Have you ever considered using your pension to buy a house for your child?
Did you know that you could not only access your pension from 55, you could access it even if you are still working?
If you add up the total amount given last year it comes to around £6.3 billion, which makes the bank of mum and dad the 10th biggest mortgage lender in the UK!
Some parents will use savings, some will use equity release from their own home, and some will use their pension.
Here’s what you need to know if you wish to consider the pension option.
Using your pension to buy a house – how it works
First of all when we say your pension, we mean the pensions you have built up through your work or savings, not the State Pension.
The State Pension is fixed in terms of when you can access it and there are limited scenarios when a lump sum can be taken.
For most other pension schemes you will now have the ability to access your money from age 55.
You do not actually need to ‘retire’ in order to take money from your pension. You could withdraw a lump sum or start receiving an income from your pension whilst you are still working if you desire.
Under certain income withdrawal methods (like pension drawdown) you could even start withdrawing and then stop at a later date and then continue building the pension funds back up.
Clearly the earlier you start withdrawing from your pension, the less there will be for you in the future.
Other circumstances where it may make sense to start withdrawing from your pension earlier and/or whilst still working:
- You have multiple pensions and you don’t need all of them to cover all your future retirement income needs.
- You are not currently working and so want to temporary access your pension to provide you with an income.
- You’re single and have no family relying on a future inheritance from you.
- You suffer from ill-health and have a shortened life expectancy.
Things to think about when using your pension to buy a house
Just because you can access your pension to buy a house for your child doesn’t mean you should. There are a number of potential problems if done the wrong way.
These include:
- Leaving yourself short in retirement – Accessing your pension earlier than planned means less time for your pension to benefit from investment growth.
- Paying increased Income Tax – If you’re still working and withdraw an income from your pension this will be added to your other income and will potentially be taxed at a higher rate.
- Inheritance Tax – Money gifted to children, even if it’s from your pension could be subject to Inheritance Tax if you die within 7 years of the gift. It’s the child who would pay!
- Keeping the house in your name could also cause Inheritance Tax problems – Especially if you allow a child to live there rent free.
- Lending the money rather than gifting can cause issues if not properly documented – If you die suddenly the money may never be returned and if you include interest in the loan this may be taxed.
Ultimately the flexibilities of pensions give you another option to help your child buy a home.
But these are irreversible decisions so you must go into the thought process knowing all the facts. Proper, professional financial advice here is essential.
If you would like more information on how you could be using your pension to buy a house for your child then take advantage of our free 15 minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
