Buy to let as a pension booster

robbay

Appreciate any advice on the following please.
I am 52 and my wife is 50. We have a mortgage with 13 years left (£195k left) and a company pension where I submit 6% and they match it but pension pot is forecast to only give me an annuity of £6k a year at 65. My wife has a small pension from a previous job (45k) but has been self employed for the last 14 years.
Sadly we are about to inherit some money from an estate which could be around £50k and I was looking at options. One of which was to purchase a buy to let property for around £150k on a repayment mortgage over 15 years with the £50k as a deposit. Once we reach pension age the plan would be to sell the property and use any money made for our retirement or possibly keep it going as a monthly income. 
I am sure you will tell me this is madness but thought I would ask. 
If there are better options such as paying off main mortgage or adding to pension pot please let me know,
Rob

Albermarle

You will not find many fans of BTL on a pensions forum .
The tax regime for BTL is much less generous than it was and it can be hard work with tenants, maintenance etc .
Best left to experienced landlords or those with building trade/handyman skills .
Pension forecasts tend to be unduly pessimistic so increasing your pension contributions should get you up to over £10kpa hopefully. 
On the other hand your mortgage is quite big still considering your ages . It is always a difficult decision - pension or mortgage .
If you have a secure job pension usually wins financially but emotionally it is nice to get the mortgage down.
By the way self employed people can also contribute to a pension and get tax relief.
Have you both checked your state pension projection ? Do either of you need to buy any extra NI years ?

robbay

Albermarle thank you for your response. We have checked our state forecast and we will get full pension if that makes any difference. 

Marcon

12% pension contributions are pretty modest at age 52. Remember that projections are just that - and are always on the pessimistic side, so don't take too much notice of them. Do you have any other pension provision from previous employments?

Is your wife contributing to a pension (and getting the benefit of tax relief even if she's a non-taxpayer)?

Purchasing a buy to let property is effectively putting what appears to be a large percentage of your overall savings in one asset class. Much depends on how comfortable you are with that, and also whether you have any experience of being a landlord and all the hassles that normally accompany it?

steampowered

You do not need to buy an annuity. These days most people go into drawdown. That will get you a better income than £6k per year and the flexibility to draw as and when required.

You are very likely to get a better return on money put into your pension than on money put into buy-to-let. This is for the following three reasons:
1) Pension contributions get tax relief. This is the main reason. That's worth is a 20% top up from the government if you are a basic rate tax payer, 40% top up if you are a higher rate tax payer.
2) Good returns are available. The returns on your pension will depend on what it is invested in. If you are invested in a medium risk investment fund, you might expect returns of 5-6% per year on average. If you are fully invested in the global stock markets then you might expect returns of 7-8% per year on average though the risk will be higher. 
3) Pensions have lower costs than BTL. You will be paying fees to your pension fund provider -  and you should find out what these are and shop around. But you won't face any of the costs associated with buy-to-let - higher rate stamp duty; conveyancing fees; letting agent fees; income tax on the rent; property maintenance costs; void periods; capital gains tax when you sell the property.

A good alternative option option would be to open a stocks & shares ISA. You and your wife can invest up to £20k per year into an ISA. You can then simply put the money into a global stock market tracker, which might be expected to generate the returns mentioned above. Any returns/withdrawals are completely tax free. However, you will not get the tax relief that you would get with a pension.

Personally, if I was a basic rate taxpayer now and expected to still be a basic rate tax payer in retirement, I would choose the S&S ISA.

If I did not expect to be an income tax payer in retirement, or if I was a higher rate tax payer now, I would invest into a pension, as under those scenarios the tax relief on pension contributions is a huge benefit.

dunstonh

pot is forecast to only give me an annuity of £6k a year at 65

Firstly, it is not a forecast.  A forecast is something likely to happen.  What you get is a projection based on a range of synthetic assumptions.   You need to understand the assumptions (which are given on the statement).  Otherwise, you can end up making bad decisions.   For example, the figures on the statement will assume the most expensive type of annuity going and at below market rates.  Barely anyone buys those (most do drawdown nowadays too).    They also assume lower than expected annual growth rates.   And they deduct a further 2% p.a. for inflation to show the figure in today's spending power.  

I am sure you will tell me this is madness but thought I would ask. 

Property is a viable option but its not as easy as it used to be.   The Government has been repeatedly hitting landlords with increased taxation.   There is currently a review of CGT and its expected that landlords will be hit again.

In the property boom years, a blind monkey could pick a property and you could profit from it.  That is no longer the case.  It requires more research than before to get a decent rental yield.

If there are better options such as paying off main mortgage or adding to pension pot please let me

You haven't told us anything about your pension or your mortgage or when you want to retire or one how much or how you are doing for your objectives.   So, we cannot really help with solutions when we do not know what you are trying to achieve.  More info is needed.

xylophone

but has been self employed for the last 14 years.

No pension?

Thrugelmir

robbay said:

One of which was to purchase a buy to let property for around £150k on a repayment mortgage over 15 years with the £50k as a deposit. Once we reach pension age the plan would be to sell the property and use any money made for our retirement or possibly keep it going as a monthly income. 

Have you factored in that letting property may not be as profitable as you hope. 

Grumpy_chap

In this context, BTL may be a viable option if you have a 'liveable' pension as your primary source of funds (total of private and state pension).  Remember that 'liveable' will be lower than currently because the expense of the mortgage will be gone.

enthusiasticsaver

I am not a fan of BTL.  Not at all diversified as far as investments go as all in one asset class - property, requires maintenance and unpredictable return if left empty or tenants cannot pay rent and no longer tax efficient.  If the property market crashes then buying it and selling it could actually leave you with a loss. 

As others have said the projection for your pension has to be taken with a pinch of salt as first of all annuity rates are dreadful and a lot of people no longer take them.  You could go for a drawdown SIPP instead. Has your wife not taken out a pension since being self employed?  If so she should address that straight away. The mortgage is large for your age  but if a low interest rate then investing the £50k either in SIPPs or stocks and shares ISAs would give you better returns although of course nothing is guaranteed.  I would up your pension contribution and get your wife to start one and maybe put a lump sum from the inheritance in both to boost them a bit.  I would also up your mortgage repayments.  What age do you plan to retire? 

Terron

steampowered said:

You do not need to buy an annuity. These days most people go into drawdown. That will get you a better income than £6k per year and the flexibility to draw as and when required.

You are very likely to get a better return on money put into your pension than on money put into buy-to-let. This is for the following three reasons:
1) Pension contributions get tax relief. This is the main reason. That's worth is a 20% top up from the government if you are a basic rate tax payer, 40% top up if you are a higher rate tax payer.
2) Good returns are available. The returns on your pension will depend on what it is invested in. If you are invested in a medium risk investment fund, you might expect returns of 5-6% per year on average. If you are fully invested in the global stock markets then you might expect returns of 7-8% per year on average though the risk will be higher. 
3) Pensions have lower costs than BTL. You will be paying fees to your pension fund provider -  and you should find out what these are and shop around. But you won't face any of the costs associated with buy-to-let - higher rate stamp duty; conveyancing fees; letting agent fees; income tax on the rent; property maintenance costs; void periods; capital gains tax when you sell the property.

A good alternative option option would be to open a stocks & shares ISA. You and your wife can invest up to £20k per year into an ISA. You can then simply put the money into a global stock market tracker, which might be expected to generate the returns mentioned above. Any returns/withdrawals are completely tax free. However, you will not get the tax relief that you would get with a pension.

Personally, if I was a basic rate taxpayer now and expected to still be a basic rate tax payer in retirement, I would choose the S&S ISA.

If I did not expect to be an income tax payer in retirement, or if I was a higher rate tax payer now, I would invest into a pension, as under those scenarios the tax relief on pension contributions is a huge benefit.

I have to disagree about the likelyhood of higher returns. I get 8% net returns just from rents (after all costs including full management by an agent) and price rises can boost that considerably.

If your employer is matching your contributions, certainly you should go for a pension up to the limit that is matched.

After that it is debateable. There are many reasons why you might not want to go with BTL, but lower returns is not one.

BTL requires more effort, even if you use an agent for full management. You need a good one. I was recommended an agent buy a family friend and he has done well for me for the last six years. If you don't use an agent then you need to know what you are doing, and may need to spend considerable time doing it.

There are several strategies for BTL. The most common are buying hoping for prices to rise, using rents just to cover costs, and buying to make money from rents with price rises as a bonus. The former is more common in the South, the latter in the North and is the one I use.

It is best to know the area you are operating it, so most people have limit choices. Buying in an area you don't know is very risky.

You can avoid CGT by not selling. You can still benefit from price rises by remortgaging.

You shouldn't depend only on BTL. I have more money in my pensions, though BTL provides most of my income.

If you expect to be a higher rate tax payer in retirement than the tax on leveraged BTL in your own name may be quire high. I am a basic rate payer which is sufficient for me.

You shouldn't rely on a single BTL property for retirement income, only as a bonus, since a void might stop it. If you want to use BTL for a signifcant part of your retirement income you should have at least three properties, so that a single void or bad tenant would only stop a third of it.

BTL allows you to control your level of risk by deciding what LTV you find acceptable and the type of property you buy. I go for higher quality housing that attracts better tenants, and an overall LTV less than 50%.