Desperate Measures Called For - Ideas Welcomed

atush

I agre. With only 1-2 rental, all the while paying tax on income and capital gains, it isn't tax efficient.

Nor is paying tax on income, and mtg interest on 2-3 properties while your main one wont be paid off til age 68. Not matter what "saint J" says.

It is one thing leveraging your main property (am in favor of), and another leveraging a rental esp if your portfolio is too small to be tax efficient.

And yes, if you want the farm, try and make it pay.

jamesd

AuntLily wrote: »

Pension pot is currently £129,000 with £1000 being paid in per month.

AuntLily wrote: »

Income need around £12000 a year after mortgage paid off.

One general guide is that you can take about 4% of the initial value and increase that with inflation in retirement. So so far you have enough to provide £5,160 of income. Ignoring investment growth you're increasing that by at least £480 a year with your £12,000 a year of pension contributions. Add the state pension and you probably already have enough to meet your income target at state pension age so your problem is the early retirement part.

Pension benefits can be taken from age 55 so for early retirement after that age a pension is suitable because with the new rules from 6 April 2015 you can take money out as fast as you need it.

So how close are you today to retiring at say 55? Assuming you get to £8,000 state pension you need to keep untouched enough money to provide £4,000 of income at state pension age, say 68. Ignoring growth that would require keeping £100,000 untouched. But with 16 years to go and just a 4% plus inflation growth rate a pot of money would grow in real terms to 1.87 times it's initial value in the next 16 years. £100,000 / 1.87 = £53,475. Add a bit of safety margin and call it £60,000. That leaves you £40,000 of the £100,000 and the remaining £29,000 for funding early retirement, so you currently have an early retirement pot of £69,000.

In addition to that £69,000 you have the £50,000 in savings, so a total pot of £119,000. I've ignored the tax relief effects from paying the savings into a pension via the business, what you'd really do is increase contributions to a pension from the business and live on the savings to get that tax relief.

A poor approximation of how much £119,000 could sustain is £119,000 / 16 = £7,437 a year. Crude because it ignores all investment returns so it's really lower than reality. I'll continue using that crude approximation for the estimates to follow.

Each year you're adding £12,000 a year and eliminating the need to pay for a year's living expenses so here's how the next few years look:

1 year away: 15 years to go, pot size now £119,000 + £12,000. Crude income £131,000 / 15 = £8,730.

2 years: 14 to go, pot size £143,000. Crude income £143,000 / 14 = £10,200.

3 years: 13 to go, pot size £155,000. crude income £155,000 / 13 = £11,923.

At that point without safety margin you could meet your target. The crude approximation ignores income and you could probably get 4% income from investments, so £6,200 at the start, which reduces the capital drawing so you could probably really do it sooner, maybe even now when the £119,000 pot could provide £4,760 income before drawing on capital. A spreadsheet should really be used to allow for that but for rough estimating it's OK to ignore it for a while longer.

That ignores your current higher expenses from the mortgages so you'll also need to provide for the money to pay those until they end. You should also really provide a safety margin of at least 50% above targets.

Now I've provided a basic approach to estimating you should be able to put in numbers for your temporary costs, assuming the mortgages all get cleared at 68, to work out when you can meet both your £12,000 requirement and the extra top-up you need to cover the mortgage excess cost.

jamesd

AuntLily wrote: »

My thinking is that I could reduce my outgoings substantially by clearing the mortgage on the farm. ... Property number 2 has enough equity to either then provide me with a lump sum (around £100,000) if sold, or, when I'm 67 an income of £9000 a year at todays rates.

What are the mortgage types and interest rates for each property? I'm wondering in particular whether you have a BTL mortgage on the let property that is more costly than a possible residential rate on the farm, but the farm might not be at residential rates.

The reason I'm asking is that the interest on borrowing for a let property is deductible from rental income but that borrowing does not have to be secured on the let property. It's usually cheaper to take an advance on a residential property and use that as the mortgage for the let property and that's still deductible provided it's carried out as a transaction clearly for that purpose, say an additional advance used to clear a BTL mortgage. The lower interest rate can significantly increase the profitability of the let property and may change it from a net cash drain if on repayment basis to nil cost or even profit. That could eliminate it as an expense you need to provide for in your early retirement plan, or at least a reduced outgoing level.

The rental income from the let property after the mortgage is paid is higher than the safe drawing level from investments so it seems best to keep this property and use it to reduce your income need in retirement. £9,000 from this property plus an assumed £8,000 of state pension would take you to £17,000 a year of taxable income, comfortably above your minimum target. This means that you would not need to preserve the £60,000 I used in my earlier post to top up he state pension to £12,000. So that £60,000 would be available now to cover costs. So try plugging that into the approximate calculation method I used earlier and see where it gets you, after allowing for the ongoing costs of both mortgages.

jamesd

Earlier I just assumed £8,00 from the state pension but that's for one person and assumes that you'll have a suitably full contribution record. You should really check your state pension statement to see how many years you have so far and then again once your flat rate foundation amount calculation is available so that you'll know how many more years you'll need to pay in to get the full flat rate state pension.

kidmugsy

atush wrote: »

James a saint? Not in my bible

What, is St James's Park a misnomer? How about all the Santiagos?

greenglide

kidmugsy wrote: »

What, is St James's Park a misnomer?

St James's Park is currently reasonably named. It is the home of Newcastle United Football Club and doesn't have Wonga or Sports Direct in the name.

AuntLily

dunstonh wrote: »

You avoid corporation tax and NI.



The accountant seems to have forgotten the NI.

He said that he took that into account and that the figures balanced. From my point of view to have it go directly from the company means I don't think of it as 'mine' in anyway and so never think of reducing and as he said the figures were equal it seemed the best option.

AuntLily

Thrugelmir wrote: »

Why not pay more into your pension scheme and reap the tax benefits. Rather than leverage up with more debt and expose yourself yet further to the whims of the property market. While opting for a particularly tax inefficient form of investment.

I think I'm missing something - which is why I am so grateful for the replies - so I was thinking of this option because after paying the interest I will make £440 a month for putting £45,000 down. If I put that £45000 into my pension I didn't think it would make £440 a month ??



I see that I am racking up more debt technically because I would have another loan on the BTL - but - it would be generating income until the property is sold to clear the loan, presumably on my death.

AuntLily

jamesd wrote: »

What are the mortgage types and interest rates for each property? I'm wondering in particular whether you have a BTL mortgage on the let property that is more costly than a possible residential rate on the farm, but the farm might not be at residential rates.

2.89 % on a BTL mortgage which is lower than the rate on the farm. Farm is a residential mortgage currently on SVR because I'm overpaying to be rid of the debt.

jamesd wrote: »

Earlier I just assumed £8,00 from the state pension but that's for one person and assumes that you'll have a suitably full contribution record. You should really check your state pension statement to see how many years you have so far and then again once your flat rate foundation amount calculation is available so that you'll know how many more years you'll need to pay in to get the full flat rate state pension.

Yes I did get state pension forecast when I started thinking about this. According to forecast based on my NI contributions record to date it is £120.78 a week. There was no breakdown of how that was worked out and a reminder that it would change in April 2016. I'm thinking it will be lower because I spent many years contracted out whilst only paying a pittance into a private pension (£20 a month) and thinking I would never get old :embarasse

AuntLily

Jamesed can I just say a big thank you for taking the time to type out your response and give me some ideas.


All of the responses have been very kind. They have helped me think through options in a way that was a lot less circular than previously.