of drawing it down?
Your wealth is not just tied in a house, you and your children enjoying it. Life may well prompt you to move later on in life anyway - you may meet someone or want to move closer to grown up children. Every move is an expense , the fewer the moves the reacher the person. Besides what's the point in taking money from a well performing asset to put it into another asset(investments).
So my opinion it would been madness to do it.
In the meantime could be good idea to look at your needs and resources more attentively.

xylophone

Have you obtained your starting amount for new state pension?

https://www.gov.uk/yourstatepension?utm_source=Mail-Online&utm_medium=Partnership&utm_campaign=GTKY

https://www.gov.uk/new-state-pension/what-youll-get

kidmugsy

bluephoenix wrote: »

The Good News
- No debts
- Mortgage-free
- Emergency fund for 4 months

The Not So Good News
- 43 years old
- Pension (SIPP/ISA) of £71k
- Self-employed and currently have very low earnings (mainly because I need the flexibility to look after my kids)

The outgoings on my current house are fairly low but a large amount of capital is tied up in it. I am wondering whether it is a good idea to downsize now (while the kids are still at home) to top up my pension savings?

If I downsize or move to a cheaper area I think I would be able to release in the region of £200K equity. My worry is that selling up would be a big upheaval for the kids and the move could be a mistake in reality. On the other hand, it seems crazy to have most of my money tied up in my house.

Be of good cheer - you are being far too glum. Look, the thing you need for old age is money - in the end it's secondary whether it comes from selling your house at 60 or having money in a pension. Your reasons for not downsizing now are compelling. So don't: do it after the children have vamoosed and you need less space.

Moreover, the efficiency of pensions can be illusory for someone who doesn't get employer contributions, with one exception I'll turn to below. So if you want to try investing for your old age try ISAs: the money isn't locked up until you're 55, so it will be available in case of emergency, albeit at a possible loss if the stock markets have done badly. Or try the popular game of using high interest current accounts and regular savers. You can make up to £1k p.a. of interest from these without having any income tax to pay on it. And you can even harvest the odd £100 incentive for switching an account to a new provider. Tax-free!

Now, the compelling advantage for you of a pension in old age is if you would otherwise have unused Personal Allowance. Consider a pensioner in 17/18. His pension income, state and occupational, comes to, say, £9k. But he's allowed £11,500 before there is income tax to pay. So he'd be better off, with great tax-efficiency, if he had a further £2,500 p.a. of pension. So even if he had received no employer contribution he'd have been wise to have saved into a private pension when he was working.

From this I infer that your best bet is to sell the house after the children have left, and you are no longer tied by wanting to be handy for their schools and so on. Then contribute plenty to pensions: after all, you should then be working longer hours, and you'll be able to put all your earnings into a pension if you want (up to £40k p.a.), while living off your capital. Meantime you live in a house which is spared Capital Gains Tax when you sell it, and where the imputed rent is spared income tax while it's owner-occupied. The tax deal is tremendous: don't toss it away.

WobblyDog

House prices have risen strongly for the past couple of decades. Although I frequent the HousePriceCrash website, I expect house prices to carry on growing. I personally wouldn't downsize my house just to fund a pension unless I was planning to retire within a couple of years and had no other options.

bluephoenix

Xylophone - Thanks for the reminder. I got my state pension forecast about 3 years ago and I had 20 qualifying years then so looks like I'm on track.

Kidmugsy - Appreciate the in depth response. Yes I agree about ISAs over pensions as I am self-employed and I am concentrating on ISAs to save/invest as there will be no tax to pay on withdrawals. Good point about the CGT exemption on my home too.

WobbyDog - Yes, I'm no expert but my impression is that house prices will continue to rise.

I've got lots to think about!