pension vs property dilemma

n12maser wrote: »

I think it would take me around 5 years get the £300k equity all in pensions, due to the yearly contribution limit. An earlier poster suggested spreading the payments out even longer so I keep child benefit for a longer period. Do you still think it's an advisable route despite how long it would take me to get all of the equity in the BTL shielded from tax? Thanks.

the key point is that you don't want to leave it in cash while waiting to put it in a pension. if the plan is to put it in a pension eventually, then you can invest the money in exactly the same way before it goes in, in an ISA in so far as it fits, and the rest in a taxable account. then it doesn't really matter when it goes into the pension, because it will be growing at the same rate before and after it goes in (or very slightly less in the taxable account, where there may be some tax on income and gains). but the rate of tax relief you get when it does go in makes a huge difference.

e.g. if you only get 20% relief, then a pension contribution of £1,000 becomes £1,250 inside the pension. but if you get 40% relief, then a contribution which costs you (allowing for all tax relief) £1,000 becomes £1,667 inside the pension. so in the latter case, your pension fund is 33% bigger!

(in both cases, there will be some tax payable when you eventually draw the pension. so the overall tax reduction from using a pension is not quite so great. but the above figures are a fair comparison of the relative advantages of pension contributions attracting 20% or 40% tax relief.)

and if you get 40% relief and also retain child benefit, the gain is bigger still.

so i think you should start by planning to contribute enough to pensions to retain all child benefit. that means contributing enough each year to reduce your adjusted income to £50k. adjusted income = total pre-tax taxable income (of all kinds: earnings, property, interest, dividends, ...) minus gross value of all pension contributions minus gross value of any gift aid.

and if you can go further, consider contributing enough to get all the 40% tax relief you can. which means getting adjusted income down to the higher-rate threshold, which is £45k this year (except in scotland).

and only if you want to consistently make larger contributions than that over many years, should you consider making contributions that only attract 20% relief. and arguably, that isn't worth doing, and you'd be better keeping the rest in ISAs or even taxable accounts.