Advice needed re. cashing in pension & buying property

xylophone

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

Is his current house too big for him? Would he consider downsizing?

He might then be in a position to make you an outright gift of a deposit for your own home?

If he is going to continue to work, he might wish to consider deferring both his state pension and taking his private pension until he decides to retire?

He could benefit from the advice of an IFA.

jamesd

Hannah75 wrote: »

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.

This is normal and applies to all pensions. It works that way because that is what the law requires for the money to be paid and not subject to inheritance tax. What normally happens is simply that the pension firm offers people the opportunity to send an "expression of wishes" form and the trustees do what that says. The exceptions come in cases where that is clearly out of date or something else unexpected happens. In that case the trustees will have to make a decision. That can happen, for example, if the person divorces and remarries than has a child in the second relationship. The trustees would be unlikely to pay all of the money to the first spouse in that situation.

Hannah75 wrote: »

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.

It has not been necessary to buy an annuity since 2006. It's entirely possible and increasingly common to leave the money invested and take an income from investments.

Hannah75 wrote: »

We have worked out that after tax, he should be left with approx. £115k. He would be renting the house out for approx. £600 per month.

£7,200 / £115,000 = 6.26% yield. Not wonderful for BTL but not horribly bad either, depending on just where in the country the property is.

He should not buy one BTL property. That is reckless and leaves him dependent on just one asset. If he's doing BTL he should be buying several properties. He can do that by using mortgages.

He should ideally not use a mortgage secured on the BTL properties. Instead he should use one secured on his own home. This is because those are cheaper and more flexible. The interest remains tax deductible provided the mortgage was taken out for buying or refinancing a BTL or for any other appropriate thing, like withdrawing capital from the BTL business after property value increase.

He'll also find if he tries to do it with a BTL mortgage that they normally ban having family living in the property. So he could do it but you couldn't be the tenant.

Hannah75 wrote: »

He would carry on working so obviously would be hit for 40% tax on his wages & rental income in the first year.

That doesn't make sense for him. Why choose to throw away money on 40% and perhaps 45% income tax when he can withdraw the money more gradually and pay only 20%?

It's also not necessary even if you want it now for your own timing reason as and he wants to help. He should be using a mortgage so he can do it anyway using the 25% tax free lump sum and income withdrawing that takes him only up to the edge of higher rate tax, not above.

Some BTL and some continuing investments makes more sense than the original plan. He can start with one BTL and add more as he withdraws money or he can start with several and make capital payments as he withdraws money from the pension pot over time at 20% tax instead of throwing money away at 40% or 40% plus loss of personal allowance and then 45%.

There's nothing fundamentally wrong with him helping you or using some BTL. Just needed a better plan than the original one and I've outlined a more sensible way to get it done, that will save him a lot of money and increase his margin of rent over interest.

mania112

I make it £106,402 left on £150,000.

If taxable income is under £150,000 (so you can remove the 25% tax free cash from the equation) income will be taxed at 20% and 40%.

£37,500 tax free cash, leaves £112,500 taxable.

£25k from working sits at the bottom (and more tax will be paid from this as the Personal Allowance will be gone).

£7,010 taxable at 20% = £1,402
£105,490 at 40% = £42,196

So £43,598 tax to pay. leaving you with £106,402.

Of course, this assume the rules allow, which we're not 100% of yet. There could be financial penalties to doing this.

mgdavid

some details of the two pensions would be useful; are either of them Defined Benefit (final salary-type) pensions or are they both Defined conrtributions?

bigadaj

OP, there has been a lot of discussion about the different ways of accessing the money and tax, but what does your father want or need?

It might be best for him to determine his needs or priorities and work back from there. Does he want to maximise his income now, delay taking income now so that he can take more later, either to bridge a gap before taking state pension or to supplement it or soemthing else?

Is inheritance a big concern for him?

Drawdown would sensibly generate £6000 a year say, so adding wages and state pension then he should, still be below the higher rate tax band. Once he hits pension age he won't be paying national insurance, and this won't apply opto a pension, so his income could be a lot more than currently, which begs the question why draw now and not leave until actual retirement, when total income could be less than now.