Money Makeover ‘I’ve got no pension – can I still afford my dream home?

Isabella Day wants to know whether her successful business is enough to realise her long-held goal, writes Mattie Brignal

After 20 years as a goldsmith, Isabella Day is still passionate about her trade. At her artisan jewellery workshop in Dartmouth, Devon, she handcrafts bespoke, high- carat gold pieces for clients, while the firm’s online arm sells on sites such as Etsy.

“I love the craft, it’s wonderful,” she said. “It takes patience and precision. I have ADHD so I think that’s one of the reasons why I like it, because you get to really focus on things.”

Lately, however, her focus has shifted to her finances, and how she should plan for the next phase of her life. Ms Day lives in a “really beautiful barn conversion” on a long-term let with her partner, a Japanese metalwork specialist, and three sons, aged between 15 and 25.

But her 10-year goal is to build her own house. She says: “We want some more financial security in terms of where we live. My grandparents lived in Cornwall and ever since I was a little girl I used to dream of having a little house that looked over an estuary.

“We just need a tiny little bedroom and a kitchen and a great big studio where we can keep on making things until we die, with a lovely view and a garden. But not a massive mansion.”

Despite being 51, Ms Day sees retirement as a long way off. She says: “I can’t imagine a day when I’d want to retire. I want to keep on making beautiful things.”

She has no pension pot but has around £15,000 in savings, and manages to save between £200 and £800 a month, keeping most of the money in a stocks and shares Isa.

She says: “I always felt like the business was my pension. There are parts of it I could split off and sell, so I’ve always felt like it’ll work itself out. I’ve spent the last 20 years investing in it.”

Her father had a pension with Equitable Life, and lost the entire pot when the company collapsed. She says: “I’ve

Putting £5,000 a year into a pension pot could net Isabella £102,000 after 15 years at 4pc growth rate pa

Minimum percentage deposit required for a specialist self-build mortgage always been wary of pensions. But by investing in a business and buying a house, no one can take that off you. I don’t need loads of money – just a safe place for our retirement. If I had £500,000 I could probably buy a plot and build a nice house.”

Ms Day takes between £60,000 and £ 70,000 a year as dividend income from her profitable business. But she has a £ 70,000 VAT bill to pay and around £45,000 of outstanding business loans. She spends £500 a month paying off the VAT bill and £1,600 servicing the loan.

The couple also has a selection of valuable objects Ms Day could sell, including an antique Japanese silver bowl worth around £30,000 once restored. She says: “I don’t know whether I should be saving hard now for a pension or clearing all the business debts.”

Ian Futcher

Financial planner at Quilter

Ms Day finds herself in a similar position to many over-50s in the UK, lacking private pension provision. According to SunLife, nearly 7m over-50s have no private pension savings.

However, it’s better to start late than never. Wanting to buy a house is a bit more tricky. As a business owner, the first priority is to tackle the company’s debts. The £70,000 VAT bill must be a priority, which she should pay off immediately if she can. Ms Day’s company loan is currently being paid at £ 1,600 a month. She could increase these payments to clear it quicker, if there are no early repayment charges.

To answer her question – do you prioritise debt or save for retirement? – she can do both. Firstly, check her state pension forecast and make sure she is on track for the full 35 years of National Insurance payments to qualify for a full state pension, which will really help.

If she is short, she may be able to top up any missed years. After this, Ms Day

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telegraph.co.uk/ moneynewsletter can start to plan a private pension. There are two ways to pay into a scheme: either through personal contributions or company contributions.

Contributions are limited to UK relevant earnings. Because she mainly pays herself in company dividends, her personal contributions would not be high.

However, as a company owner and director she can set her company contribution to what she wishes. There are no limits as long as it is within an individual’s personal allowance of £60,000.

These contributions can be offset against corporation tax as long as it meets HMRC’s rules. Putting in £5,000 a year at a growth rate of 4pc per annum, after 10 years Ms Day could have a pension pot of £ 61,000, and £102,000 after 15 years.

Buying a property, mortgage lenders are likely to focus more on whether

Ms Day can afford the monthly payments. To achieve £500,000 for a selfbuild, you would need a minimum of a 20pc deposit and an approximate joint income of £100,000. With mainly dividend income, Isabella may need to find a lender happy to use this.

To get to the deposit of £ 100,000 could take up to seven years, which would result in a shorter term and higher payments. It may be simpler to buy a residential property first, which will require a smaller deposit.

Kusal Ariyawansa

Financial planner at Appleton Gerrard Private Wealth Management

Ms Day has a key question to deal with here: does the property dream outweigh her income needs in retirement?

There is little harm in renting. For example, buying her first property on a

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You must be willing to be photographed for the article. 25-year mortgage at 61, means only being debt free at 86.

The capital appreciation of the house would be nullified by the mortgage interest, meaning at best, she could be cost-neutral, only to then use the house equity to pay for lifestyle maintenance or even care fees due to a lack of pension income.

Not many people would opt to carry this level of debt into retirement, making it a questionable strategy where the dream masks the reality. It appears to be an inefficient use of money.

However, there are advantages to building your own home: no stamp duty is payable on the building work, or on the completed property; duty is only payable on the value of the land if the building costs exceed £125,000; and you can apply for a refund of VAT on building materials and services.

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

Despite wanting to work until she physically cannot, Ms Day needs an effective exit strategy. She could sell all or part of the business, and use the money to pay for lifestyle needs, or ringfence business earnings for future income needs through a pension. The key driver in deciding the most efficient strategy would be the annualised growth rate she could get between now and when the savings are converted to a future income.

Ms Day needs a financial plan which gives her clarity and certainty about each option being considered. Its numbers will inform her decision on whether to build savings for a property now, or fund a pension.

At any stage the plan could be derailed if there is a health scare, meaning she needs adequate income protection and critical illness insurance now.