4 pensions - which to draw down from tax free??

traceyap

Hello, I'm posting on behalf of my husband (57). We are in the process of purchasing a second buy to let property to provide an income when we retire in 14 years.

We want to release just £10,000 from his pension fund (to stay within lower tax bracket) before April and don't know whether to take one amount from the larger fund or withdraw (and close) one of the smaller ones and the rest from another smaller fund.

He has 2 pensions of approximately £9k each that he no longer pays into and two current ones of £2k in (work - he pays £50pm) and £49k (private - he pays £66pm).

Has anyone else faced the same decision or has any advice about this?

We also have a load of other questions such as should he still be paying into his old personal one ... or up his payment into his current work on .... should he stop paying into pensions altogether ...:rotfl:

Many thanks

dunstonh

Has anyone else faced the same decision or has any advice about this?

It makes no difference from a generic point of view. It really comes down to whether the pensions support UFCLS or drawdown (depending on what method you intend to use) and the charges for doing so as well as the investment options on the pensions remaining.

Remember the reduction in the annual allowance if he does this. It is now quite low and that can be restrictive on future contributions. Especially at age 57 when paying larger amounts into pensions is usually a good idea.

We also have a load of other questions such as should he still be paying into his old personal one ... or up his payment into his current work on .... should he stop paying into pensions altogether ...

1 - we know nothing of the old personal pension. So, cant make an assessment.
2 - as 1
3 - pensions are very tax efficient and a very effective way to provide retirement provision. The pension freedom options have made them even more flexible and attractive (whilst at the same time, property has become less attractive for landlords and expected to continue to do so.) He is paying in peanuts at the moment. So, rather than stop, he should probably increase the contributions.

traceyap

Thank you dunstonh, I suspected it would raise more questions!

atush

I would boost a pension rather than taking from one or more to fund BTL.

BTL is now highly taxed, and not efficient for pension provision.

enthusiasticsaver

I would also advise upping contributions. If he is only paying in £116 per month that does not sound a lot considering his age. Is he really going to work up until 71? He is the same age as me roughly and I plan on going at the end of this year, beginning of 2018 and spa must be in 10 years for him?

traceyap

Thanks both. Very simply - we have downsized greatly and bought a second house for cash ... considering purchasing a second with BTL repayment mortgage ending when I retire in 14 years, using the rent from both properties to cover the mortgage so we will have two paid off houses generating income. We are aware (we think!!) that BTL with interest only mortgages generate very little profit.

My husband says he intends (at the moment) to carry on working until I retire.

I think our main concern is that we have left it too late to push enough money into pensions to provides for us and wanted to look into other ways of funding our old age.

atush

We are aware (we think!!) that BTL with interest only mortgages generate very little profit.

With BTL the income is taxed at yoru highest rate, the income cannot be put into a pension, and the capital gain is taxed too.

With a pension, the income you put into the pension you pay no tax on, and you pay no tax on the growth of the underlying assets.

You put 100 into a BTL, it costs you 100- and you pay tax on the income.

with a pension, you put 100 into a pension and it costs you only 80 (or 60 if you pay HRT) and the income it generates doesnt suffer income tax. Add in that things you could use to offet your BTL income are being reduced/scrapped, plus the costs for BTL incl increased sharply ie Stamp duty?

You dont need to be a maths genius to realise that BTL is no longer the road to pension riches it may have appeared to be int he past?

I get why you did it the first time, but it wont be the same the second time around- the govt is finally seeing they have been too lax on the tax regime

jamesd

If he takes even a penny of taxable income, including in taxable lump sum form, his annual allowance for pension contributions will be reduced to 4k a year, for life.

So he should not use UFPLS because that is always a 25% tax free, 75% taxable split, triggering the reduced allowance.

Instead he should transfer, if required, take a 25% tax free lump sum and leave the remaining 75% in flexible drawdown without taking any of the 75% out. If flexible drawdown isn't available just transfer to one of the many places that provide it.

jamesd

He's 57 so why is he looking to retire at 71 instead of trying to make it possible to do it now on sufficient income?

It may be useful to do a more complete analysis of your combined financial resources and location and income desires to see whether retiring much sooner can be achieved.

traceyap

Thank you everyone. I think we'd both love to retire early but have absolutely no idea how we could fund that! My husband earns £30k and I earn £16K ... neither of us have anything in the way of pension really .. we just have a paid off house we rent out and about £50k left in the bank to do something with to secure our future.

kidmugsy

The big question is whether you are up-to-date on the tax changes that the government has already announced for BTL, which start being phased in in April 2017.

I recommend that you study those. It may well be that they'll cause a fall in the value of BTL properties, so that even if you are determined to buy a BTL it could be wise to wait a few years to see how everything shakes down.

But if you are determined on the BTL now I don't see why you don't get the required £10k by taking the Tax Free Lump Sum from his £49k private pension pot. That would axiomatically be tax-free and doesn't restrict future pension contributions.