Buy to Let or Pension investment?

scoobydoo789

Trying to get some ideas on how to build up a bit of long-term savings. We're approaching 40, and just finished paying our mortgage off on our house (no interest in moving or developing the property).

My wife volunteers so does not have an income but I do. She doesn't have a pension - and that worries us so...

We are trying to figure out whether its worth us getting a flat nearby and renting it out to use that as a source of money in 20 years time. On first glance rental income seems to almost equate to mortgage payments on a repayment mortgage. Or would it be smarter for me to pay extra money from my salary into my pension each month?

I am leaning towards getting a buy to let mortgage and just treating it like someone putting money into a mortgage for me each month but am I missing some big tax issue here? Even if the rental income is 800 on a 1k mortgage, it feels like for my 200 spent I get 800 from someone else topping it up! I figure if I was to invest in pension I might save income tax but it would end up taxed when I retire anyway...)

Anyone got ideas on the pros / cons of either approach?

Cheers!

Alexland

Are you making enough workplace pension contributions to benefit from the most your employer will match and avoid higher rate tax if applicable?

If you are nearly 40 then you both just have enough time to open a S&S Lifetime ISA for a 25% bonus on contributions of up to £4k per tax year. You must open before 40, can contribute until age 50 for (tax free) withdrawal from age 60.

I wouldn't touch BTL as it can be very tax inefficient.

Wildsound

The way I see it:

By putting money into a pension, you're being given free money by the government to invest in a wide range of liquid diversified assets at low cost and with little work.

By putting money into buy-to-let, you're giving money to the government to invest in a single illiquid asset which is a pain in the backside to maintain and manage.

Your choice, but I know which one I would pick. And if my choice wasn't available, I would pick the next best thing, which isn't the other choice.

SonOf

There are over 30,000 conventional investment options for a pension and a near-infinite variety. There are millions of properties.

I figure if I was to invest in pension I might save income tax but it would end up taxed when I retire anyway...)

Some of it would. Not all of it though. The state pension is less than the personal allowance. So, you will have some personal allowance left over. The income from the pension using phased flexi-access drawdown would equate to 15%. Whereas rental income is 20%. Property sales on investment properties are subject to capital gains tax.

Your spouse has a personal allowance too. So, you can split your retirement planning to use both of your personal allowances.

What are you doing about the workplace pension?

Even if the rental income is 800 on a 1k mortgage, it feels like for my 200 spent I get 800 from someone else topping it up! I

That is extremely kind of you to have a tenant where you pay £200 for the benefit of them living there.

xylophone

Your wife has no relevant earnings but could contribute a net £2880 per tax year to a pension and the provider would claim tax relief of £720 and add it to her pot.

https://monevator.com/low-cost-index-trackers/

https://www.hl.co.uk/pensions/sipp?utm_source=money.co.uk&utm_medium=affiliate&utm_campaign=Money.co.uk+SIPP+AFMON&theSource=AFMON&Override=1

HL is thought expensive but for a modest fund might suit.

Has your wife obtained a state pension forecast?

https://www.gov.uk/check-state-pension

Dazed_and_confused

but am I missing some big tax issue here?

Quite probably.

From 6 April 2020 your loan interest payments (and any capital repayment) can no longer be claimed as an expense.

So £800 rent and £1,000 mortgage payment = £800 profit for income tax purposes.

There is a tax credit which can be claimed in respect of certain finance costs which might reduce any tax liability but you probably need to read up this before going house hunting.

Alistair31

FWIW, I’ve just sold my BTL and will be putting the majority of the sale proceeds in my SIPP.

Fortunately my tenant for the last 5 years has been fantastic but I know I won’t get it that good again, quitting while I’m ahead !
One bad tenant and you’ll be gutted.

atush

Trying to get some ideas on how to build up a bit of long-term savings. We're approaching 40, and just finished paying our mortgage off on our house (no interest in moving or developing the property).

If you have been paying off your mtg early (at todays low rates) you may have made a financial mistake of large proportion- esp if you neglected paying into a pension for these years.

Do you have a workplace pension? How much as a % of salary are you paying in?

I think you need to think of pensions and Lisas (esp for your wife) going forwards.

BTLs are very tax inefficient. And a lot of hassle.

Thrugelmir

scoobydoo789 wrote: »

On first glance rental income seems to almost equate to mortgage payments on a repayment mortgage.

Only interest element of the repayment is tax deductible. Capital is repaid out of after tax income. Maintenance and other overhead costs being tax deductible too. Crunch your numbers fully before committing to what is an illiquid asset.

AnotherJoe

You've probably already made a financial mistake by paying off your mortgage instead of adding to you and wife's pensions*, please don't compound it by starting a loss making inherently risky BTL business.
And certainly don't start a business based on what it "feels like" :eek: start it based on actual profit.

* if you are a high rate tax payer, a really bad mistake

scoobydoo789

Great suggestions so far, thanks for this keep them coming. Sounds like BTL not worth the hassle.

To one of the earlier posts, I have maxed out what I could get my employer to contribute to my pension; its a good idea though.

Given all these options I've never heard of like lifetime ISAs it sounds like a trip to some sort of IFA might be worthwhile to get some sort of plan in place.