Pension or BTL

Kobi11

I am a novice buy to let investor holding a full-time job like many others. I am torn between contributing to a pension (which I only recently started in my last job) or using this proportion of income to reduce the mortgage on my rental property.

My employer (NHS) contributes a significant proportion to my pension pot, which was the only reason I opted for a pension, but I equally have to make a significant contribution to this. In all, about £270 go to my pension contribution monthly - which I think will repay my mortgage.

I have never had a pension until I started this job , with c 25 years left to retirement, I was wondering if it would make more financial sense to channel this contribution to the mortgage i.e changing to a repayment mortgage rather than an interest-only mortgage.

The rental property is in a prime London location with potential to continue rising in value. My question is with c25 years to retire, would it make more financial sense to channel to this contribution (£270) to repay my BTL mortgage and benefit more from the sale of the property, or to keep making monthly contributions to this pension? I am sort of leaning towards this idea. I know it's all about speculation, and risk, but would be interesting to hear anyone in a similar situation or can proffer some thoughts. Thanks all

hyubh

Kobi11 wrote: »

I am a novice buy to let investor

<snip>

My employer (NHS)...

Opting out of the NHS scheme to help fund your 'novice' buy to let dreams would be pretty silly. Unless you were to join another public sector scheme, no other pension you might realistically come to have would come close.

I equally have to make a significant contribution to this.

Irrelevant, it's extremely cheap for the benefits, and nothing like the effective employer contribution. The formal employer rate will be heavily north of your own employee one, but even then, it will be (is) somewhat artificially low because the strength of the guarantee is not costed for.

I have never had a pension until I started this job

Erm, all the more reason not to opt out!

with c 25 years left to retirement, I was wondering if it would make more financial sense to channel this contribution to the mortgage i.e changing to a repayment mortgage

No.

Andy_L

As a tax payer I would love you to opt out of the pension.

As someone on MSE its the worst financial decision you could make, unless you get involved with some Nigerian Prince who needs your help to get his money out of the country

HappyMJ

Kobi11 wrote: »

I am a novice buy to let investor holding a full-time job like many others. I am torn between contributing to a pension (which I only recently started in my last job) or using this proportion of income to reduce the mortgage on my rental property.

My employer (NHS) contributes a significant proportion to my pension pot, which was the only reason I opted for a pension, but I equally have to make a significant contribution to this. In all, about £270 go to my pension contribution monthly - which I think will repay my mortgage.

I have never had a pension until I started this job , with c 25 years left to retirement, I was wondering if it would make more financial sense to channel this contribution to the mortgage i.e changing to a repayment mortgage rather than an interest-only mortgage.

The rental property is in a prime London location with potential to continue rising in value. My question is with c25 years to retire, would it make more financial sense to channel to this contribution (£270) to repay my BTL mortgage and benefit more from the sale of the property, or to keep making monthly contributions to this pension? I am sort of leaning towards this idea. I know it's all about speculation, and risk, but would be interesting to hear anyone in a similar situation or can proffer some thoughts. Thanks all

Do you own the property that you live in?

The house you live in is free from capital gains tax. The BTL property has income tax on the rental income and capital gains tax on the eventual sale of the property.

For tax reasons you're actually better off not paying off the BTL mortgage as you get tax relief on the interest. The money that you could have used to pay the mortgage off can be redirected into other savings or investments that will earn more in interest or dividends some of which can be paid tax free.

Me personally....I'd save the cash. If saving in the pension is going to give you the best return then save there. If saving after tax income is going to allow you to borrow more on a mortgage to buy a home to live in then pull out, get the mortgage then restart the pension when you can afford to.

£270 a month in your take home pay could enable you to borrow another £50,000. That might make the difference between a 2 bedroom flat and a 3 bedroom house.

At the end of the day it's up to you.

Kobi11

The plan was to pull out of the pension and redirect the contribution to the mortgage.
CGT, which I didn't consider earlier may significantly impact any potential gains from the BTL. Again, this all depends on being employed for the rest of my career here . Problem is there is no guarantee as there are significant cuts to where I work, and the axe may fall on me anytime. Thanks anyway! Definitely food for thought.

edinburgher

How best to put this? If you prioritise BTL investing as an inexperienced investor over one of the best pension schemes in the country, you need to have your head examined :beer:

The fact that you even have to ask suggests that the most prudent option is to stick with the pension.

I have 2 years worth of preserved benefits from a similar scheme. They are worth as much as 6-7 years of my defined contribution pension.

dunstonh

I was wondering if it would make more financial sense to channel this contribution to the mortgage i.e changing to a repayment mortgage rather than an interest-only mortgage.

The pension trounces all over the BTL. It's not even close.

The rental property is in a prime London location with potential to continue rising in value.

And the potential to go down as London is in a pricing bubble due to the value of sterling and it being priced on the international stage.

I am sort of leaning towards this idea.

It would be absolute madness. The only ones to gain are taxpayers.

HappyMJ

Kobi11 wrote: »

The plan was to pull out of the pension and redirect the contribution to the mortgage.
CGT, which I didn't consider earlier may significantly impact any potential gains from the BTL. Again, this all depends on being employed for the rest of my career here . Problem is there is no guarantee as there are significant cuts to where I work, and the axe may fall on me anytime. Thanks anyway! Definitely food for thought.

As long as you don't mind paying tax on the rental income then go ahead. At least you won't be in debt. I don't like paying tax myself so I maximize all of my deductions and tax offsets to pay zero tax. That means keeping the mortgage as interest only, extending it whenever possible and never paying it off.

edinburgher

As long as you don't mind paying tax on the rental income then go ahead. At least you won't be in debt.

What about the BTL mortgage? That's a (leveraged, secured) debt.

HappyMJ

edinburgher wrote: »

What about the BTL mortgage? That's a (leveraged, secured) debt.

As I read it...the OP wants to pay that debt off by redirecting the £270 per month from pension contributions to paying off the BTL mortgage which I wouldn't recommend. The profits from the BTL will increase and more income tax will become payable.

If the OP wants to get further into BTL then it's possible to do that without any money at all. The OP could buy more properties using the equity in the existing properties and taking out new mortgages using the proposed rent to pay the interest on those mortgages. The OP wouldn't require any money at all and can continue to contribute £270 per month to the pension and also create a BTL income stream.

edinburgher

From what I've read about the changes to BTL taxation, income tax would remain the same regardless of how large a mortgage would be carried against the property as it will be levied on rent received (which hasn't changed in our example). Profitability might reduce as the OP deleveraged, but that's not the same thing.