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Can I use my pension pot to buy a house?

05th June 2019

If you’ve been reading the news recently you’ll have come across discussions on pensions and property deposits. In this post we summarise our current thinking on the proposal recently released.

At the moment, there are also a lot of different expenses associated with using pension money to buy a house. With most pension schemes, you can withdraw 25% of your pot tax-free, but anything above that will come with an income tax bill of as much as 45% depending on your tax bracket. Making pensions withdrawals extremely unappealing.

 

Should we be able to take money from our pensions to go towards a house?

The 2008 Pensions Act means that all UK employers are required by law to put qualifying employees into workplace pension schemes with automatic enrolment. This law was put in place with the view of ensuring that people have sufficient funds to live on when they retire. Prior to it being enforced, few people were saving enough independently to fund the standard of living they hope for when they retire. Exactly how much you need to put aside in order to get by once you stop working depends entirely on you as an individual. But depending on their lifestyle and financial situation people can require anything from 50-80% of their pre-retirement income in order to fund their retirement – which is a lot!

Having a pot of money exclusively for your retirement sounds very sensible, so why on earth would anyone be suggesting we take money out of these schemes?

 

What is James Brokenshire’s proposal?

Housing Secretary, James Brokenshire’s proposal is to allow people to take money from their pension in order to purchase a house. With most normal pensions, you’re only allowed to withdraw 25% of your pension pot tax-free from the age of fifty-five.

This has been criticised by many and not without reason. Our initial reaction is to advise clients to ignore this proposal and leave their pensions savings alone. After all, the whole purpose of a pension fund is to provide you with a form of income after you’ve stopped working and are no longer receiving a salary from an employer. Your pension pot is your pension pot and it shouldn’t be used for anything else! However, upon reflection, we believe that this proposal might be worthy of consideration and shouldn’t be dismissed as quickly as it has been by its critics.

 

Is this proposal a good idea?

Our view is that the proposal might be appropriate for some people provided that certain criteria are met and enforced:

  • The withdrawal is tax free
  • Proof that the funds withdrawn are used to purchase a property is provided
  • An age limit of up to forty five is enforced

Why do we think this?

Between the ages of twenty five and forty five you’re likely to have made contributions to your pension fund which are significant enough to help you put a deposit down on a house. We think many people would like the opportunity to make a tax free withdrawal to put towards a private home. This age restriction would leave the individual with at least thirty years’ worth of pension contributions to save for their retirement (providing they work up until the forecast age of seventy five).

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