Larger lump sum or Pension?

atush

I would consider refinancing the rental (CGT effects notwithstanding).

If it is worth 300K with a 60K mtg, you could reduce if not clear the other mtg. It is best to have the highest interest only mtg on the rental (within the agreed LTV terms) as it is tax deductible against the income. You don't get this with the mtg on the family home.

I would always take the highest FS pension amount available. We are going to have to assume you have some savings and investments outside property and the pension, as again you don't say.

You are asking a fairly complicated question, the answer to which really depends on all the facts (incl the ones you don't disclose).

snowgo

nurseneedshelp wrote: »

Do I take the higher pension or lump sum?

I took early retirement from the NHS just over two years ago with a full pension. I have been working privately part time since then, although as time has gone on I am doing less and less self-employed work. At NHS retirement I had the same dilemma as you - do I reduce my pension to take a higher lump sum, or stick with the higher pension amount. Or any combination in between? I spent as much time as I could researching the options. In the end I decided to take the maximum pension and lowest lump sum, as I felt the argument about poor commutation rate (as jamesd has described) was compelling. The pension is linked to CPI whereas the lump sum in my bank account would not be, and that at least gives me some psychological sense of security. I guess that if you urgently need cash, you may have a different take on it. But I have no regrets with taking the highest pension/lowest lump sum combination.

jamesd

atush wrote: »

It is best to have the highest interest only mtg on the rental (within the agreed LTV terms) as it is tax deductible against the income. You don't get this with the mtg on the family home.

That is wrong and should be ignored.

The property that the mortgage is on makes no difference at all to whether the interest is tax deductible. All that matters is the business purpose.

This is why it is completely routine for BTL investors to use mortgages secured on their own home - it's cheaper and does not affect the deductibility of the interest.

atush

I'd like to see HMRC confirmation on this, as quite frankly I dont' believe you.

In the OPs case, it is quite clear there are 2 different mtgs and only one is linked to the rental.

bigadaj

Hmrc would generally require a clear connection between the loan on which the tax is claimed and the business asset. It can be fiddly and it's likely you'd need to raise a new mortgage on the owners property. There are other rules like being limited to the value of the property at the time of commencement of letting etc so you need to be careful and read up or employ an accountant.

jamesd

bigadaj wrote: »

Hmrc would generally require a clear connection between the loan on which the tax is claimed and the business asset. It can be fiddly and it's likely you'd need to raise a new mortgage on the owners property. There are other rules like being limited to the value of the property at the time of commencement of letting etc so you need to be careful and read up or employ an accountant.

Yes, it needs to be done with care. One easy way to do it would be to clear the mortgage on the rental using an increase in borrowing on the current residence, another would be to clear the mortgage on the residence and use a new mortgage on it to clear the rental one. It's a good idea to get an accountant familiar with this area to take a look at any plan to ensure it'll meet the HMRC requirements. It is possible to wrongly structure it and fail to qualify for the relief. Not hard to get right but the value makes it worth paying an accountant to be sure it is.

atush wrote: »

I'd like to see HMRC confirmation on this, as quite frankly I dont' believe you. In the OPs case, it is quite clear there are 2 different mtgs and only one is linked to the rental.

This is completely routine and your claim is debunked here among other places. The purpose of the loan is the critical part, not the property it's secured on: "The security for borrowed funds does not determine the use of those funds. It is very common in small businesses for loans to be secured on the proprietor’s home, because that is the only substantial owned asset. This is not relevant to the consideration of the use of the funds borrowed.". You just need to learn more about this area, it's a common mistake to associate the security with the purpose.

You might also find it of interest to read the second of the example 3 links from the HMRC page, for it shows tax deductible interest on a loan used to buy a holiday home and how the portion permitted was calculated. A cheaper holiday home could have had 100% tax deductible interest.

FatherAbraham

jamesd wrote: »

This is why it is completely routine for BTL investors to use mortgages secured on their own home - it's cheaper and does not affect the deductibility of the interest.

There's also usually no free lunch -- so where is the additional cost or risk hidden?

Warmest regards,
FA

FatherAbraham

snowgo wrote: »

The pension is linked to CPI whereas the lump sum in my bank account would not be, and that at least gives me some psychological sense of security.

The lump sum would have been index linked had you used it to buy index-linked gilts, or an inflation-linked annuity.

Warmest regards,
FA

kidmugsy

FatherAbraham wrote: »

There's also usually no free lunch -- so where is the additional cost or risk hidden?

You've put your owner-occupied house at greater risk?

jamesd

FatherAbraham wrote: »

There's also usually no free lunch -- so where is the additional cost or risk hidden?

There's generally less risk than with a BTL mortgage involved because a standard residential mortgage gets extra protection for the borrower compared to the business purpose BTL mortgage. So the business owner gets things like FCA-imposed requirements for forbearance and access to the FOS.

Whatever the mortgage is secured on, the mortgage can be repaid by selling the let property. If there's a shortfall the business owner is liable for it personally whether the mortgage is secured on the let or personally occupied property.

The major risk whatever the mortgage security is would come from ignoring the mandatory requirement to have the let property insured, then having it destroyed somehow and also being unable to continue to pay the mortgage. Whatever the security, the lender can be expected to go after the home in this case, via bankruptcy if necessary. If the mortgage is secured on the residence, repossession is possible directly, though that does presume that neither owner is paying anything, otherwise forbearance requirements would probably block repossession. If it's secured on the let property, the business owner could be made personally bankrupt and an attempt can be made to force sale of the residence to release their portion of the equity. How the attempt to force sale turns out in either case would depend on how much of the mortgage is being paid and how the equity is split between the parties. Secured on the residence probably has the lower chance of a forced sale if the other party is continuing to pay, since that'd allow dropping to interest only payments under forbearance requirements.

kidmugsy wrote: »

You've put your owner-occupied house at greater risk?

The lender can go after it anyway if you don't pay the mortgage and refuse to or can't sell the let property to repay the mortgage. Risk is lowered by the lower interest cost, so it's easier to maintain the payments.

Lots of people just wouldn't like the idea of having the loan secured on their own home, though. And since it takes agreement of the other owner of the home, that owner would also have to agree to it and might not. The other owner has a substantial increase in risk because they change from not having any personal responsibility for the debt to being jointly responsible for it. And to the extent there's any hidden risk, that's where it lies.