Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@. Skimlinks & other affiliated links are turned on

Search
  • 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 3
    • atush
    • By atush 14th Sep 17, 3:10 PM
    • 16,333 Posts
    • 10,081 Thanks
    atush
    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!
    Originally posted by n12maser
    Id say your link to RL was an innacuracy, if you misunderstand it?
    • chucknorris
    • By chucknorris 14th Sep 17, 3:12 PM
    • 9,309 Posts
    • 13,960 Thanks
    chucknorris
    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?
    Originally posted by n12maser
    What he meant was that you ALSO have to have earned enough 'relevant earnings' within the tax year that you actually invest. Although my annual income is quite high, most of it is rental and dividend income, which are not classed as 'relevant earnings'. So I am capped by my employment income for investing into my SIPP.
    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, 3:33 PM
    • 19 Posts
    • 3 Thanks
    n12maser
    Just so I understand, do I need to earn £190k of 'employment' income in the year 2017 in order to dump that amount in my pension as a lump sum, or is it ok that I earn around £50k per year over the last 3 years and this year to make it allowed?
    • kidmugsy
    • By kidmugsy 14th Sep 17, 3:36 PM
    • 9,821 Posts
    • 6,614 Thanks
    kidmugsy
    You should aim, I suggest, at getting your taxable income down to £45k p.a. which both avoids 40% income tax and preserves your child benefit entitlement. I'd suggest you don't aim to make the max £40k contribution every year (unless you can do it by salary sacrifice) since your avoiding 20% tax is not worth stretching financially for. If you really, really want to avoid 20% tax, make the contributions for your lover not for yourself. (So that she'll be able to drawdown pension tax-free when you're both older, in all likelihood.)

    If you're stuck for money to make the pension contributions, and are loathe to sell the flat, consider increasing the size of one of your mortgage loans, whichever is cheapest. Another possibility is that you marry the lass pronto and then gift her (say) 99% ownership of the let property so that 99% of the rent goes against her tax not against yours. That way you can avoid 40% tax with smaller pension contributions than otherwise. You'd have to check whether your mortgage company would be happy with that.

    Don't panic about pensions: you own two properties for heaven's sake. But do ensure that you get 40% tax relief on contributions which will ensure that later in life you'll be able to draw much of the money out again at 0% tax, namely the tax-free lump sum, and as much annual income as will use up your personal allowance against income tax.
    • n12maser
    • By n12maser 14th Sep 17, 3:39 PM
    • 19 Posts
    • 3 Thanks
    n12maser
    Id say your link to RL was an innacuracy, if you misunderstand it?
    Originally posted by atush
    I don't misunderstand it, I comission surveys for clients at work, I understand the scope of data that a good survey provides. Quantitative data, not mere hypothesising which is much of what the challenges to the RL figures have been on this thread when it got slightly off track. The ideal is survey data validated by other findings whether that be cognitive studies or more in-depth interviews - not something we have the luxury of in this case.
    • kidmugsy
    • By kidmugsy 14th Sep 17, 3:45 PM
    • 9,821 Posts
    • 6,614 Thanks
    kidmugsy
    Just so I understand, do I need to earn £190k of 'employment' income in the year 2017 in order to dump that amount in my pension as a lump sum
    Originally posted by n12maser
    Yes. The maximum you can contribute each year and get the tax advantages is the bigger of (i) your earnings, and (ii) £3600.

    Those are gross figures.
    • chucknorris
    • By chucknorris 14th Sep 17, 4:03 PM
    • 9,309 Posts
    • 13,960 Thanks
    chucknorris
    Just so I understand, do I need to earn £190k of 'employment' income in the year 2017 in order to dump that amount in my pension as a lump sum, or is it ok that I earn around £50k per year over the last 3 years and this year to make it allowed?
    Originally posted by n12maser
    Not necessarily employment income, but it has to be 'relevant earnings', which are:

    The following earnings are relevant UK earnings:

    Income chargeable under Part 2 ITTOIA 2005 immediately derived from a trade, profession or vocation.
    Employment income such as salary, wages, bonus, overtime, commission providing it is chargeable to tax under Section 7(2) ITEPA 2003
    Any part of a redundancy payment which exceeds the £30,000 tax exempt threshold under section 403(1) ITEPA 2003.
    Benefits in kind which are chargeable to tax.
    Profit related pay (including the part which is not taxable)
    Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) provided it is paid by the employer and chargeable to tax under Section 7(2) ITEPA 2003
    Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment
    Salary paid by way of Government Securities
    Remuneration paid in the form of units in an authorised unit trust provided it is treated, on receipt, as a taxable emolument of the individual
    Patent rights treated as earned income under Sch 1 para 473(3) ITA 2007
    General earnings from overseas Crown employment which are subject to tax in accordance with Section 28 of ITEPA 2003
    Amounts deducted from salary to purchase partnership shares in a share incentive plan provided they qualify as such under paragraph 83 of Schedule 8 of Finance Act 2000
    Per HMRC this list is not exhaustive, see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual
    Last edited by chucknorris; 14-09-2017 at 4:05 PM.
    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)
    • kidmugsy
    • By kidmugsy 14th Sep 17, 4:41 PM
    • 9,821 Posts
    • 6,614 Thanks
    kidmugsy
    Another possibility is that you marry the lass pronto and then gift her (say) 99% ownership of the let property so that 99% of the rent goes against her tax not against yours. That way you can avoid 40% tax with smaller pension contributions than otherwise. You'd have to check whether your mortgage company would be happy with that.
    Originally posted by kidmugsy
    Sorry, OP, I withdraw that. I now have a memory of another thread where it was pointed out that to minimise Capital Gains Tax when you eventually sell the property the best ratio would not be 99:1. Do you worry more about income tax in the here and now or CGT in the future? Maybe start another thread to attract the experts. Suggested title "What fraction of my flat should I gift to my wife?" You could also ask people to explain the tax advantages of your being married if you are going to try this manoeuvre. Perhaps put it on the Cutting Tax forum or the Savings and Investment forum.
  • jamesd
    Slight update - having the run the figures I think we only need £40k a year between us to live very comfortably in retirement.
    Originally posted by n12maser
    At the moment, ignoring state pensions you're at about £650k including all equity. It's only for 30 years of retirement but the 4% rule for pension income suggests that at the moment you're potentially on £26,000 less some deduction for buying an inexpensive place to live. At 35 it'd actually be a fair bit less than that, though, since you'd have to recon on living to a hundred, which requires a slower capital drawing rate. You say you don't want to downsize and I assume not relocate as well, so this paragraph is just to illustrate potential. Would a cheaper home be worth it to be retired at say 40 or 45? I don't know, up to you. reduced property spending is often one of the core attributes of very early retirement, as in the "financial independence" movement.

    Forget about "pension income" and your pension pot being low for your age and income. What you need is "retirement income". That doesn't have to be from pensions and if you design a life around them you're wasting lots of potential and locking yourself into a later retirement than you could manage. Aim for total retirement income instead.

    Your thinking about keeping cash to reduce your future mortgage is an odd move. Why save yourself a couple of percent when you can make say 10% from peer to peer lending or around 5% plus inflation from the UK stock market long term average? In that environment you should be looking to increase mortgage borrowing, not reduce it, and any overpayment is a lost opportunity to be better off. Change your thinking, not "mortgage free" or "less mortgage" but "mortgage covered by investment income, and money left over on top". I have a mortgage. It's worth about ten percent of my gross worth. Pointless for me to pay it off because it'd just make me poorer.

    You have a substantial income tax bill. Venture Capital Trusts provide 30% tax relief on the amount spent, repayable to HMRC if you sell within five years. Tax exempt dividends and no CGT. By the time you reach 55 you could have done this four times over for a total of 120% income tax relief. Pensions are good but they aren't that good.

    So I suggest that you think about:

    1. Enough pension contributions in your name so that your income is below the loss of child benefit threshold. Maybe for your whole higher rate income if you can fund 2 sufficiently while doing this.
    2. Starting in on VCT investing to make the rest of your income largely tax free, partly funding with increased borrowing. After the first five years this would be self-sustaining with sales paying for the next round of buying.
    3. Once your income is tax free in effect, up the pension contributions now you no longer need more non-pension money for the VCT buying, that being funded by the recycling of money from five years earlier.

    A disadvantage of this is that it leaves you with quite a lot of money in the small companies that VCTs invest in during the early years, including the whole first five years, if you do the low pension variation of 1. The whole higher rate portion reduces that concentration. As you do more VCT cycles the pension proportion rises rapidly so this gradually becomes less of a concentration.

    A major advantage of non-pension investing for you is that the money is available to you before you reach 55 or whatever the age is when you get there. Since it appears likely that you'll be able to retire well before age 55 that's significant. You'll need a lot of money outside the pensions to fund the years until you can get at the pension money.

    The BTL property will benefit from letting relief because it was your home. Assuming you're married when selling you can switch a portion of the ownership to her to use her CGT allowance as well, though no letting relief for her unless it was also her home for a while. But it's a nice enough bit of diversification so I suggest keeping it, just raising borrowing to fund the first round of VCT buying.

    One of your key decisions is also the trade off between "lifetime property" and "retire early". More expensive property means later retirement so think about lifetime properties in cheaper areas if you want a different blend of same property quality but earlier retiring.
    Last edited by jamesd; 14-09-2017 at 9:11 PM.
    • Alexland
    • By Alexland 14th Sep 17, 10:33 PM
    • 643 Posts
    • 401 Thanks
    Alexland
    A few other thoughts on this thread:

    1 - the total return growth estimates for both property and shares look massively optimistic remember you need to deduct compound fees and inflation to see real returns.

    2 - if you decide to sell the BTL (this really is your choice you can boost the pension without selling it) then if you can make the contributions via your employer payroll then salary swap might save you NI but don't save so much you miss your state pension contribution. Also consider Junior ISA and child pension options.

    3 - consider the long term estate planning as a pension wrapper can save tax when you pass assets on.

    4 - consider a LISA in addition to a pension if you need to wrap up a lot of money for the long term.

    Alex.
    Last edited by Alexland; 14-09-2017 at 10:39 PM.
    • cashbackproblems
    • By cashbackproblems 15th Sep 17, 10:49 AM
    • 1,705 Posts
    • 662 Thanks
    cashbackproblems
    Due to your BTL property equity you are in a very strong position and can easily retire at 60 due to the compounding effect if you were to invest that pot and continue contributions at your current rate (assuming wage increases) you would be looking at a pot of potentially £1m if invested well.


    Property market even in London is looking slow and will continue for many years imo. I personally would sell and invest it in a SIPP, you will automatically get a 40% boost from the tax man as you are a higher rate payer.
    • n12maser
    • By n12maser 15th Sep 17, 4:05 PM
    • 19 Posts
    • 3 Thanks
    n12maser
    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.
    • grey gym sock
    • By grey gym sock 15th Sep 17, 6:14 PM
    • 4,130 Posts
    • 3,632 Thanks
    grey gym sock
    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.
    Originally posted by n12maser
    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.
    • kidmugsy
    • By kidmugsy 15th Sep 17, 6:54 PM
    • 9,821 Posts
    • 6,614 Thanks
    kidmugsy
    the key point is that you don't want to leave it in cash while waiting to put it in a pension. ... 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.
    Originally posted by grey gym sock
    It would be better for income tax for OP's wife (if he arranges that!) to hold the tax-exposed shares. For Capital Gains Tax it would probably be better to split the holding. OP to sort out the details if he goes this route.
    • kidmugsy
    • By kidmugsy 15th Sep 17, 7:02 PM
    • 9,821 Posts
    • 6,614 Thanks
    kidmugsy
    One stray thought: as the child gets bigger - or even more so, if you have another - might you want to live in a bigger house? If so it's conceivable that selling the flat to help fund the move might seem a natural thing to do, with any capital left over going into the pensions. It might even be wise to ensure that your new mortgage is big enough to leave a generous sum over for future pension contributions while being small enough to ensure that you get a sharp interest rate on the loan.

    You may find it advantageous to exploit to the hilt the tax treatment of owner-occupied housing.
    • n12maser
    • By n12maser 15th Sep 17, 7:09 PM
    • 19 Posts
    • 3 Thanks
    n12maser
    Our current child is two and a half and would imagine we may well wish for another in a year or two. We're currently in a two bed flat so moving house is on the agenda, 100%. Probably looking to move mid to late next year to (ideally) a three or four bed house.
    • Alexland
    • By Alexland 15th Sep 17, 9:34 PM
    • 643 Posts
    • 401 Thanks
    Alexland
    Right in which case using some of the equity in the BTL to get the house that would give you the right lifestyle might be worth doing. You only live once and it's still an OK and more tax efficient investment.

    We consolidated our 2 properties from single 20s living into 1 big family home and it really has improved our standard of living. It also means our mortgage was low enough to enable the big pension contributions from income.
    Last edited by Alexland; 15-09-2017 at 9:37 PM.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

79Posts Today

2,578Users online

Martin's Twitter
  • I believe I can boldly go where no twitter poll has gone before https://t.co/HA0jC92gAK

  • OK I'm wilting to public pressure and there will be a star trek captain's poll at some point next week

  • I can get that. My order is 1. Picard 2. Janeway 3. Kirk. Too early to say where Lorca will end up (or would you? https://t.co/kawtCOe9RA

  • Follow Martin