Can I use my pension fund to pay for home extension?

Happy senior couple from behind looking at front of house and car

Ask the expert at Smith & Pinching about using a pension fund to pay for home improvements - Credit: Getty Images/iStockphoto

My latest statement about my pension shows that I have about £320,000 in my fund. I’m age 58 and not looking to retire for another 10 years. We would like to build an extension on our house and wonder if we can use some of my pension fund to pay for it. Is that a good idea?

Matthew Hinchliffe, Independent Financial Adviser with Smith & Pinching 

Matthew Hinchliffe, Independent Financial Adviser with Smith & Pinching - Credit: Smith & Pinching

Matthew Hinchliffe of Smith & Pinching responds:

Taking cash from your pension is certainly one of the options you might consider, particularly if you have no other savings or investments available. You can access your pension savings at any stage from the minimum retirement age of 55, although that is due to go up to age 57 on April 6, 2028.

From your question, I’m assuming that you have a Defined Contribution (DC) pension where the value of the fund is based on the contributions you and perhaps your employer have made to the fund, plus any tax relief and investment growth.

With a DC pension, you are entitled to take up to a quarter of the fund as a tax-free lump sum. This may well provide you with the resources you need for your extension, but it’s important to remember that any withdrawals you take from your pension fund before retirement will reduce the amount available to you to provide an income once you’ve retired.

If you take more than your tax-free cash entitlement, the excess will be counted as income for tax purposes and you would be likely to pay tax at your highest rate on it. In addition, you may trigger something called the Money Purchase Annual Allowance (MPAA) which would have a significant impact on what you can save into your pension in the remaining years of your working life. Once the MPAA has been triggered the amount you can contribute to your fund in the tax year drops to just £4,000 (as of April 2022). If you are making pension contributions and getting contributions from your employer to a workplace scheme, you may contravene the MPAA and suffer a tax charge as a result.

The alternative to a DC pension is a Defined Benefit (DB) pension where your pension benefits are calculated according to your salary and length of service. The tax-free cash rules may be different for some DB schemes. I suggest you take independent financial advice to work out if you can take the tax-free lump sum now and still achieve your retirement objectives.

Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

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