Will Releasing Pensions lead to a lot more BTL

gadgetmind

Based on what I've seen over the last few days, the recently changed announcements regards access to pensions will get a lot of people saving who might not have done otherwise.

chewmylegoff

gadgetmind wrote: »

A professional married couple could easily have £500k of PCLS between them, which would cover a fair few 40% deposits.

Of course but that is nothing to do with the changes in this budget and would have been the case regardless. The same couple are not likely to also draw the other £1.5m out pursuant to the new changes and pay 45% tax on pretty much the lot in order to fund more BTL purchases.

Hence what you say is right but not evidence that the budget will result in more BTL purchases than would otherwise have happened.

gadgetmind

chewmylegoff wrote: »

Hence what you say is right but not evidence that the budget will result in more BTL purchases than would otherwise have happened.

I don't think that anyone sane will use their pension for BTL once they run the numbers properly, but there are a lot of insane people in the world.

Options:
1) Leave in pension, diversify well, draw down using personal allowances and 20% band.
2) Remove from pension, pay lots more tax at 20% and potentially skads at 40%. Then invest in BTL, risk voids/damage etc., and face paying tax on all income.

bigheadxx

It would actually make more sense to invest in BTL commercial property. This can be done inside the pension wrapper.

chucknorris

Thrugelmir wrote: »

I believe pension saving in Australia is compulsory. So a totally different scenario to that of the UK where there is a potential crisis looming anyway.

That doesn't change the fact that only 4% choose to buy an annuity. Of course I get your implied (obvious) point that the population will include people who reluctantly invested in pensions and couldn't wait to get the cash out, and/or they have such a small pot that the annuity would be a very small one, nevertheless 4% is still an extremely low take up. Personally I don't think that annuities are that bad a deal for those that need guaranteed income, particularly if they can get an enhanced annuity.

IveSeenTheLight

wotsthat wrote: »

It was already possible to extract cash from a pension without the need to take an annuity.

I don't think it'll make much difference.

It was always possible to extract a portion of your pension (25% IIRC).
Now you can extract the whole value.

Suppose someone has a pension pot of £500k, as opposed to being forced to take an annuity with the remaining pot of £375k+, people can now choose how the invest the additional £375k in whatever way they decide is best at that time.

gadgetmind

IveSeenTheLight wrote: »

people can now choose how the invest the additional £375k in whatever way they decide is best at that time.

Sadly not.

They will get £10k of the £375k tax free, pay 20% tax on just under £32k of it, and 40% tax on the rest. I reckon this will result in a tax bill of nearly £140k leaving £235k of the pot.

If they then use that £235k for a BTL, they will have to pay tax again on the income.

How much better yield will that BTL give than they could get by investing via drawdown? Will it really make up for the 37% tax bill?

(Of course, sums slightly different if £500k evenly split between couple.)

IveSeenTheLight

gadgetmind wrote: »

Sadly not.

They will get £10k of the £375k tax free, pay 20% tax on just under £32k of it, and 40% tax on the rest. I reckon this will result in a tax bill of nearly £140k leaving £235k of the pot.

If they then use that £235k for a BTL, they will have to pay tax again on the income.

How much better yield will that BTL give than they could get by investing via drawdown? Will it really make up for the 37% tax bill?

(Of course, sums slightly different if £500k evenly split between couple.)

Thanks,
I've not delved deeply into this and can understand the tax issues you are citing.

Potentially however, the investment has the opportunity to recover through future years HPI.

If you have an annuity and unfortunately pass on after only a couple of years, then the insurance industry wins.

If you draw down and live off the BTL income, then at least when you move on, the estate can be passed on.

I'd like to look at this deeper in terms of returns and taxes.

Incidentally, I am getting a 13%+ return on my BTL investments, coupled with HPI growth that taking an initial hit on tax may still be a viable consideration.

this may of course be a first step in a better investment option should the rules change in the future.

I certainly think it may have helped those forced into annuity in 2008 when the rates were pretty poor for annuities.

gadgetmind

I've lived through periods when everyone was buzzing and feeling rich because of HPI and I've lived through periods when many people were deep into negative equity and facing repossession.

Yes, you can get the same with investments that are in drawdown, but you can diversify much more widely across assets and territories. You can also invest in these without losing nearly 40% up-front, which makes a huge difference.

chewmylegoff

IveSeenTheLight wrote: »

Thanks,
I've not delved deeply into this and can understand the tax issues you are citing.

Potentially however, the investment has the opportunity to recover through future years HPI.

If you have an annuity and unfortunately pass on after only a couple of years, then the insurance industry wins.

If you draw down and live off the BTL income, then at least when you move on, the estate can be passed on.

I'd like to look at this deeper in terms of returns and taxes.

Incidentally, I am getting a 13%+ return on my BTL investments, coupled with HPI growth that taking an initial hit on tax may still be a viable consideration.

this may of course be a first step in a better investment option should the rules change in the future.

I certainly think it may have helped those forced into annuity in 2008 when the rates were pretty poor for annuities.

You do have to bear in mind that any money which you leave inside the tax wrapper can continue to be invested in any eligible investment and any income and gains will be tax free until drawn down.

If you draw the whole lot down you pay a huge amount of tax up front and then are still subject to tax on the income and tax on any capital gains.

If you draw down and take the tax hit any BTL is going to have to experience enormous (taxable) capital growth in order to bridge the gap.

Most people will be better off not taking such a gamble and simply aiming to draw down the max they can each year without paying 40% tax.

If you're so rich that you can afford such a gamble in retirement then you probably already have enough money outside pension wrappers to fund BTL purchases anyway.

Furthermore, I would personally rather not spend my retirement managing a portfolio of rental properties - that sounds like working rather than being retired.