25% Tax free and investing it or paying off debt

Markdavid1962

I am approaching 55 in May, intend to retire at 61 or 62 and have 4 pension pots and am considering taking the 25% tax free from 3 pension pots (approx £70k) and I am looking at either paying the £70k off the mortgage or using the £70k plus other savings to purchase a property in Orlando to rent out (average rental is £50 per night low season and similar property in the same location rents out between 40 and 51 weeks per year) generating income in retirement of >£14k

However the mortgage could be cleared in 2019 if I use the £70k from the pension pot, as I have been over paying on the mortgage otherwise I would be mortgage free at age 62

With Brexit, I have already changed the pension plans to low risk (lifestyle) and 90% invested as cash in case the shares drop due to Brexit/Article 50 to protect the value of the pots.

I know I would need to look at a flexible access drawdown for all 3 pots or consolidate the 3 pension pots in to a single pot as it has more options.

Any advice on overseas investment or pay off the mortgage etc

Thanks

PensionTech

Firstly, I assume from your reference to pension pots and their values means that we are discussing DC pensions, where your and your employer's contributions are invested in a pot and grow in line with market returns - rather than the type of pension that would guarantee you a defined income for life.

The next thing is to point out that paying your mortgage off with the pension is probably a terrible idea. It's nice to be debt free but mortgage debt is shockingly cheap at the moment and you could almost certainly do better leaving your money invested in the pension, as the investment returns are probably higher than your mortgage interest. Remember that a pension is just an tax-efficient investment wrapper, so if it's a good idea to invest it outside the pension then it's probably just as good an idea, if not better, to keep it invested inside the pension.

Thirdly, your property aspirations: rental income sounds lovely but I'm sure you're aware that you need to take maintenance, administrative and inconvenience costs into account too. You also have a not inconsiderable element of risk - property values and rental markets can go up and down, tenants can destroy homes, occupation can be unpredictable and disasters can happen. And as you get older you will be less able to run a property portfolio, particularly from abroad (assuming you are not going to live in Orlando yourself).

It's impossible to say whether your predicted return on a rental property is good or bad without knowing how much money, including "other savings", you're actually investing in it - and without being sure whether you've taken your one-off and ongoing costs into account. But if this is your only retirement income then I would be very cautious indeed about putting it all into property overseas, particularly if you are not an experienced landlord. Have you spoken to a financial advisor?

dunstonh

am considering taking the 25% tax free from 3 pension pots (approx £70k) and I am looking at either paying the £70k off the mortgage or using the £70k plus other savings to purchase a property in Orlando to rent out (average rental is £50 per night low season and similar property in the same location rents out between 40 and 51 weeks per year) generating income in retirement of >£14k

What is your mortgage interest rate? Probably very low and must less than the pensions are making. So, why would you take money out of a tax free environment earning more than the debt you are paying?

Any advice on overseas investment or pay off the mortgage etc

If you are needing to ask for advice in such a specialist area that is open to manipulation and consumers getting conned out of money (by over paying for property, not being aware of taxes and legislation etc until after the event) then that would be a concern. Investing in overseas property is not something a typical UK consumer would consider.

If rental yields are that good in Orlando, why are US residents not doing it with their money? Why are they having to attract naive overseas investors? Those rental yields are way above the typical. So, whats the catch?

With Brexit, I have already changed the pension plans to low risk (lifestyle) and 90% invested as cash in case the shares drop due to Brexit/Article 50 to protect the value of the pots.

So, risk is not something you are comfortable with. So, how does entering into overseas property fit with your overly cautious approach? BTW, hopefully, you only changed to cash in the last couple of weeks as any time before that is likely to have been a costly mistake.

AnotherJoe

I looked into rental properties in Orlando maybe 20 years ago.

It looked attractive for a while on the back of an envelope, and then whilst wondering the best way to advertise such a property, i googled something like "Orlando Disney villa rental" and got millions of hits (just tried it now, got 1.43 million)

So, when you are competing against 1.43 million other renters all offering the same as you, how do you think you'd fare if you didn't spend a shed load of money advertising and being signed up with rental agencies to manage all the complexities of renting a holiday let, which obviously take a fair cut of the income before all the other expenses come in.

Add in taxes, foreign tax complexities (think needing an accountant and lawyer for the US side
of things), maintenance (at a distance so expensive), voids*, etc etc, I can be confident to say your £14k is a pipe dream. If it wasn't you'd find a lot more folk on the mostly US early retirement blogs looking at rental properties in Florida instead of staid old investments, as the way to wealth.

* it takes time, persistence, and most of all money to agencies and advertisers, to build up a stream of repeat clients such as in the 40 week example you mention.

ThinkingOutLoud_2

As above. you sound like a cautious investor - but one who recognises some important decisions are coming up.

Mortgage paid off vs the potential for higher returns seems as said a poor deal. But, with 90% your pensions in cash per your Brexit fear - you won't be seeing great growth (but might be safe from a big fall, as you hope).

Florida - sounds like somewhere you should enjoy holidays when you can, not build a remote business in a tough business you are not experienced in and that has notable entry and exit costs. Have you considered the dollar exposure - so did your £50 night come from today's unusual exchange rate or @ $1.40 vs £1.

You mention 4 pots, but not the size of the missing pot. Your 25% / 70k to pay off the mortgage means you have £210k left + your 4th pot + state pension. You do not mention any other source of notable income.

If you are 55 then your state pension will not kick in till you are 67. This means a minimum of 5 years from age 62 with no other income. So if that were 5 x 14k guessed income need = that takes 70k or 1/3 of your £210k (falsely ignoring inflation and drawdown charges and investment returns on cash - but for simplicity).

Have you calculated your income needs in retirement? How does your £140k left plus your 4th pot + state pension leave you?

Knowing that is a good place to start deciding if you can afford a holiday home, even if it is rented sometimes. You may be fine and have very decent pot compared to many, but it is not so lavish as to make bold jumps perhaps.

atush

i own a home on Florida that i rent out. i currently use it 2 months per year.

The running cots incl insurance, property taxes, HOA fees utilities and maintenance can be quite high. My taxes and insurance are nearly 6K by themselves.

While mine isnt in orlando, I looked int he Orlando market before i bought near the coast. And the homes are ridden hard and put up wet (the ones that get 40+ weeks a year) and so need constant maintenance and redecoration/replacements. It isnt a road to retirement riches. Sure, i get around 14K a year, but my running costs mean i dont make a profit.

It made sense for me only as I intend to retire there 6 months a year and i have family there and i pay taxes and vote there.

So forget that part of your plan.

Not to mention the current poor exchange rate ( I bought when it was over 2:1)

AnotherJoe

Ps I only just noticed that the OP is so cautious an investor he's gone all into cash for an event 2 years away (so he's losing money every month for sure) though Brexit has on the whole increased U.K. share values and certainly global ones which a cautious investor should arguably be in, yet he's up for going into one of the most competitive real estate markets in the World (for the OP competitive = low profits )

OP i suggest you pay off your mortage since you seemingly don't have the stomach or knowledge for shares, and an investment in Florida would be way too much hassle and risk for you (as well as likely losing you money )

ThinkingOutLoud_2

AnotherJoe wrote: »

Ps I only just noticed that the OP is so cautious an investor he's gone all into cash for an event 2 years away )

I don't disagree with you.

But, then when he likely did this there were plenty of harbingers of woe saying things would bomb. Many are still clear, it is very volatile.

And if doing what the markets said overall was always right - Soros and Buffet would be a lot less wealthy.

Hindsight today is 20/20.

But, you are saying Brexit will all dusted in 2 years?

dunstonh

Hindsight today is 20/20.

Not really. There are posts on this site (mine included) before the referendum saying that sterling would fall (that was pretty much a given no-one could argue with). When sterling falls, the FTSE tends to go up as it is priced on the global stage.

You can never predict the future but in some areas you have a pretty good idea.

kidmugsy

Markdavid1962 wrote: »

... using the £70k plus other savings to purchase a property in Orlando to rent out

Putting it all into one undiversified property wouldn't appeal to me. Nor would exposing myself to the US legal system, which seems to me to be crude and corrupt.

ThinkingOutLoud_2

dunstonh wrote: »

You can never predict the future but in some areas you have a pretty good idea.

Agreed.
But I think it is also possible to sympathise with the OP's fear and resultant desire to "de risk" from stocks as he saw it, given that the press was full of highly respected sources predicting uncertainty.
This doesn't mean it was wise behaviour or that he has not lost out on growth based on current markets. Not everyone is an infallible investment guru.