My wife and I are both 29. We have liquid savings of around £24,000 and a combined gross income of £140,000. We would like to buy a house and probably need a deposit of £69,000. Should we stop paying money into our pensions until we have built up the deposit, or will this short-change us in retirement? If we have a home of our own, our mortgage payment could be £700 a month lower than our current rent. We don’t have children yet, but would like to start a family in the next few years.
Go to three different advisers and you’ll get three different pieces of advice for a conundrum with as many variables as this, says Charles Calkin, head of financial planning at James Hambro & Company.
Although I do not know the full facts, my instinct is to advise you to keep your pension contributions going at a reasonable level, but to put the primary emphasis on buying a house.
To explain why, I will talk about basic financial planning principles. The first stage in our financial journey through life is usually to attain independence and security, which often means buying a house. The second stage is to accumulate wealth to fund retirement. Finally, we decumulate our wealth, spending retirement savings and considering the tax-efficient transfer of our legacy to future generations.
You are at the first stage, and you may be able to buy the house and keep funding your pension, as long as you test your assumptions.
If you’re confident house prices will continue rising in your chosen area, and buying a property will really save you so much a month, what can you do to speed the process? Could you buy a cheaper house? Do you really need to save an extra £45,000 before you can buy? Go to a good mortgage broker and ask for advice. Also consider tapping up family for loans that you can repay with the savings you make from no longer paying rent.
Make sure you don’t overstretch yourselves though — don’t assume interest rates will remain as low as they are today.
If you’re planning for children think of the longer term too — will both of you work? How will childcare costs erode your ability to repay your mortgage loan? What about local schools?
Regarding pensions, if your employers are matching your contributions, be very careful about cutting back and forgoing this generous tax-efficient saving benefit. Try and make savings in other areas by reviewing your outgoings carefully, right down to what you spend on going to restaurants, hailing taxis or buying new clothes. Tightening your belts now will be enormously beneficial for your future.
Also, consider any insured element to your pensions. Often an employee pension scheme will provide benefits in the event of death, long-term disability or critical illness that hopefully won’t — but might — come in useful. Amid all this, you should not forget to consider insurance for both of you.
You have to get the money from somewhere, says Philippa Gee, of Philippa Gee Wealth Management. You can hopefully free up cash by examining your spending habits and making your existing savings work better for you, although reining in your pension contributions temporarily seems unavoidable.
To minimise the impact on your pension pot, first write down and analyse your expenses, to see where you can spend less. Are there any items you buy regularly that you can source more cheaply? Any costly activities you could avoid altogether, at least for a while?
After you are satisfied you are not wasting money or overspending, examine what you are doing with the liquid savings you already have. Is the money languishing in a bank account that does not pay much interest? The funds should be moved into a vehicle that is as tax efficient as possible, while obtaining the highest rate of risk-free interest you can get, although always make sure the institution you save with is covered by a deposit protection scheme. You could also invest the money in markets to generate higher returns, although this is not possible without risking your capital.
Having made these two steps, turn to your retirement provision. It is a shame to miss out on vital savings towards your pension. Compounding means missed contributions can take a considerable amount off the value of your retirement pot. However, given that you are both young, with retirement ages getting later and later, it is not so reckless to divert pension savings into a property deposit. This will allow you to build up the money you need for your downpayment much more quickly.
What is also encouraging is that you have identified you will save £700 each month after buying a property, compared with renting. Once you’ve spent what you need on furniture, decorating and refurbishments, you could recycle that £700 a month back into your pensions.
I would, however, urge you not to rush into buying a house. The process is expensive and time consuming, so you have to be as certain as possible whether the location of the property, its size and price are right for you. Far better to rent for an extra year or two than tie yourself up in a short-term decision with longer-term implications.
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