Help: Buy-to-let as a pension

xiledlanc

My wife has recently gone self-employed after 15 years working in a corporation and we are looking to set up some form of retirement pans to supplement the work place pension.

We are considering getting into the buy-to-let market as a pension option, but will admit to not really understanding the complexities of the situation and an internet search at the moment seems to come up with a lot of information on the recent changes to the tax rules that is very in depth.

In simple terms I see it as follows, but would be happy to be corrected:

Purchase a flat for c. £125,000 (a number of these close by and a good rental market).
Deposit of £25000
Cost of purchase c. £5000 (Stamp and fees)

Rental Income c. £8000 pa
Maintenance charges / maintenance on property c. £1000 pa
Tax payable c. £1000 pa
Mortgage c. £7000 pa

Over the course of the 20 years my wife would have invested £50,000 in this 'pension' (£30,000 up front (deposit and costs) and £20,000 (£1000 costs per year)).

For this the return in 20 years would be a property value £125000 (without any market value changes) and an income of c. £6,000 pa.

This seems like a reasonable return?

We'd hope to be able to get a couple of these to start with, and then perhaps add another couple on over the next few years with a view of getting maybe 4 or 5 in total. This would give an annual income of c. £25,000 (and assets of approx £500,000+ that could be sold and invested elsewhere).

Compared to investing in a standard pension pot - this seems like a reasonable option, however only just started to look at this and wondered what people on here think of the approach?

marksoton

You need to investigate the responsibilities of being a landlord before even crunching the numbers.

Bluebirdman_of_Alcathays

Isn't that a negative annual cashflow of £1k? There are loads of problems with the numbers, but that in particular stands out.

xiledlanc

We have already got one house that we run as a tenanted property (from when we got together and each had our own places), and have done so for around 5 years.

So pretty comfortable with the Landlord aspects (we use an agency to vet tenants, but manage ourselves using some trusted tradesmen when needed and all the certificates etc).

Its currently just done through a self-assessment form for Tax purposes.

xiledlanc

It is a negative cashflow of £1k pa. However we view that as the 'putting money in' to a pension i.e. £1,000 pa pension contribution (or if we get 4 or 5 of them, c.£5k pa pension contribution).

More than happy for people to point out the flaws / areas of concern - that is why I posted this on here to get some challenge and review.

Thanks for the comments so far.

booksurr

so you need to buy with a BTL mortgage
SDLT 3k + 2k for legals seems reasonable

you plan to spend 125k on the purchase price
why do you think you will only need 25k deposit given nearly all BTL mortgages start at 25% deposit minimum (ie £31,250)

please show the calculation of your 7k annual mortgage figure. I assume interest only? What allowance have you made for rate increases?

you cannot hold residential property in a pension wrapper so comparing the outturn to a pension fund is not as simple as you think. Please show how you calculate £1k per year income tax? If you end up owning 4 - 5 properties you would almost certainly be a higher rate taxpayer at which point that income tax amount is wrong.

Cakeguts

What ever you buy you have got to be able to sell it quickly if circumstances change. Some properties are really more suitable to being bought by investors and rented. However if you are waiting to sell to another investor this really narrows your market so my advice would be to buy something that you could easily sell to an owner occupier if you needed to.

marksoton

Surely a pension attracts tax relief. Owning property doesn't, if anything the opposite?

Or am i missing something?

xiledlanc

I used money supermarket for a quick search on Mortgages:

BTL: £125k value, £100k loan, 25 years, Interest & Capital - gave mortgages £550-£600 pcm. Therefore I thought that £7k was reasonable. Fees ranged from £0 to £2k, so again I assumed £1,000 plus stamp duty in the fees.

With regards to interest rates I having assumed any changes (but we could afford it if they varied a reasonable amount from what we would want to invest overall into a pension). Could take a 5 year fixed mortgage from the Yorkshire Bank and up the mortgage costs to £8k.

In terms of tax I based it on reading this article from L and C online (but cannot put a link - something like Buy to Let Tax Guide in google will pull it up)


The properties would be in my wife's name and she is currently self employed and only takes an income that is within the personal allowance. Therefore I assumed that even with 4 properties with an income (not accounting for running costs) of £8000 pa, it would still sit within the 20% allowance.

This article shows a tax implication of £840 from an income of £15,000, so £1000 pa per property seemed reasonable?

xiledlanc

The being able to sell it quickly is an interesting question.

Firstly the areas we are looking at do seem to be pretty reasonable in terms of sales, but we are viewing this as a pension pot - so getting hands on the cash in an emergency isn't really something we are considering (I cannot get the money out of my corporate pot).

xiledlanc

The tax relief is definitely an area that we are not sure on.

Previously, taking a company contribution pension was a no-brainer, and the benefits of tax relief that come with the company contribution were straight forward.

As a self-employed person taking a low salary, the tax benefits are not as clear to me. I think she could set up a company pension and get tax relief on corporation tax which obviously this method doesn't provide.

However when you read you need a pension pot of c. £1m to get you a retirement income of £40k - then it seemed that potentially the buy-to-let might offer a better deal?