Big house or pension?

[WhichHoose]

If you had a budget that could buy you a really nice house, would you go for a nice house or a more modest home (that still met your needs, but only just) and put the rest into your pension?

My pension pot is about £1k due to extended ill health and I'm 36 so while I really want a nice house, I'm scared of getting used to the space/comfort then having to leave it when I retire to fund my retirement!

My budget is £375k (North of England) and the houses that would just about meet my needs are £170k with repayments of around £300 a month with the deposit I have (£130k).

WWYD?

1000% this.

Thank you this is a good thing to think about. Both the cheaper houses we're looking at are probably only a bit smaller than I'd like as an ideal for a family of 4. Our kids are 4 and 2 (boy and girl so I want to give them their own rooms ASAP). Both houses I've seen at the low end of our budget have 3 reasonable bedrooms, 2 reception rooms, small kitchen (not a chance of getting a table in there), small bathroom, somewhere to park the car off-road, small garden. An attic. Both are about 900 square feet.

That should be plenty, except DH has two of those hobbies that involves collecting loads and loads of stuff and at the moment it's all in storage in big plastic boxes where he can't do any of it, so he was hoping for a separate room for his hobby (an "office"). We don't have much furniture atm as we're currently in a tiny 2 bed flat that's about 450 square feet.

Good point. I suppose she could always sell the house she's living in and move into the rental to avoid tax and perhaps, it could be a downsize at a time in life when that might suit her well.

That’s not how Capital Gains Tax works. The OP would still need to pay a proportion of tax based on the time she didn’t live there if/when she sold.

Did anyone say that.

Not suggesting that OP’s house will be worth over 100 x what she paid for it, but even if it’s only 2x she’s ahead.

And remember people thought exactly the same in 2007.

Interesting thought exercise.

My parents bought their house in this same town 32 years ago in 1992 for £30,000. It's now worth £145,000 which my calculator tells me is about 5% growth year on year. If a £170,000 house does 5% growth over 32 years, we're looking at £810,000-ish. If a £300,000 house does 5% growth over 32 years, we're looking at about £1.4mill.

That's more than we could ever save into pensions.

But what will that money be worth in the distant future and how much will be left once we downsize and buy another property which has also increased by 5% YOY? If we downsize to something like an £810,000 property (i.e. the £170k one we are looking at now), we would have £590,000 left to live off? That seems pretty decent by today's standards.

Ok now I'm seeing the logic behind team house (if property price increase remains at that rate).

I understand what people are saying re the tax benefit of pensions however I'm saying house.

I don't trust governments to continue with the tax relief. It's not a given, eg the max amount you can save in a pension will likely change again if Labour get in. Pensions are subject to stock market fluctuations even though they are long term plus funds going bust etc. This is still, and will continue to happen despite, 'regulation'. Retirement may also coincide with a difficult financial period and your pension ends up not buying or being worth what you hoped.
In a pension the money is out of my control - I can't just take it and use it as I wish eg if I want to give my children a lump, pay for an operation, go overseas for 6 months.
With a house I can release funds by selling and get a lump sum tax free (currently). I can then do what I like - buy, rent, give it away.
If I run out of 'house' money I can (currently) get pension credit and benefits etc.

First thing is to max out ISAs anyway.

Where does downsizing in early retirement sit within the whole "deprivation of assets" issue for paying for care? Do they come after you for the value of your bigger house? What happens if you spent the money (e.g. used it instead of a pension)?

@makeanddo Yes I feel like the uncertainty over what laws will even exist in 25-30 years' time is one reason why IDK which option is best! The flip side of that coin is, Labour could increase IHT or lower the threshold or keep it where it is in spite of inflation and if house prices grow as they have in the past, then in 30 years time a £250,000 IHT threshold won't buy half a shoe!

A wealth tax could really hurt the big house small pension approach. Risk is a factor of life, that's why so many go for the middle approach of pension and house balanced.

It shouldn’t be counted as deprivation of assets. Really that only becomes an issue if you are seen as deliberately getting rid of assets to avoid care costs. If it’s part of normal retirement planning it should be fine.

I run payrolls for clients.
Employee earns £275 a week, TOTAL ERS and EES contributions are £8 per week

that will never EVER add up to a good living

the key point is that a big mortgage free family home at age 55 is then an asset to be rented out, leveraged etc

a pension relies on the same laws being in place for 30 years
I liked MIRAS when it applied to my first mortgage
(google)

You may NEVER live long enough to receive a pension.

Yes I might get hit by a bus tomorrow. Or I might live to 106. I'd rather plan my life based on "what if I live" because it doesn't matter if I die tomorrow what I spent money on while I was alive, God isn't going to be standing at the Pearly Gates with a long list of my finances ready to tell me off for saving instead of chucking my money on chimineas or whatever. But if I live to 106 and can't pay for myself, that's a very miserable existence.

You are not depriving yourself of the asset, just converting it to cash. If you then gave that cash to someone else, that would be deprivation of the asset.

Ahhh thanks, that makes sense! I've learned so much from this thread!

Pension. We are at the top of the property market cycle. You don't want to be buying a big house now.

I agree re the gain from selling a house - some sort of tax on 'profit' has to be on the table (although not yet floated). The problem is that if it's too high surely there's a risk of a house price crash where everyone tries to sell and it becomes a buyers market.

Also interesting re deprivation of assets. Given they are floating a retirement age of 71 I wonder how they can accuse anyone of freeing up money to just survive retirement. Perhaps those with the fingers in the pies recognise the care home gravy train is either going to be exposed or has limited revenue options due to lack of affordable workforce.

Downsize and free up capital later

Given that you are 36 with a very low pension and taking out presumably a bigger mortgage I would lean towards the more modest home or all your income will be sucked up by the mortgage leaving little to go towards your pension. Ideally you would be putting 30%+ of your salary away including your employer contribution. That may be a tall order given presumably you have put virtually nothing in so far but I would aI, for that in the next few years.

Sorry, what's a property market cycle?

I think you might have made some assumptions here that aren't correct, and there's hard numbers further up that you've missed. If you click "see all" you should be able to catch up.

Well yes in theory but that all depends on the equity extracted being enough to live on. Plus some will go on legal fees, stamp duty etc in moving.

reality is that OPs perfected numbers are way out. A house of thaf value isn’t going to be worth over a million in 30 years and if it is then the cost of everything else will have increased massively too so we’ll be in £10 loaf of bread territory.

however Talkinpeace talks a lot of sense. That pension is hardly worth having. Pension numbers are scary. I have a fairly good amount in mine (over half a million) but the predicted pension from it isn’t high, particularly if I wanted to stop working at 60.

@Cornishclio where are you getting your 30% figure from. Martin Lewis says when you start contributing you halve your age and invest that % from that point on. So starting at 36 she would need to invest 18% of her pretax salary from now till she retires. This assumes she retires at the state pension age, you obviously need more to retire earlier.

The things this all highlights for me is that if own property then you potentially have a way of (partially) funding your retirement. And if you don't .. well .. I don't know how we can rebalance things while property is an investment above and beyond somewhere to live.