Advice needed re. cashing in pension & buying property

Hannah75

Sorted now, thank you.

jem16

Hannah75 wrote: »

We have worked out that after tax, he should be left with approx. £115k.

I suspect he will be left with less than £115k as some, if not most of it, will be subject to tax at 40% as you say he will carry on working.

If he buys a house, he can take his money and run, the downside being the tax he has to pay. I would really appreciate any views/advice as to whether this is a good idea or not. Thank you

Has your father experience in being a landlord? Will he be able to fix anything that goes wrong in the house when necessary? What happens if you don't get tenants for any period of time or they don't pay? Is he prepared for that possible hassle?

What happens as he gets older and needs to rely on the money to live?

He doesn't have to buy an annuity. He can use drawdown instead so the money is still there if that's what is worrying him.

greenglide

If he doesn't cash in his pension next year, his pension company have stated in a letter that should he die, it would be 'left to their discretion' what would happen to the remainder of his pension, which I find a very odd statement.

If he dies before the pension is crystallised the the entire fund is paid by the scheme to the person named in his "expression of wish" that he should have completed when he started the plan. This is paid outside of his estate by the trustees of the scheme which is the reason for the strange language.

This seems, on the surface, to be a strange way of possibly trying to avoid buying an annuity when he doesnt have to do this anyway. The are other ways of doing this which don't involve the potential risk and effort of rental property.

Hannah75

Sorted now, thank you.

dunstonh

My dad (nearly 65) is considering cashing in his pensions (approx. £150k) next year and buying a small property to rent out instead of buying an annuity.

1 - he cannot currrently cash in a pension. He will be able to from next year but if he did that in one year he would lose a third of it in tax. More if he is working and/or has state pension.

2 - he doesnt need to be annuity if he doesnt want to. There hasnt been a requirement for some years.

3 - What he is proposing does not seem to be a good idea. It just seems to result in him paying a lot of tax to avoid doing something he doesnt need to do anyway.

As to tenants etc, I would rent the house from my dad - I am living in rented accommodation at the moment, therefore it would be an ideal situation for me as I'd obviously rather pay rent to my dad than to my current landlord.

Your dad is going to get slaughtered for tax. his personal allowance will be wiped out in year 1 and will pay 45% tax on what you pay him. Your situation is not changing as you will be a tenant before and after. Your dad will just lose tens of thousands of pounds for no reason.

gadgetmind

Hannah75 wrote: »

We have worked out that after tax, he should be left with approx. £115k

How did you work that out? Remember, anything over £100k and you start losing personal allowance, which is effectively 60% tax for that band, and anything over £150k is taxed at 45%.

If he instead leaves this money in his pension, he can take it out over a number of years at 20% tax, or perhaps even less.

Hannah75

I'd really appreciate any advice on what his other options are


As I said, he has 2 pensions of approx. £120k + £30k, plus he has his state pension which we don't yet know the amount of as he opted out and then back in.


He plans to continue working as long as possible, he earns approx. £25k.


His house is paid for, he has minimal savings and he is a widower.


Many thanks

dunstonh

I'd really appreciate any advice on what his other options are

If he is working and doesnt need the money then he leaves it in the pension wrapper. Either the one he has or an alternative if an alternative one is better.

plus he has his state pension which we don't yet know the amount of as he opted out and then back in.

You dont opt in or out of the state pension. What you probably mean is that he contracted out of the additional state pension (SERPS and/or S2P) for a period. That does not change the basic state pension though.

bmm78

At the broadest level there are two options. Buy an annuity, or leave the fund invested in drawdown and take whatever income is required.

Drawdown runs the risk of the fund being exhausted, particularly if high levels of income are taken or the underlying investments perform poorly. It can be very useful for people who need flexibility of income, such as those who gradually ease into retirement by cutting down their working hours.

As others have pointed out, taking out the entire pot in one go seems like a very bad idea.

I think it's always a good idea to establish the best annuity available, even if it's only as a benchmarking exercise. Depending on your father's state of health the rates may be attractive, and knowing what "risk-free" rate of return is available helps to make informed decisions on the alternatives such as drawdown.

There is a stigma surrounding annuities at the moment, some of which has little to do with the actual benefits they can provide. They are still a viable product when bought under the right circumstances.

somethingcorporate

https://www.unbiased.co.uk or ask around for recommendations of an IFA that specialises in retirement planning.

As all the experts above have posted, this idea is monumentally bad because your father is going to get whacked with an enormous tax bill.

OnTheWay

The alternate to do this is rather than buying the house outright is to take the 25% tax free lump sum (37.5k) and for him to use that as a deposit on a BTL mortgage for the property that you want. He would be able to offset the mortgage interest against the rental income recieved for tax purposes.

The problem with this being that a number of BTL companies have maximum age / minimum income restrictions which he may not meet AND that if the intention is for you to live there then I believe that this would fall under the scope of a regulated BTL as you are related.

Whether the numbers would make sense if it was possible you'd need to work out. A conversation with a mortgage broker on feasability might be your first step.