Buy a house, or put into a pension?

jamesd

I'm wondering how close you are to being 55, the age at which you can start to take money from a pension. This matters because if you have pay of £12k you get 25% added to the whole £12k when you pay it into a pension even though most of it isn't taxable. Then on the way out of a pension 25% can be taken as a tax free lump sum, the rest taxable when taken. Means tested benefit rules for many benefits will force you to take about 3% a year of the 75% or treat you as if you have that income anyway, it's the income a dual life inflation-linked annuity would pay at your age, but don't buy one of those. You can take 25% from only a part and only the matching 75% will count. You can do this to avoid savings limits if those matter, you probably will have such high savings that they won't.

Given £150,000 of capital I would expect to make about £15,000 a year after bad debt and before tax from peer to peer lending. With £12k of work income the first £5,500 of that would be tax free, covered by the starter rate for savings and the savings allowance. The rest taxed at 20%. With £20k of IF ISA allowance a year the rest could gradually be made tax free by using some P2P in an ISA.

That level of extra income might get and keep you out of means tested benefits.

So a general plan might be to learn about P2P and make substantial pension contributions from the capital up to your whole pay. Those pension contributions will reduce your income for benefits calculations. When you hit 55 take the 25% tax free lump sum and invest in P2P to generate income. This assumes that you are in your late 40s because the pension contributions would cut the P2P income that you'd be living on too much otherwise.

I don't know just how much you get in means tested benefits and WTC but you might end up a good bit better off in income and accumulated pension terms this way.

To do this properly really requires knowing all the details of your income as well as your age so the effect on benefits can be fully included in the planning. Probably more than you're comfortable with.