Pension Robbery. You can't Have Your Money

Terron

Malthusian wrote: »

If he knows which end of a house should be pointy he understands property better than pensions

Yes. But what makes property or pensions a gamble is lack of knowledge so property is less of a gamble for him.

Could be borrowing involved,

I was assuming so. He could get the two properties he mentioned in the area I invest infor that. amount, get 6.5% net on rents, and last year we got 8% capital growth. If there is a bubble it is just starting here - whcih is the time to buy.

Your return is based on the interest rate on the debt, not the rental yield of the property. If I buy wine on my credit card or a car on PCP and then pay it off, I'm not investing in wine or cars.

You could be if they were fine vintages and classic cars

In terms of yields paying off the mortgages is a bad idea., buying more properties with mortgages would work better, My average rental yield is over 7% (net), my mortgages around 3%. Paying off the mortgages will reduce my average yields, but will increase my income from the properties so is an investment.

It would be a poor investment if it weren't for the tax effects.. Taking the pensions will tahe me into higher rate tax teritory and cause me to be affected by the reduction in mortgage relief.

quotememiserable

Let's face facts: OP has gone away.

Malthusian

Terron wrote: »

Yes. But what makes property or pensions a gamble is lack of knowledge so property is less of a gamble for him.

No, what makes property or pensions any kind of "gamble" is that yields and capital growth are unknown on both. While good management can improve returns, there is an upper limit.

It doesn't matter how knowledgeable you are about property, if you do what the OP is proposing the returns you generate will never make up for the initial hit on tax. If he was that good at property investment, it would be trivial for him to read up on pensions and apply those skills to investment in other assets, and generate similar returns in his pension fund.

I was assuming so. He could get the two properties he mentioned in the area I invest infor that. amount, get 6.5% net on rents, and last year we got 8% capital growth. If there is a bubble it is just starting here - whcih is the time to buy.

Are you trying to flog your properties to the OP?

You could be if they were fine vintages and classic cars

If I borrowed £100,000 at 2.5% to buy fine wines which are returning 8%, and I pay off the debt, I have an extra £2,500 each year in my pocket, and my return is 2.5%. If I borrowed £100,000 to buy a classic car which appreciates in value by 10%, and I pay off the debt, I have an extra £2,500 in my pocket and my return is still 2.5%.

If I have £100,000 to spare and my choice is between either paying off the loan I used to buy the car or buying another classic car which will appreciate by the same amount as the current one, will I get the same return from both "investments"? Clearly not. If I pay off the debt my net wealth will increase by £2,500 next year guaranteed and if I buy another car my net wealth will increase by whatever the rate of return on the car is. When you pay off a debt your return from doing so is based solely on the interest rate payable on the debt, what you used the loan for is independent.

Terron

Malthusian wrote: »

No, what makes property or pensions any kind of "gamble" is that yields and capital growth are unknown on both. While good management can improve returns, there is an upper limit.

If you measure yield a return on capital employed there was no upper limit for property before the crash when you could get 100% mortgages.

I was not saying that what the OP was suggesting was the right thing to do. I was saying that describing property as a gamble was wrong in context. If done caregully it is no more risky than a pension might be.

redux

Terron wrote: »

If you measure yield a return on capital employed there was no upper limit for property before the crash when you could get 100% mortgages.

I was not saying that what the OP was suggesting was the right thing to do. I was saying that describing property as a gamble was wrong in context. If done caregully it is no more risky than a pension might be.

But it isn't an argument about which is slightly better, as the choices here are not roughly and arguably equivalent.

This particular case starts with approximately halving the amount, by paying tax to remove it from the pension scheme.

Anyone who is already paying some of their income tax at 40% is going to have some of their income taxed at 45% if it increases by over £100,000 in a year, and someone said above that also the tax allowance is whittled down.

Property would have to outperform equities by several per cent a year for several years in order to catch up. And then the property income and the capital gains are taxable, adding even more to the required hurdle rate in the comparison.

But to go back to your 100% mortgages era, there was no downside limit either.

Terron

redux wrote: »

Property would have to outperform equities by several per cent a year for several years in order to catch up.

Whuch they have been doing for me, with an overall tax rate of ~10% on income for last year. Next year I plan to sell one but they will be no CGT as it is my forer home/ I will need to sell as my pension income will be taxable and would push me into HRT , which will hurt harder than it otherwise would due to my mortgages in my own name..

dunstonh

Terron wrote: »

Whuch they have been doing for me, with an overall tax rate of ~10% on income for last year. Next year I plan to sell one but they will be no CGT as it is my forer home/ I will need to sell as my pension income will be taxable and would push me into HRT , which will hurt harder than it otherwise would due to my mortgages in my own name..

Individual circumstances are something the IFA does in their analysis.

From what the OP has said though, he is a high earner with a pension that could see an effective 60% tax deduction (loss of personal allowance and falling in the highest rate band).

Even if you think property is better than a balanced portfolio (which usually it isnt without gearing), there is just so much money lost in tax due to this transaction that it would be unrealistic for it to catch up.

Also, remember that the OP said they want to do this so they can pass the money on. The pension is outside of the estate. Property is within the estate. 40% IHT on that doesnt look good when the pension would be passed on free of tax (and only subject to income tax at the beneficiaries rate if they drew it out, if death occurred after 75).

Is there anything that sounds reasonable in the OP that makes you think it is a good idea?

Terron

dunstonh wrote: »

Even if you think property is better than a balanced portfolio (which usually it isnt without gearing),

Yes, gearing makes property a much better investment., which is why anyone doing it seriously as an investment will be using it. Ignring gearing when considering property as an investment is similar to ignoring the tax advantages when discussing pensions as an investment.

there is just so much money lost in tax due to this transaction that it would be unrealistic for it to catch up.

Also, remember that the OP said they want to do this so they can
pass the money on.

The is not relevant to the point I was making, which was objecting to the characterisation of property as a gamble in comparison to a pension. Both can be low risk or high risk.

Is there anything that sounds reasonable in the OP that makes you think it is a good idea?

No. I think it is a bad idea. I did say I wouldn't do it.

Malthusian

Terron wrote: »

Yes, gearing makes property a much better investment., which is why anyone doing it seriously as an investment will be using it.

It doesn't make it "better", it makes it higher risk with the potential for higher reward. And with the combination the credit crunch and the restriction on mortgage tax relief, the potential for higher reward is lower than it used to be. While the higher risk - that you fail to make a return from your property due to bad tenants / void periods / declining area, but still have to pay the mortgage - has remained the same.

Ignring gearing when considering property as an investment is similar to ignoring the tax advantages when discussing pensions as an investment.

Tax advantages don't come with the disadvantage of potentially losing more than you staked.

The is not relevant to the point I was making, which was objecting to the characterisation of property as a gamble in comparison to a pension.

On that point I agree entirely - it's not a gamble as a virtually guaranteed loser is not a gamble.

Terron

Malthusian wrote: »

It doesn't make it "better", it makes it higher risk with the potential for higher reward. And with the combination the credit crunch and the restriction on mortgage tax relief, the potential for higher reward is lower than it used to be. While the higher risk - that you fail to make a return from your property due to bad tenants / void periods / declining area, but still have to pay the mortgage - has remained the same.

Tax advantages don't come with the disadvantage of potentially losing more than you staked.

That happened to me once - on the first ever property I bought, as a home, bit as an investment. I bought a the peak of the bubble in 1989. That was the largest drop in my lifetime. Otherwise I have been buying below previous peaks, and some times forcing appreciation by rennovating properties. The maximum LRV I go for is 75%. Still low risk, but doing better than my other investments including my pensions, even when the others went up 15% om a year. Not as low as my DB pensions of course, but I can't invest any more in them.

I have had void periods, even a couple that lasted over a month. I still make over 7% just on the rents. No bad tenants, so far. That is not pure luck. I chose properties that would attract tenants who would tens to stay a long time and be more reliable, That sis come at a slight reduction in the yield. The two properties that have had voids are my first investment property, chosen when I was still learning, and my former home. 50% capital growth since I started letting it out makes up for the lower yield on the latter.

[quote[
On that point I agree entirely - it's not a gamble as a virtually guaranteed loser is not a gamble.[/QUOTE]

!!!!!!!!. Property is not a virtually guaranteed loser.
Or are you still missing the point that I wasn't defending what the OP was proposing.