It’s a fairly common scenario. Mum and dad really want to help their child get on the housing ladder. After all, it’s really tough these days to be able to save enough for a deposit on that first home. Without the bank of mum and dad, it’s going to take them years. And renting is just throwing money down the drain etc. etc.
So what are the options? The majority of people don’t have a spare £50k sitting there doing nothing. So increasingly, the older generation are looking at two choices:
- Encash their pension
- Downsize their home.
The right decision will very much depend on individual circumstances. But we look at the options in broad terms to see which is usually better.
Encashing your pension
Since new pension freedoms were announced a couple of years ago, you’ve been free to take all your pension out as cash once you reach 55. The first 25% is usually tax free. But the rest of it will be taxed as income. That tax bill could be pretty hefty, particularly if it pushes you in to the next tax bracket. So that’s one significant down side.
But the main down side of doing this is the very real risk that you will then run out of money in retirement. By using your pension wisely, you can ensure an income for life. By taking it all out, that safety net is gone.
Downsizing your home
If the kids are flying the nest, you may find you don’t need as much space. You could downsize and make some cash that way. But can you really make enough whilst maintaining the lifestyle and location, and the social connections that come with that? You may end up sacrificing your long term happiness.
Some people are tempted to go for option 1, encashing their pension, thinking that the equity in their home will replace that income as and when they need it. This can be a dangerous option too. Are you sure you’ll have enough for life, even if you invest any profit from the sale of your family home?
So, what’s the best option?
The best option is to get saving for your kids from as early as you possibly can, and teach them the value of saving and the magic of compound interest from a young age so they can afford the deposit on their own home! Wouldn’t that be nice.
If it’s too late for that, or it’s simply not a realistic possibility, go and see a financial adviser and get some professional advice before you do anything else.
We’ve had two clients recently each wanting to encash their pensions to help their children, but with no idea of what they will live on. We’re able to run a cash flow against their figures. We’ll look at how much there is in the pension, or how much they’re likely to pocket through downsizing their home, return rates, against an estimated life expectancy to find the best way to both fund the kids and ensure an income for life for the parents.
The usual outcome? Keeping the pension intact is the most sensible option, providing the most secure income.