Moral Money: our reader wants to know whether to invest or keep the cash for retirement
Dear Moral Money,
I am 59 years old, and after four years of negotiating I have finally received the lump sum settlement from my divorce. It is just under £260,000.
I’m enjoying a loving relationship with my new partner and we live in his home in London. It’s gorgeous and we both want it to be our forever home.
My partner has a £150,000 interest-only mortgage balance, which expires in two years’ time when he reaches 65. He had been intending to downsize at some point to clear the mortgage and move somewhere less expensive, once working in London was no longer a priority.
However, my partner has made the suggestion to use my divorce settlement to clear the mortgage, and I would then have a representative proportion of the house transferred into my name. I am keen to provide a legacy for my children – who are, in all honesty, grown up and financially independent – but I want to be sure my wealth goes to them.
Apparently this can be achieved by writing a will that gives my portion of the house to my children, although my partner could not be ejected from the property during his lifetime. There would be a reciprocal arrangement for my partner’s portion of the house and, given the difference in our ages, it is more likely I will benefit from being able to stay in the property for my lifetime, even though I don’t own it all. This seems like a fair solution, but I still feel resistant to doing it.
I have no pension other than my state pension, and I work freelance in the arts. If I spend my settlement on a property, whether a buy-to-let or somewhere to live, I still won’t be able to spend the money tied up in bricks and mortar during my retirement. Having done a forecast I will need to spend most of the capital if I am to make ends meet as my earning opportunities subside.
I instinctively feel I need to say no to using my money to clear the mortgage, however, I do love living here. I also feel buying a property, or buying into my partner’s property, will secure a legacy, but it will be at the expense of an impoverished retirement. Is it selfish of me to keep all the money for myself, especially as it would likely force a move that neither of us want?
Anon
Dear reader,
We have been working together for a few years now, and I am so pleased to see you happily enjoying your London lifestyle and loving relationship. I am glad the divorce negotiations are finally over – let the new era begin, even if it is starting off with a dilemma.
Residential property ownership in the UK has been a great way of building wealth over the long term. Many of the legacies we see pass into the hands of the next generation consist of a big chunk of property. Often parents got on the property ladder as soon as they were married, having sacrificed holidays and parties to accumulate a deposit, then borrowed to the max and struggled to make mortgage payments in the early years.
I make this point because, in actual fact, the three important features of this wealth creation are: borrow to invest (known as gearing), start really early (instead of partying) and maintain the investment over the long term (quarter of a century or so). An investor who adopts this approach could also create wealth out of stocks and shares portfolio, but we are all conditioned to use this approach for buying a home, and seduced into believing “property” is a great investment.
Property as an asset class has the very real flaw you have identified – you can’t use bricks and mortar to pay the bill at the supermarket, or cover the cost of this year’s holiday. It is this illiquidity that forces property owners to curtail spending in favour of saving for a deposit, and then service the loan repayments, and ultimately have a reduced retirement lifestyle because all the wealth is tied up in the property.
You will, of course, have heard about equity release loans, which help property-rich cash-poor people turn bricks and mortar back into spendable cash during his lifetime. This is an option for those who can’t face selling up and downsizing to release the equity in the home.
It seems to me that you and your partner have already reached the equity release stage – it is just that you are not calling it that. If your partner’s interest-only mortgage is reaching maturity, and there really is no means of clearing the balance, then maybe it’s time to talk to lenders who specialise in lifetime lending? With this type of loan it is expected that the mortgage balance will remain open until you are both gone – yes, it will reduce the legacy value, but it will enable you to have a great retirement and continue living in your London home.
You mention that your children are financially sorted. I get that you feel obliged to try and make sure that anything of yours goes to them on your death, but I really do feel that our number one responsibility to our children is making sure we are financially secure during our lifetime. Forget the legacy, let’s make sure we are not going to have to get them to bail us out because we don’t have enough money to maintain a house we won’t leave, or can’t afford the home help we need in later life.
I think your instincts are right and that staying with a much more spendable investment portfolio for your divorce settlement is going to serve you better. You can organise it to maximise growth opportunity, but still ensure chunks come available for spending at strategic points.
This will provide much more flexibility and choice. If that means a house move to keep your lifestyle sustainable then so be it – I think cramping your lifestyle to maintain an unaffordable property leaves you vulnerable and deprived of opportunity. It doesn’t sound as if the children would expect that of you, and they may well be against the idea if you told them what you were considering.
If you do stay in the London house, but without buying a stake in it, your partner can still make arrangements in the will to ensure you get to live there during your lifetime, if you so chose, with the ownership passing to heirs once you die. It may be that you would be happy to move under such circumstances, but it may be nice to have the choice.
One last point is not to be too hard on the whole interest-only mortgage idea. Yes, it has created a dilemma for you, but the dilemma comes from your altered circumstances now you both feel you want to stay in London in retirement. Had the original downsizing idea played out then the balance would easily have been cleared with the spare money and the new home owned outright.
The good news is you have lots of options, and you seem to have great instincts – with a bit of financial planning and the ability to discuss things openly with your partner, I know you are going to find the solution that works well for you.