Pension Investment Dilemma

Speckledhen

I’m in a dilemma as to what to do with a recently inherited rental property. My circumstances are as follows: I’ve just turned 56 and I’m planning to retire in 10 years. I am a PAYE 40% tax payer and my current pension pot stands at £222,000. I’m currently investing just over 20% of my salary into a mixture of pension and ISA and my employer contributes a further 5% to my pension.
The rental property generates an income of £440/month and has a market value of around £70,000 to £80,000. It is a leasehold property with just over 50 years to run and the tenant is on a 12 month contract, due for renewal in June. I'm told that the property will be difficult to sell without first extending the lease and that the approximate cost of this will be £5,000 to £10,000.
My question is, should I sell the property and invest the proceeds into my pension pot, or, should I keep the property on and use the rental income to fund my pension and then supplement my income in retirement?
Any guidance on this matter would be greatly appreciated.

jamesd

You're 56. In just three weeks you will have immediate access to all money in any pension pots that you have. Why are you using ISA investing at all when you can get pension tax relief and use the same investments, without any more having the money locked up?

You're 56. If you ask before 6 April 2015 you can start capped income drawdown. Then you can take the GAD limit income and recycle that into new pension contributions to get more tax relief. There are caps on recycling the lump sum, don't recycle that or learn about them, the easy one in your case is not to recycle it until the third tax year after the one in which you take it. If you wait until 6 April 2015 you would face a reduction in your annual pension contribution allowance from £40k to £10k if you took anything more than the tax free lump sum, because new capped drawdown plans can't be started then, just the new flexi-access drawdown. But new money can be added to any existing capped drawdown pot. So get even £100 into capped drawdown in time and you gain a lot of flexibility and tax relief potential at minimal cost.

jamesd

Who owns the least? Is it perhaps a flat in a converted house where you might be able to buy the rest of the house then give yourself a free extension? Or at lower cost might be able to get the other leaseholders to all agree that they also want an extension and wont' charge each other to do it?

Without the extension you could only sell to cash buyers because the property isn't mortgageable. So getting it done somehow looks like a good move. You also need to know that the cost of extending increases dramatically as the lease becomes very short, so it's best to do it as early as possible. Best if possible while there are still 75 years or more on the least because that avoids "marriage value" increases in the cost.

Do you want the hassles of having tenants to deal with? That's the first key decision to make.

atush

I would get the lease extended even if you wont hold the property long term as you would have trouble selling it at a good price if all buyers who need a mtg can't buy it. So if just a few flats getting together with the others and buying the freehold is a very good idea.

Whatever you do, i'd be putting more money into pension. Either by using the rental income to live on and whacking more of your salary into pension, or selling and using the capital to do so.

Long term you do need to ask yourself as James says if you w ant to be a landlord or not.