pension vs property dilemma

chucknorris

n12maser wrote: »

The statement is based on this guidance from the pension advisory service, regarding "carry forward" rules:

"To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2017-18) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago. You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it."

So couldn't I do this, considering my earnings were mostly over £50k for the last 3 years and I hardly contributed anything to my pension in that time?

What he meant was that you ALSO have to have earned enough 'relevant earnings' within the tax year that you actually invest. Although my annual income is quite high, most of it is rental and dividend income, which are not classed as 'relevant earnings'. So I am capped by my employment income for investing into my SIPP.

n12maser

Just so I understand, do I need to earn £190k of 'employment' income in the year 2017 in order to dump that amount in my pension as a lump sum, or is it ok that I earn around £50k per year over the last 3 years and this year to make it allowed?

kidmugsy

You should aim, I suggest, at getting your taxable income down to £45k p.a. which both avoids 40% income tax and preserves your child benefit entitlement. I'd suggest you don't aim to make the max £40k contribution every year (unless you can do it by salary sacrifice) since your avoiding 20% tax is not worth stretching financially for. If you really, really want to avoid 20% tax, make the contributions for your lover not for yourself. (So that she'll be able to drawdown pension tax-free when you're both older, in all likelihood.)

If you're stuck for money to make the pension contributions, and are loathe to sell the flat, consider increasing the size of one of your mortgage loans, whichever is cheapest. Another possibility is that you marry the lass pronto and then gift her (say) 99% ownership of the let property so that 99% of the rent goes against her tax not against yours. That way you can avoid 40% tax with smaller pension contributions than otherwise. You'd have to check whether your mortgage company would be happy with that.

Don't panic about pensions: you own two properties for heaven's sake. But do ensure that you get 40% tax relief on contributions which will ensure that later in life you'll be able to draw much of the money out again at 0% tax, namely the tax-free lump sum, and as much annual income as will use up your personal allowance against income tax.

n12maser

atush wrote: »

Id say your link to RL was an innacuracy, if you misunderstand it?

I don't misunderstand it, I comission surveys for clients at work, I understand the scope of data that a good survey provides. Quantitative data, not mere hypothesising which is much of what the challenges to the RL figures have been on this thread when it got slightly off track. The ideal is survey data validated by other findings whether that be cognitive studies or more in-depth interviews - not something we have the luxury of in this case.

kidmugsy

n12maser wrote: »

Just so I understand, do I need to earn £190k of 'employment' income in the year 2017 in order to dump that amount in my pension as a lump sum

Yes. The maximum you can contribute each year and get the tax advantages is the bigger of (i) your earnings, and (ii) £3600.

Those are gross figures.

chucknorris

n12maser wrote: »

Just so I understand, do I need to earn £190k of 'employment' income in the year 2017 in order to dump that amount in my pension as a lump sum, or is it ok that I earn around £50k per year over the last 3 years and this year to make it allowed?

Not necessarily employment income, but it has to be 'relevant earnings', which are:

The following earnings are relevant UK earnings:

Income chargeable under Part 2 ITTOIA 2005 immediately derived from a trade, profession or vocation.
Employment income such as salary, wages, bonus, overtime, commission providing it is chargeable to tax under Section 7(2) ITEPA 2003
Any part of a redundancy payment which exceeds the £30,000 tax exempt threshold under section 403(1) ITEPA 2003.
Benefits in kind which are chargeable to tax.
Profit related pay (including the part which is not taxable)
Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) provided it is paid by the employer and chargeable to tax under Section 7(2) ITEPA 2003
Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment
Salary paid by way of Government Securities
Remuneration paid in the form of units in an authorised unit trust provided it is treated, on receipt, as a taxable emolument of the individual
Patent rights treated as earned income under Sch 1 para 473(3) ITA 2007
General earnings from overseas Crown employment which are subject to tax in accordance with Section 28 of ITEPA 2003
Amounts deducted from salary to purchase partnership shares in a share incentive plan provided they qualify as such under paragraph 83 of Schedule 8 of Finance Act 2000
Per HMRC this list is not exhaustive, see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual

kidmugsy

kidmugsy wrote: »

Another possibility is that you marry the lass pronto and then gift her (say) 99% ownership of the let property so that 99% of the rent goes against her tax not against yours. That way you can avoid 40% tax with smaller pension contributions than otherwise. You'd have to check whether your mortgage company would be happy with that.

Sorry, OP, I withdraw that. I now have a memory of another thread where it was pointed out that to minimise Capital Gains Tax when you eventually sell the property the best ratio would not be 99:1. Do you worry more about income tax in the here and now or CGT in the future? Maybe start another thread to attract the experts. Suggested title "What fraction of my flat should I gift to my wife?" You could also ask people to explain the tax advantages of your being married if you are going to try this manoeuvre. Perhaps put it on the Cutting Tax forum or the Savings and Investment forum.

jamesd

n12maser wrote: »

Slight update - having the run the figures I think we only need £40k a year between us to live very comfortably in retirement.

At the moment, ignoring state pensions you're at about £650k including all equity. It's only for 30 years of retirement but the 4% rule for pension income suggests that at the moment you're potentially on £26,000 less some deduction for buying an inexpensive place to live. At 35 it'd actually be a fair bit less than that, though, since you'd have to recon on living to a hundred, which requires a slower capital drawing rate. You say you don't want to downsize and I assume not relocate as well, so this paragraph is just to illustrate potential. Would a cheaper home be worth it to be retired at say 40 or 45? I don't know, up to you. reduced property spending is often one of the core attributes of very early retirement, as in the "financial independence" movement.

Forget about "pension income" and your pension pot being low for your age and income. What you need is "retirement income". That doesn't have to be from pensions and if you design a life around them you're wasting lots of potential and locking yourself into a later retirement than you could manage. Aim for total retirement income instead.

Your thinking about keeping cash to reduce your future mortgage is an odd move. Why save yourself a couple of percent when you can make say 10% from peer to peer lending or around 5% plus inflation from the UK stock market long term average? In that environment you should be looking to increase mortgage borrowing, not reduce it, and any overpayment is a lost opportunity to be better off. Change your thinking, not "mortgage free" or "less mortgage" but "mortgage covered by investment income, and money left over on top". I have a mortgage. It's worth about ten percent of my gross worth. Pointless for me to pay it off because it'd just make me poorer.

You have a substantial income tax bill. Venture Capital Trusts provide 30% tax relief on the amount spent, repayable to HMRC if you sell within five years. Tax exempt dividends and no CGT. By the time you reach 55 you could have done this four times over for a total of 120% income tax relief. Pensions are good but they aren't that good.

So I suggest that you think about:

1. Enough pension contributions in your name so that your income is below the loss of child benefit threshold. Maybe for your whole higher rate income if you can fund 2 sufficiently while doing this.
2. Starting in on VCT investing to make the rest of your income largely tax free, partly funding with increased borrowing. After the first five years this would be self-sustaining with sales paying for the next round of buying.
3. Once your income is tax free in effect, up the pension contributions now you no longer need more non-pension money for the VCT buying, that being funded by the recycling of money from five years earlier.

A disadvantage of this is that it leaves you with quite a lot of money in the small companies that VCTs invest in during the early years, including the whole first five years, if you do the low pension variation of 1. The whole higher rate portion reduces that concentration. As you do more VCT cycles the pension proportion rises rapidly so this gradually becomes less of a concentration.

A major advantage of non-pension investing for you is that the money is available to you before you reach 55 or whatever the age is when you get there. Since it appears likely that you'll be able to retire well before age 55 that's significant. You'll need a lot of money outside the pensions to fund the years until you can get at the pension money.

The BTL property will benefit from letting relief because it was your home. Assuming you're married when selling you can switch a portion of the ownership to her to use her CGT allowance as well, though no letting relief for her unless it was also her home for a while. But it's a nice enough bit of diversification so I suggest keeping it, just raising borrowing to fund the first round of VCT buying.

One of your key decisions is also the trade off between "lifetime property" and "retire early". More expensive property means later retirement so think about lifetime properties in cheaper areas if you want a different blend of same property quality but earlier retiring.

Alexland

A few other thoughts on this thread:

1 - the total return growth estimates for both property and shares look massively optimistic remember you need to deduct compound fees and inflation to see real returns.

2 - if you decide to sell the BTL (this really is your choice you can boost the pension without selling it) then if you can make the contributions via your employer payroll then salary swap might save you NI but don't save so much you miss your state pension contribution. Also consider Junior ISA and child pension options.

3 - consider the long term estate planning as a pension wrapper can save tax when you pass assets on.

4 - consider a LISA in addition to a pension if you need to wrap up a lot of money for the long term.

Alex.

cashbackproblems

Due to your BTL property equity you are in a very strong position and can easily retire at 60 due to the compounding effect if you were to invest that pot and continue contributions at your current rate (assuming wage increases) you would be looking at a pot of potentially £1m if invested well.


Property market even in London is looking slow and will continue for many years imo. I personally would sell and invest it in a SIPP, you will automatically get a 40% boost from the tax man as you are a higher rate payer.