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  • FIRST POST
    • n12maser
    • By n12maser 13th Sep 17, 2:19 PM
    • 19Posts
    • 3Thanks
    n12maser
    pension vs property dilemma
    • #1
    • 13th Sep 17, 2:19 PM
    pension vs property dilemma 13th Sep 17 at 2:19 PM
    Hi all,

    Longtime lurker, 1st time poster - thank you all for the advice I've benefited from by skimming the forum over the last fews years. Now I've got a retirement planning situation which has me stumped and hoping you guys can offer some valuable insight/advice!

    Am aged 35, earning £50k salary likely soon to increase to £65k when I move jobs. Partner (unmarried) is same age and works part-time earning £27k. Have only started taking my pension seriously since the start of this year, putting in 7% and company puts in 3% - total equates to £400 per month. Have £7k pot so far, invested in some historically well-performing US index funds via Zurich. My partner has very little in her pension and I think only puts a few % of her salary in each month. We have one child and receive £82 child benefit a month. We're aiming to get married in the next few years btw.

    Property-wise we joint-own our residence worth aprox £485k with a £130k joint-mortgage, and I own a flat (used to live in from 2007 to 2014, now an investment property) worth aprox £520k with an interest-only £200k BTL mortgage. After various expenses the flat tends to create a net income of around £4 to £5k a year. Was bought for 250k in 2007 so over 10 years it's doubled in value. So far it's had no gaps in tenancy as in a pretty desirable area of north London.

    Consider myself exceptionally privileged to be in this position, but that doesn't stop me wondering how best to juggle things longterm. The question - to best plan for our future, should I sell the flat now and whack all of the equity left over into my pension at £40k per year (and/or S&S ISAs) to benefit from the various tax breaks etc. OR should I hang onto the property for the next 30 years as historically it has performed exceptionally well as an investment, despite the fact that it will be subject to a large Capital Gains bill if I were to finally sell it as we approach retirement.

    Or other options I haven't thought of?

    One other thing I'm considering is selling the investment flat, keeping £100k cash to use towards a deposit on our next family home (to help reduce monthly payments on the inevitable larger mortgage), and put the remaining £200kish equity left over into my pension and/or ISAs for our retirement.

    Thoughts?!
Page 2
    • n12maser
    • By n12maser 14th Sep 17, 12:03 AM
    • 19 Posts
    • 3 Thanks
    n12maser
    Your pension is exceptionally low for your age.
    Originally posted by Alexland
    Need to call you out on this as it's simply not true. A Royal London survey in 2015 revealed the average pension savings of a 35 year old in the UK to be £14k. Source - The Guardian (can't yet post link as a new user)

    Well done for you and your wife saving some huge sums but that is certainly not the norm. My generation is heading for a pensions crisis - I work in a reasonably well paid industry (advertising) in London and the majority of my colleagues of a similar age have no property and I imagine little if anything left to contribute to a pension each month after rent + living costs. None of them live particularly beyond their means as far as I can see. House prices out of reach, wages stagnating, food & service prices inflating etc etc
    • n12maser
    • By n12maser 14th Sep 17, 12:34 AM
    • 19 Posts
    • 3 Thanks
    n12maser
    I'd keep the investment property personally.... If (and I guess it's a very big if) you still have it at 65, that's a continuing income and in theory it'll continue to go up in value.

    Your pension pot isn't great, but neither is your employer's contribution - I think you need to find a way to up regular contributions (e.g.: when your childcare costs decrease) rather than take drastic action and sell the flat.
    Originally posted by fiisch
    Thanks fiisch. This feels very pragmatic advice. Just been looking at your post history and it appears we have a fair bit in common - both frustratingly late to the pensions game, both struggling to rein in spending esp with a child sucking wallet dry , and both with a serious week spot for fast cars mine's a 1995 Porsche 993, high miles but still nicely appreciating in value, so hope it's accepted by the MSE crowd as a justified 'one indulgence'!!
    • Abertawe_joe
    • By Abertawe_joe 14th Sep 17, 1:46 AM
    • 1 Posts
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    Abertawe_joe
    I would keep the rental property but any income from this plus a larger percentage of your pay I would pay into a pension.

    You've also just missed out on a really good 6/7 years of stock market performance!
    • Alexland
    • By Alexland 14th Sep 17, 6:51 AM
    • 670 Posts
    • 420 Thanks
    Alexland
    Royal Londons survey should be of no comfort. On your incomes you should be aiming much higher.

    In isolation your pension pot so far is exceptionally low compared to the what is likely to be needed as income by most people.
    Last edited by Alexland; 14-09-2017 at 10:01 PM.
    • n12maser
    • By n12maser 14th Sep 17, 7:50 AM
    • 19 Posts
    • 3 Thanks
    n12maser
    No comfort in the Royal London figure, I understand I'm way short. But people coming to this thread in a similar situation shouldn't be misled with inaccuracies.

    Now that you've rephrased what you said before it's a fair point!
    • chucknorris
    • By chucknorris 14th Sep 17, 8:05 AM
    • 9,311 Posts
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    chucknorris
    Hi Ray,

    Thanks for your reply.

    Minimum aged 65 I'd like us to be able to continue living in our 'forever home' which we will probably have already been living in for at least 10 years before that, and for it to be mortgage free or nearly paid off. I don't want us to have to sell it to downsize, thus unlocking equity to live off in retirement.

    This is a somewhat of a shot in the dark as would need to do the calcs, but in today's terms I'd like us to be able to live as comfortably as we do now..so maybe a joint pension income of aprox £50k net?
    Originally posted by n12maser
    What I did was worked out how much equity I would receive after paying all the fees and CGT, then compare the anticipated yields between property and the alternative investment. Although we decided last year was the time to start selling, and would do so when they became vacant (and we sold two properties). After receiving notice from a tenant from our highest yielding property, my spreadsheet showed that I would have to earn 7% on the alternative investment, mainly because I lost use of the significant CGT (it would no longer be working for me) so I decided to re-let that particular property, I'll sell it when the market is doing reasonably well, hopefully in about 5-10 years (when I am between 65 and 70).
    Last edited by chucknorris; 14-09-2017 at 8:08 AM.
    Chuck Norris can kill two stones with one bird
    The only time Chuck Norris was wrong was when he thought he had made a mistake
    Chuck Norris puts the "laughter" in "manslaughter".
    After running injuries I now also hike, cycle and swim, less impact on my joints.

    For the avoidance of doubt Chuck Norris is an actor and an ex martial artist (not me)
    • n12maser
    • By n12maser 14th Sep 17, 8:56 AM
    • 19 Posts
    • 3 Thanks
    n12maser
    Thanks ChuckN, super helpful perspective.

    When you calculated the equity left after CHAT and fees, do you mean if selling now or do you mean a prediction for selling in run up to retirement based on predicted house price growth? Think u mean the first of these but just want to clarify...
    • n12maser
    • By n12maser 14th Sep 17, 8:58 AM
    • 19 Posts
    • 3 Thanks
    n12maser
    CGT not CHAT, bl##dy phone auto-correct
    • dunstonh
    • By dunstonh 14th Sep 17, 10:21 AM
    • 89,558 Posts
    • 56,009 Thanks
    dunstonh
    Need to call you out on this as it's simply not true. A Royal London survey in 2015 revealed the average pension savings of a 35 year old in the UK to be £14k. Source - The Guardian (can't yet post link as a new user)
    Doesnt matter what others have. There is one of those sayings that you should aim for £35k by 35 to be on track.

    The problem with surveys is that you get a snapshot of a limited number of people of what they think they have. Many of those will have more than one pension. Maybe a final salary scheme which has no value and a personal pension which is £14k. So, the £14k pension gets recorded.

    Another way the figure is often misrepresented is that they take the average value of a pension at that age. Again, this is very unreliable as people frequently have multiple pensions. So, they may have two worth £15k each but the averaging of pot values doesnt show £30. It shows £15k.

    In some areas of the country, there was a saying that you got a payrise on retirement as a little bit of pension saving and the state pension meant they ended up with more money in retirement than they had when working. In low paid areas (East Anglia, Wales, North for example), many people do not need large pots as the state pension and relatively small personal pension will give them enough.

    For the level earnings being discussed on this thread, the pension value is far behind where you would expect it to be if on track.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • n12maser
    • By n12maser 14th Sep 17, 10:51 AM
    • 19 Posts
    • 3 Thanks
    n12maser
    "Your pension is exceptionally low for your age" can be taken two ways - the first meaning "£7k in a pension is way behind the majority of people your age in the UK"....this is what I took the poster to mean, so challenged it (maybe wrongly based on my own assumption), as it's not true. That survey took data from over 1000 30 to 40 year olds, all in work. That's a pretty big pool as far as surveys go. I agree, they don't always give the full picture but they still give a meaningful indication. Even if the actual average is actually something like £25k, it's still not the case that £7k is exeptionally low for a 35 year old in the UK.

    Either way, the poster has since clarified what was meant by this phrase is "Your pension is exceptionally low for what it should be for your age to retire how you want to", which is fine and I agree, I'm way behind!!

    Getting things back on track, where my head's at right now is hanging onto the property but putting all of the profit from this BTL into my pension pot. I'm predicting that even after captial gains tax it will do better than selling now and dumping any cash left in pension. Albeit my calcs are based on two massive assumptions - average annual growth of 8% (not adjusted for inflation) of shares and that the property will double in price every 10 years, like it did the last 10 years.
    • dunstonh
    • By dunstonh 14th Sep 17, 11:38 AM
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    dunstonh
    That survey took data from over 1000 30 to 40 year olds, all in work.
    So, on average, that will be people earning around £22,000 a year.

    That's a pretty big pool as far as surveys go.
    And all the inaccuracies and flaws that come with such a sample.

    Take 1000 city dwellers and you get a totally different set of results to 1000 that live in rural areas.

    Even if the actual average is actually something like £25k, it's still not the case that £7k is exeptionally low for a 35 year old in the UK.
    £7k for a 35 year old is exceptionally low. It cannot be dressed up any other way. Nil is exceptionally low for a 35 year old and there are plenty of people that havent done anything at 35. It is not going to help you to play statistics using random samples of people with large margins of error. Look at your scenario and with your level of income, it is very low. Although, at least you are now looking at it.

    I'm predicting that even after captial gains tax it will do better than selling now and dumping any cash left in pension.
    In your case, you already have the property, so you would be looking at a position of disposal and the costs incurred with that. So, that is a handicap position to be in.

    Albeit my calcs are based on two massive assumptions - average annual growth of 8% (not adjusted for inflation) of shares and that the property will double in price every 10 years, like it did the last 10 years.
    Property does not normally double in 10 years. Investments do more often than not double (assuming typical spread for someone with 30 or more years to go). Landlords are being targetted by the Govt. Higher rate taxpayers losing the ability to full offset interest for example.

    I think you need a proper calculation as the pension may well be the better option but until that calculation is done you will never know. (pension getting higher rate relief and returning child benefit you are about to lose is bigger than the CGT you are likely to pay. The dividend yield is similar to rental yield but tax free in the pension but taxable on the property. Long term growth (rather than short term trends) tends to put equities better than property - returns unknown but even if you assume broadly similar, you could look purely at the tax position to see what the result is.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • n12maser
    • By n12maser 14th Sep 17, 12:04 PM
    • 19 Posts
    • 3 Thanks
    n12maser
    Thanks Dunstonh, appreciate the advice.

    If I sold the BTL property now, based on the .gov.uk calculator, my CGT bill right now would only be £5k as I lived in the property for 7 out of the 10 years I have owned it. After other fees and settling the BTL mortgage, I'd be left with aprox £303k cash. My understanding is I could put about £190k of that into my pension straight away (3 previous years allowance @ £50k, this year's allowance @ £40k) then the rest over the next 3 years. It would all be wrapped in the pension by 2020.

    Think it really comes down to how much of a risk do I want to take with regards expectations of London house-price growth over the next 30 years - my understanding is you think it's way too risky, and I think I agree. Looks like the pension route over this period of time is far lower risk + the added benefits you highlighted regarding child benefit & 40% threshold
    • dunstonh
    • By dunstonh 14th Sep 17, 12:39 PM
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    dunstonh
    My understanding is I could put about £190k of that into my pension straight away (3 previous years allowance @ £50k, this year's allowance @ £40k) then the rest over the next 3 years. It would all be wrapped in the pension by 2020.
    I may be more inclined to hold some more back to feed the pension over a longer period to get maximum 40% relief (and maintain child benefit beyond 2020). ISA the rest in the meantime each year and then feed the pension from the ISA when there is no unwrapped money left. (ISAs, pensions and unwrapped sharing the same investments at the same cost with only tax differences means you can plan over a longer period and no need to rush it).
    Think it really comes down to how much of a risk do I want to take with regards expectations of London house-price growth over the next 30 years - my understanding is you think it's way too risky, and I think I agree. Looks like the pension route over this period of time is far lower risk + the added benefits you highlighted regarding child benefit & 40% threshold
    London is priced on the international stage. The falls in sterling in the global recession and post referendum have pushed values up in London. When sterling shows signs of reversing, this will put London property prices at risk of falling. However, there is still a supply and demand issue in London. You also have the impact of brexit when we do actually leave. Will supply and demand weaken. Lots of unknowns and pressures in both directions.

    Everything has unknowns. So, start with the knowns and that will be tax. Assume the same growth rate on pension and property. Just look at how the tax will differ and see which is best purely from a tax point of view and how much the difference in tax will be.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • chucknorris
    • By chucknorris 14th Sep 17, 12:52 PM
    • 9,311 Posts
    • 13,968 Thanks
    chucknorris
    Thanks ChuckN, super helpful perspective.

    When you calculated the equity left after CHAT and fees, do you mean if selling now or do you mean a prediction for selling in run up to retirement based on predicted house price growth? Think u mean the first of these but just want to clarify...
    Originally posted by n12maser
    I did meant now, but both are virtually the same for me anyway (as I'm 59, and I have recently dropped down to working only one day a week).
    Chuck Norris can kill two stones with one bird
    The only time Chuck Norris was wrong was when he thought he had made a mistake
    Chuck Norris puts the "laughter" in "manslaughter".
    After running injuries I now also hike, cycle and swim, less impact on my joints.

    For the avoidance of doubt Chuck Norris is an actor and an ex martial artist (not me)
    • greenglide
    • By greenglide 14th Sep 17, 2:31 PM
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    greenglide
    I'd be left with aprox £303k cash. My understanding is I could put about £190k of that into my pension straight away (3 previous years allowance @ £50k, this year's allowance @ £40k)
    So you have (or will have) £190,000 of earned income in this tax year to enable this pension payment? If you haven't then you cannot do this.
    • n12maser
    • By n12maser 14th Sep 17, 2:39 PM
    • 19 Posts
    • 3 Thanks
    n12maser
    The statement is based on this guidance from the pension advisory service, regarding "carry forward" rules:

    "To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2017-18) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago. You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it."

    So couldn't I do this, considering my earnings were mostly over £50k for the last 3 years and I hardly contributed anything to my pension in that time?
    • atush
    • By atush 14th Sep 17, 3:00 PM
    • 16,333 Posts
    • 10,081 Thanks
    atush
    Hi atush, thanks for your recommendation.

    I suppose the barrier to this is there's no way we currently have an extra £1600 a month to put into my pension, what with aprox £800 per month on childcare costs (albeit going down next year), £430 mortgage, £120 council tax, food, car-related running costs etc.

    Maybe that means I need to lower my retirement income expectations in order to get a suitable balance between 'living in the moment' and enjoying our life right now vs also planning sensibly for retirement?
    Originally posted by n12maser
    No, you dont quite get me here. The figures I gave were for when you earn 65K (right now you cant afford that level of pension as you earn only 50K).

    For now you should try and put in 10K pa into your pension.
    Last edited by atush; 14-09-2017 at 3:14 PM.
    • atush
    • By atush 14th Sep 17, 3:01 PM
    • 16,333 Posts
    • 10,081 Thanks
    atush
    Thanks for your advice. One question - is my situation not two markets currently - investment property + shares? Realise that's still not particularly diversified.
    Originally posted by n12maser
    Investment property and shares is 2 asset classes.

    But investing only in t he usa is a poor choice. Try instead a fund with global exposure
    • atush
    • By atush 14th Sep 17, 3:06 PM
    • 16,333 Posts
    • 10,081 Thanks
    atush
    No but thanks for raising we have wills on our radar to do it in the next few months. Am aware of I got hit by lightening nothing would go to my partner at present
    Originally posted by n12maser
    Marry her. In the mean time write a will and get it witnessed, like now.

    And put her as your beneficiary in your expressions of wishes form for your current pension

    Being married will cut the CGT on the sale of your property when you do it- as you can transfer half the ownership to her before you sell.
    Last edited by atush; 14-09-2017 at 3:15 PM.
    • atush
    • By atush 14th Sep 17, 3:08 PM
    • 16,333 Posts
    • 10,081 Thanks
    atush
    Need to call you out on this as it's simply not true. A Royal London survey in 2015 revealed the average pension savings of a 35 year old in the UK to be £14k. Source - The Guardian (can't yet post link as a new user)

    Well done for you and your wife saving some huge sums but that is certainly not the norm. My generation is heading for a pensions crisis - I work in a reasonably well paid industry (advertising) in London and the majority of my colleagues of a similar age have no property and I imagine little if anything left to contribute to a pension each month after rent + living costs. None of them live particularly beyond their means as far as I can see. House prices out of reach, wages stagnating, food & service prices inflating etc etc
    Originally posted by n12maser
    That study is sucked down by all those who have 0 in a pension.

    At your age you should have at least 35K in a pension. Which is easy enough to do at your salary.
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