Private pension vs real estate

Perelandra

elantan wrote: »

Can you give me an example of how exactly this would work?

I can understand you don't pay tax on any isa, but I would've thought that with the rest if you hit the tax barrier you would pay tax ... Or am I missing something ?

I'll try to get this right, but someone may correct me on this.

Detail below, but it's (for someone over 65):

Up to £10,500 tax-free from pensions (incl. state pension)
An additional £15,000 from dividends (above this point it starts affecting your tax-free allowance)
An additional £10,600 from capital gains
+ ISA income

So if you've organised well, that's about £35k per year + ISA income that you can receive without paying tax.


Your pension income will be taxable, but (as with any other taxable income) you have a tax-free allowance of £10,500 (for pensioners. Lower for younger people, but this government seems intent on closing the gap).

In addition, you have a capital gains tax allowance of £10.600; in a given year, any shares sold at a capital gain of less than that will be tax-free.

Dividend income is a little more complicated. There's three parts to this:

Tax rate on dividends: If you're a lower rate tax payer, there's no further tax to pay on income received from dividends (dividends are paid net of 10% tax, which you cannot avoid paying even with an ISA). Provided your taxable income remains below £35k-ish, there's no further tax to pay here.

However, dividend income will start affecting your personal tax allowance- for those over 65, as long as your total income (including pension) is below £25k, your retain your personal allowance. As you go above that point, you face an effective tax rate of 50%.

So for those over 65, the personal-tax allowance limit (25k) kicks in before the income tax limit (£35k taxable income). For those under 65, since you retain your personal allowance until you earn £100k, taxable income dictates when you start paying tax.

marathonic

atush wrote: »

your illustration doesn't cover the costs of the property over those years, esp the mtg interest on 200K. These all need to be added to base cost before profit?

I said, "you have to consider the cost of rent versus the cost of mortgage and maintenance".

For my own house purchased in December, the mortgage interest and a (1% of property value) annual allowance for maintenance works out at slightly less than what I'd pay to rent a comparable home in the area.

Therefore, the above differences don't impact me (well, slightly impact me in a positive way).

chucknorris

marathonic wrote: »

I said, "you have to consider the cost of rent versus the cost of mortgage and maintenance".

For my own house purchased in December, the mortgage interest and a (1% of property value) annual allowance for maintenance works out at slightly less than what I'd pay to rent a comparable home in the area.

Therefore, the above differences don't impact me (well, slightly impact me in a positive way).

What you said made perfect sense, don't worry 90% of the posters would have got it. You were quite right to point out that the leverage had been overlooked, I was about to make that point myself but noticed that you had already done so.

elantan

Perelandra wrote: »

I'll try to get this right, but someone may correct me on this.

Detail below, but it's (for someone over 65):

Up to £10,500 tax-free from pensions (incl. state pension)
An additional £15,000 from dividends (above this point it starts affecting your tax-free allowance)
An additional £10,600 from capital gains
+ ISA income

So if you've organised well, that's about £35k per year + ISA income that you can receive without paying tax.


Your pension income will be taxable, but (as with any other taxable income) you have a tax-free allowance of £10,500 (for pensioners. Lower for younger people, but this government seems intent on closing the gap).

In addition, you have a capital gains tax allowance of £10.600; in a given year, any shares sold at a capital gain of less than that will be tax-free.

Dividend income is a little more complicated. There's three parts to this:

Tax rate on dividends: If you're a lower rate tax payer, there's no further tax to pay on income received from dividends (dividends are paid net of 10% tax, which you cannot avoid paying even with an ISA). Provided your taxable income remains below £35k-ish, there's no further tax to pay here.

However, dividend income will start affecting your personal tax allowance- for those over 65, as long as your total income (including pension) is below £25k, your retain your personal allowance. As you go above that point, you face an effective tax rate of 50%.

So for those over 65, the personal-tax allowance limit (25k) kicks in before the income tax limit (£35k taxable income). For those under 65, since you retain your personal allowance until you earn £100k, taxable income dictates when you start paying tax.

Oh thank you very much I was not aware of this .... Can anyone give me an idiots guide on how the process for dividends works? For instance would you keep your shares in your isa? Or would it be safe enough ( once you've filled your isa allowance) to buy shares in company A ( purely an example here) and then those shares should they pay dividends will still be tax free ( apart from the 10% that no one can avoid) ... Could you then at a later date sell this shares and as long as you don't make more than the £10k etc CGT you still wouldn't pay tax ? Or is the CGT only for isa shares ?

Thanks

Perelandra

elantan wrote: »

Oh thank you very much I was not aware of this .... Can anyone give me an idiots guide on how the process for dividends works? For instance would you keep your shares in your isa? Or would it be safe enough ( once you've filled your isa allowance) to buy shares in company A ( purely an example here) and then those shares should they pay dividends will still be tax free ( apart from the 10% that no one can avoid) ... Could you then at a later date sell this shares and as long as you don't make more than the £10k etc CGT you still wouldn't pay tax ? Or is the CGT only for isa shares ?

Thanks

You're welcome. I've picked up masses of information about this area from these forums myself...!

Well, it does depend on your exact circumstances (age, how much you earn/receive in pension), but unless you're a higher rate taxpayer what you say is basically correct.

For normal "Joes", capital gains tax on shares can largely be taken tax-free, with a bit of planning (splitting gains over multiple years).

For lower-rate taxpayers, there's no further tax to pay on dividend income (it's already been taxed off the company earnings)- whether they're in an ISA or not.

Stocks and Shares ISAs give the most benefit to higher-rate taxpayers, and/or people who anticipate an income in retirement that would take them over £25k.

Pumpkin_King

Linton wrote: »

government policy is to move towards a single tax allowance by keeping the over-65 one constant whilst increasing the standard one by inflation.

Thanks; I admit I’ve only recently start paying attention to financial news.

marathonic wrote: »

You're ignoring leverage.

If I have £50,000 to invest for 30 years and achieve a return of 6% p/a after charges in the stock market, it'd be worth £287,000 in 2043.

If I use that £50,000 as a 20% deposit and buy a £250,000 house which grows in value by 2.8% per year, it'd be worth £572,000 by 2043.

That was very elegantly explained - thanks! And yes, that swings me back to thinking about property again.

grey_gym_sock wrote: »

i don't think that's completely valid ... regardless of how much you put in and take out of a pension per year, if the tax relief and tax paid are at the same rate (e.g. 20%), then it's neutral.

there is a gain, as you say, from the tax-free lump sum. there's a gain if you wouldn't otherwise be using your full personal allowance when retired (i.e. some pension is taxed at 0%) - or perhaps that's what you meant by the above.

I mean that although 100% of what I've put into my pension pot has benefitted from 20% tax relief, only some of what I take out of my pension pot every year as a drawdown will be taxed at 20%, since everything within my personal allowance is taxed at 0%. The less I take out of my pension every year, the smaller the proportion of my annual pension which gets taxed. Or have I missed something?

---

Where I’m at now:

As I mentioned, the point about leverage makes me feel more favourable towards property again. I don’t want to start looking now though (not least because I love where I live right now, and have a good deal on the rent), so I’ll just try and stick as much money as possible into self-select stocks & shares ISAs, and buy a home when the time is right. If the time never seems right, I can convert it all into a pension shortly before I retire (or before tax relief is curtailed).

Perelandra

Pumpkin_King wrote: »

As I mentioned, the point about leverage makes me feel more favourable towards property again.

Don't forget you can leverage your "pot" when doing shares as well-

It's called spread betting. :T

(No, I don't do that... not my thing).

marathonic

Perelandra wrote: »

Don't forget you can leverage your "pot" when doing shares as well-

It's called spread betting. :T

(No, I don't do that... not my thing).

If you leverage up your 'pot' by spread betting and lose out, you've got nothing.

If you leverage up and buy a house at the wrong time, you've still got a house.

Stochasticity

marathonic wrote: »

If you leverage up your 'pot' by spread betting and lose out, you've got nothing.

If you leverage up and buy a house at the wrong time, you've still got a house.

But quite probably no way to remortgage due to negative equity, and selling the house (should you ever want or need to move) will crystallise the exact same financial loss as similarly leveraged investments that have performed just as badly (not that spreadbetting is really investing, and not that the absence of margin calls isn't of benefit).

There's no guarantee that house prices will carry on going up over any given period of ownership. Leverage cuts both ways and increases risk as well as potential reward.

grey_gym_sock

a sensible way to use leverage is buying your own home with a mortgage - but with a big enough deposit to keep the rate low - and then investing surplus cash in shares. you get the leverage on the property, but it also enables you to invest more in shares. think of it as leveraging your entire portfolio, both property and shares.

what is much more questionable is when ppl buy their own property with the highest possible mortgage, and then go on to BTL with the highest possible mortgage. both because they're putting everything in property, and because of the level of leverage used.