Retirement savings vs deposit on a home

Scooterza

Hi there, 
(TLDR - Should I invest my South African retirement annuity into UK investments or as a deposit on a house?)
I am 45 years old, married with 2 kids and 42 year old wife.  We've just emigrated from South Africa to the UK. We've managed to find a great home which we love in a small village and kids are happy & settled at school. The landlord has now said he wants to sell this property and with it being so perfect, we were all set to try buy it. I say "were" because I had a long chat with my (more financially astute) brother last night and he said a few things that made me pause for thought.  He's knowledgeable about South Africa so thought I'd try get some "local knowledge" to help me with my dilemma. 
My plan was to bring over our full retirement investments in South Africa and use these as a deposit on the home. This would mean that we (both my wife and I) would have to start out retirement investments from zero here in the UK in our 40s. Because homes here in the UK are much more expensive than South Africa, we need to put down a sizeable proportion if not ALL of our South African retirement money down as a deposit to qualify for a loan (we've only got about 18 months of credit history).
My brother said this was a bad idea for several reasons:

• Property prices are unlikely to outstrip inflation too much over the next 10 to 20 years and the chances of getting better returns from a well-selected investment are good. 
• The likelihood is we'll live here for about 10 to 15 years as our kids finish school.  The initial costs of purchasing the house and maintenance costs would put a decent dent into any appreciation we'd get if we sold in anything less than about 12 years even with the stamp duty holiday.  
• Investing in a house means we'd forego the massive benefit of compounding interest that we'd get with an investment and as such, we are likely to do several fold better financially investing the money rather than buying a house. 

My wife is already picking out paint colours so I want to have some clear and compelling reasons for us to pause, and possibly pull out of buying this property.  If we do miss this chance, the likelihood is that we'll have to move to a different rental unit, which is a big pain as this place is so well located (from schools, train station etc) and we'd have to go through the pain of a move again which we're obviously not too keen on having just gone through that less than 2 years ago.  But I feel like we're making an emotional decision and actually if we were to fully understand how much this is going to cost us financially, we'd put up with the disappointment and inconvenience of missing out on this sale and accept either buying later or buying a smaller place or even renting long term. At our ages, we need to start thinking about our retirement much more seriously than we have done up until now. Any advice and thoughts are appreciated. 

NottinghamKnight

I suppose the first question is can you access your pension funds currently, you have to be 55 in the uk to access pension savings here.
It's mainly a lifestyle choice, in cash terms then investments will typically outperform house prices but not that spectacularly and rents are typically higher than an equivalent mortgage. Renting can be difficult with school age kids if you have to move frequently.

Scooterza

Hi @NottinghamKnight, we are busy with the process of financial emigration which means we will be able to access the funds and take the money out of South Africa.

steampowered

As you intend to live in the property for 10-20 years, you will be much better off buying.

While property prices are high in the UK, so are rents. As you are buying with a big deposit, you will find that you are paying a lot less each month on a mortgage than you would be paying on rent.

You can put the amount you are saving each month back into your pension, as additional pension contributions. You could open a SIPP for this purpose. Doing it this way actually has a tax benefit. While you are a UK income tax payer you get tax relief on your pension contributions, which is worth 20% if you are a basic tax payer or 40% if you are a higher rate tax payer. The tax relief all goes into your pension pot and can be taken with you when you go back to South Africa. By contrast, you will not benefit from tax relief by seeking your existing SA retirement savings. 

It is true that investments are likely to generate a significantly higher return than house prices. However:
- You need to take account of the rent you would be saving. The average yield on buy-to-let property in the UK is about 3.5%, which is going to be much higher than the interest rate you need to pay on the amount you are funding with a mortgage. You can treat the difference between the rent and the mortgage interest repayments as investment return.
- If you are using a mortgage that's a leveraged investment, which boosts your returns. UK mortgage interest rates are ridiculously cheap.
- The UK has very few renter protections compared to most other countries. You can essentially be asked to leave the property by being given only 2 months notice by your landlord (assuming you wouldn't want to drag out an eviction through the courts). Not ideal if you have kids doing well in a local school. Also not ideal if you want to redecorate or if you want to get a job.

It is possible to calculate the financial outcome of the different options by making reasonable assumptions. If you give us a guess of the value of the house; the size of the mortgage you would need; the rent you are paying - I can run that through a model and let you know the outcome!

It goes without saying that if you are in a situation where you have little/no retirement savings in your 40s, that is a pretty bad situation to be in, if you end up retiring in the UK. If you've only just moved to the UK you will not qualify for the full UK state pension by the time you retire. You would need to save a big chunk of your income into a pension to rectify that. Or, you could end up downsizing or buying a cheaper house in SA to release capital.

barnstar2077

If you can stay in the same house for 15+ years then I would say that it was well worth buying, as long as the repayments are reasonable and you consider your jobs to be reasonably secure as well (Or you at least have an emergency fund to cover the mortgage for three to six months if you need to.)  Rents go up all the time, where as your mortgage repayments should be pretty steady for the long term.