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    HomeMoneyBecome Debt Free‘I don’t have a pension pot. Can I afford to retire in...

    ‘I don’t have a pension pot. Can I afford to retire in Cornwall?’

    These contributions may be offset against an organization’s corporation tax so long as it meets HMRC’s wholly and exclusively rules. I’d sit down with an accountant and work out what’s comfortable to place in, but when we assumed £5,000 a yr at a growth rate of 4pc each year, after 10 years Isabella could have a pension pot of £61,000 and after 15 years £102,000.

    Buying a property, Isabella has a number of options available to her. Typically, a lender will allow a person to borrow 4 to 4.5 times their income, but with mortgage rates higher and combined with the fee of living crisis, mortgage lenders will now focus more on whether you’ll be able to afford the monthly payments.

    Bearing this in mind, she may potentially, because of her age, want the longest term available to maintain payments reasonably priced. Some lenders will let you take a mortgage term to 70 without having to prove retirement income. But for those who need a self-build mortgage, you should have to go to a specialist lender that won’t offer these particular terms as well.

    Taking all of this on board, to attain your goal of £500,000 for a self-build, you would want a minimum of a 20pc deposit and an approximate joint income of £100,000. As your income is principally dividend income, you’ll also need to search out a lender that’s comfortable to make use of this and possibly gross profits from the corporate.

    To get to the deposit of £100,000, bearing in mind your current £15,000 in savings and assuming saving an extra £800 per 30 days, once more at growth rates of 4pc, it could possibly still take seven years to attain a £100,000 deposit. This might lead to a shorter term and better payments.

    Isabella has items she is willing to sell, comparable to a Japanese bowl or arms of her business, to attain her goals faster. Nevertheless, she must bear in mind that any personal possessions sold might incur capital gains tax on any items valued higher than £6,000. Secondly, any arms of her business she sells may reduce her income and due to this fact her affordability.

    It could be simpler to purchase a residential property to begin with; it will require a smaller deposit (potentially 5-10pc) and on her income alone, she may have the opportunity to afford £250,000 as a start line to get onto the market.

    With so many options available to her and the complexity of all of them, it’s very vital to take a seat down and take proper financial advice to work out what one of the best route is.

    Kusal Ariyawansa, financial planner at Appleton Gerrard Private Wealth Management

    Isabella has a key query to take care of here: does the property dream outweigh her income needs in retirement?

    There’s little harm in renting. For instance, buying her first property on a 25-year mortgage at age 61 (in 10 years time), means only being debt free at age 86.

    The capital appreciation of the home could be nullified by the mortgage interest, meaning at best, she could possibly be cost-neutral, only to then use the home equity to pay for lifestyle maintenance and even care fees because of a scarcity of pension income.

    Not many individuals would opt to hold this level of debt into retirement, making it a questionable strategy where the dream masks the fact. It appears to be an inefficient use of cash.  

    Nevertheless, there are benefits to constructing your personal home: no stamp duty is payable on the constructing work, or on the finished property; duty is barely payable on the worth of the land if the constructing costs exceed £125,000; and you’ll be able to apply for a refund of VAT on constructing materials and services.

    A self-build mortgage would cost around 5.99pc at present, requiring a deposit of around £125,000 – which might mean saving £12,500 a yr for the following 10 years.

    Despite wanting to work until she physically cannot, Isabella needs an efficient exit strategy. She could sell all or a part of the business, and use the cash to pay for lifestyle needs.

    An alternative choice could be to ringfence business earnings for future income needs through a pension. The important thing driver in deciding probably the most efficient strategy could be the annualised growth rate she could get between now and when the savings are converted to a future income.

    She would then simply work out the speed required to offer her a desired income at a given age in the long run. These numbers drive the savings strategy for each retirement funding through a pension or business sale.

    Growth rates are enhanced by tax reliefs and the business would get corporation tax relief on employer contributions for her future pension needs. Growth inside a pension can also be freed from income and capital gains tax.

    Historic data shows that, by investing in the highest firms of the world, you might get double-digit annual returns over the long run, albeit with short-term paper losses.

    Isabella needs a financial statement which supplies her clarity and certainty about each option being considered. Its numbers will inform her decision on whether to construct savings for a property now, or efficiently fund a pension for later life.

    At any stage the plan could possibly be derailed if there’s a health scare, meaning she needs adequate income protection and important illness insurance in place now.

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