Looking for pension and retirement advice - in unusual circumstances

Bostonerimus1

[Deleted User] said:

I don't think that your situation is that unusual, fairly typical for a small business I suspect.

First thing I noticed was the property.
£18,000 income on a property worth £700,000, produces a yield of around 2.5%

I'm guessing that you paid far less, but as it stands, it's a terrible not a good investment (unless the property has some unique qualities and is worth keeping regardless of the return).

But let's wind back a little bit, you asked about pensions way back in 2012, what happened?
https://forums.moneysavingexpert.com/discussion/4065465/self-employed-please-recommend-a-pension-scheme#latest

Working damn hard all your life is all well and good but you really need to work smarter.

If finances are not your strong point, I would say that it's essential to take professional advice.

With two businesses, you must have some involvement with accountants.
You're running limited companies, that gives you lots of tax efficient options (which you don't appear to be utilising).
I would be contacting my accountant (or finding a new one) for a chat asap.
They can guide you and will know an IFA to deal with pension planning (among other things).

I wouldn't leave it any longer as I fear that you're not currently making the best decisions....

You could think of the rent as a dividend and the main return on the property being the capital gain. For long term tenant and landlords the rise in house prices can often outpace increase in rents for various reasons. I own a one bedroom rental flat and keep the rent relatively stable for my long term tenant because she’s a good tenant and I don’t want to participate in the ridiculous rent inflation where I live. For companies or landlords with many properties that won’t be the case and maximizing return is the driving force. For me it’s more about having a trouble free tenant and providing a reasonably priced, comfortable and safe place to live.

Bostonerimus1

OP, I’d check your NI record on the Government Gateway. Then do a budget to estimate your income needs in retirement. Then take advantage of whatever tax advantages you and your wife can get from pensions and use your ISA allowances. 

[Deleted User]

Bostonerimus1 said:

[Deleted User] said:

I don't think that your situation is that unusual, fairly typical for a small business I suspect.

First thing I noticed was the property.
£18,000 income on a property worth £700,000, produces a yield of around 2.5%

I'm guessing that you paid far less, but as it stands, it's a terrible not a good investment (unless the property has some unique qualities and is worth keeping regardless of the return).

But let's wind back a little bit, you asked about pensions way back in 2012, what happened?
https://forums.moneysavingexpert.com/discussion/4065465/self-employed-please-recommend-a-pension-scheme#latest

Working damn hard all your life is all well and good but you really need to work smarter.

If finances are not your strong point, I would say that it's essential to take professional advice.

With two businesses, you must have some involvement with accountants.
You're running limited companies, that gives you lots of tax efficient options (which you don't appear to be utilising).
I would be contacting my accountant (or finding a new one) for a chat asap.
They can guide you and will know an IFA to deal with pension planning (among other things).

I wouldn't leave it any longer as I fear that you're not currently making the best decisions....

You could think of the rent as a dividend and the main return on the property being the capital gain. For long term tenant and landlords the rise in house prices can often outpace increase in rents for various reasons. I own a one bedroom rental flat and keep the rent relatively stable for my long term tenant because she’s a good tenant and I don’t want to participate in the ridiculous rent inflation where I live. For companies or landlords with many properties that won’t be the case and maximizing return is the driving force. For me it’s more about having a trouble free tenant and providing a reasonably priced, comfortable and safe place to live.

I might have agreed with you quite a few years ago, when there was a good case for capital appreciation and when returns elsewhere were limited (or seen as high risk).
With increasing regulation and tax liabilities, comparable returns being available with no risk in a tax-free wrapper, or the tax benefits of pensions, I'm no longer a fan of BTL.
If OP shares the same mindset as you, they could buy a significantly cheaper property (freeing up equity), charge below market rent and still retain a similar level of income.
If they wanted to be ruthless, they could significantly improve their income, if they went to the limit and maxxed an HMO, the current £18,000 could easily become £50-60k per year. The house next door to my BTL is an HMO, it generates £48k per year and its value is far below OP's £700k property.

general_piffle

@Marcon, businesses are very profitable. Overheads for mine are minimal. More so for my wife's business but then the profit is far higher. Plus, if all goes ahead (I believe it should) we'll have a second pre-school nursery soon, which again should have a positive impact on income and create a small portfolio of settings.

These could run in the background with minimal input from us, while we've effectively retired - say in 10 years. That's part of the plan anyway. I'd imagine I'd probably do 1 day a week on those businesses (I do the marketing, HR, operations, policy updates, some admin, etc. etc. while my wife does the more hands on side of things but also liaison with Ofsted, compliance, curriculum, etc. etc.). All we need is a good manager in place. It worked well last year when we were out of the country for 3 months for family reasons. We just had fortnightly video meetings with the manager and supported remotely where needed. My business I'd naturally wind down and close at say 65 or so.

Screenshot of state pension eligibility, yes I believe this is the max.



From reading a lot of the replies and almost being able to hear the sharp intakes of breath, I'd like to add that I'm just looking for ideas on how to make the most, from a pension perspective (or otherwise), out of what I can generate from my business before retirement. The other thing to add with the 'asking a similar question years ago', which is muddying the waters is back then I was going freelance for a few years, which I did. I then got headhunted for a role, and I did that for a few years, then set up my own business about 5 years ago.

Income just for my business, as I said I have overheads such as a laptop, printer, etc. truly minimal. For example, my main client I charge £575 per day, which say for January is £11,500 (less VAT, before tax).

Plus, I'm probably of a different mindset to many people on this forum (at least from what I've read between the lines...) in that I'd rather spend a spare 20k on a classic car I fall in love with, because it will make me happy, and I know I'll have to spend even more on it to keep it running - than put 20k into a pension because it'll be worth 23k in time, which will afford me that extra bottle of decent wine every now and then, if I should happen to rumble on to 85.

However, all of this discussion has reminded me of an idea I had ages ago. They say you need 50 to 70% of your current income during retirement. I pay myself about 4k per month, mix of salary and dividend. 70% of that is £2800. My state pension forecast is £961 per month. Now, if I do a loft conversion in the London property I could rent the developed property for say £2500 per month (today's rental value). This would give me £3461 per month, without the mortgages to pay I think this will be ample.

In addition, by keeping the London property on and developing it rather than selling this will solve the 'income in retirement' question (with or without the businesses, depending on what my wife also wishes to do with them) and leave a decent inheritance for my son. 

I like the tip about a 'truly independent IFA' from @Linton, good point about not going with someone trying to sell their employer's products. I'll make sure to do that, and like I said earlier have reached out to my accountant to see if she can recommend an IFA. This is my next step.

Marcon

Dazed_and_C0nfused said:

Marcon said:

general_piffle said:

Greetings all, I'm looking for pension and retirement advice, and haven't really gone about preparing in a traditional way. 

Some brief background:

• 55 years old
• I've worked/contributed all of my life and am due the full state pension
• 2 businesses, one mine and one I share with my wife, mine has an annual turnover of about 150k, our joint business is around 500k annually
• I don't have a private or company pension of any sort
• My major asset (separate to our family home) is a property I have in London worth approx. 700k

Apart from that there are various assets, like cars and motorbikes that no doubt in 20 years or so I'll probably thin out as I get too old to at least ride the bikes.

My query is how best to prepare for retirement? I guess I'm thinking of working for another 10 to 12 years, with the last few of those years possibly being a bit more relaxed/part-time.

My business (the 150k turnover one) is a Ltd company and I'm the sole employee. Could I start tucking money away into a pension over the next 10 to 12 years? Would it be more beneficial to me and/or the business from a financial perspective to do this as a 'personal pension' or as an 'employer pension' and put money from company profits away each month?

The businesses I don't know; mine I couldn't really sell as it relies on me. The other business we could definitely sell, and I suspect my wife wouldn't mind retiring early if we were in a position to do so (she's 45). 

The property in London, I could sell I guess, or continue to rent out and take that as a monthly salary in retirement (rent is currently £1500 per month). For capital gains tax I spent more time living there than renting it out over a 20 year period of ownership, so I believe CGT will be minimal.

Finances are not really a strong-point for me, I've just worked damn hard all my life and had some lucky breaks. Any advice on company or personal pension from now until retirement - plus what to do with other assets as retirement approaches, would be very gratefully received. 

Thanks in advance!

Reading your post, I can only whole-heartedly agree that finances are not a strong point for you! Not sure why your title uses the words 'unusual circumstances', though, since there's plenty in your post which indicates you are far from unusual. Focussed on running a business to the point where a lot of other things are back burnered while you deal with today...

You say you are due a full pension. Have you actually checked to see if that's the case, or are you assuming it is because you've worked for 'lots of years'? https://www.gov.uk/check-state-pension

general_piffle said:

I paid £175,000 for the property now worth £700,000. So, not too shabby.

...but sadly your take on CGT is hopelessly wide of the mark. It can't be your 'main residence' because you refer to 'a family home' and a wife - and in the eyes of HMRC a married couple can only have one main residence. Your accountant will be able to explain the tax position if you sell (spoiler alert: your belief that CGT will be 'minimal' may not be your accountant's view).

general_piffle said:

Yes, when I asked back in 2012 I did start paying into a pension, but not consistently. Built up a small pot which got cashed in when I turned 55 last year, and absorbed by something key. Let's say a 'life event'. But this is by-the-by and not particularly relevant now.

Pretty much anyone can generate turnover by selling goods or services, but you've said nothing about whether your companies are profitable - and profit is what matters. You can't build up a pension pot unless the money is there to contribute. The fact you needed to cash in a small pension at 55 suggests that profits aren't that healthy?

Your 'not particularly relevant' cashing in of a small pension could be an equally major misunderstanding along with your take on CGT. Unless you did so under the 'small pots rule' (and you'd need to have a provider who offered this AND specify that was what you were doing - and of course the pot would need to have been under £10K at the time you cashed it in), you've triggered the Money Purchase Annual Allowance, meaning you are severely limited to the amount of tax-relievable contributions you or your company can make to a pension: maximum of £10K per tax year, including any tax relief on personal contributions.

You may also have limited your ability to use something known as 'carry forward' - you have to be a member of a registered pension scheme during each tax year you want to carry forward, and if you've cashed in the only pension you've ever had, that's going to knock out at least one tax year from the sound of things.

general_piffle said:

Yes, we have a good accountant. Who I've already contacted about exactly this. However, I was hoping to gain some insights here. Thanks.

Thirteen years ago you were posting about wanting to put your feet up in retirement etc https://forums.moneysavingexpert.com/discussion/4065465/self-employed-please-recommend-a-pension-scheme#latest but you've cashed in even the modest little pension pot you had.

Better late than never, but you've tied the hands of your accountant and any other adviser you choose to use by some of the actions you've taken, which have clearly been not so much ill-advised as totally un-advised. Hopefully it's not too late to ensure you and your wife can be put on track for a reasonable retirement after working so hard for so many years - but you need action, not just aspirations. 

Even that glimmer of hope doesn't exist.

I'm pretty sure carry forward is simply not an option once MPAA has been triggered.

Thank you - I've edited my post to clarify that carry forward would still have been an option had OP decided to get a job which offers a DB scheme, given that the MPAA doesn't apply to DB schemes, but even then they would have limited their options if they weren't a member of a registered pension scheme for any of the years they'd want to use for carry forward purposes.

Marcon

general_piffle said:

@Marcon, businesses are very profitable. Overheads for mine are minimal. More so for my wife's business but then the profit is far higher. Plus, if all goes ahead (I believe it should) we'll have a second pre-school nursery soon, which again should have a positive impact on income and create a small portfolio of settings.

These could run in the background with minimal input from us, while we've effectively retired - say in 10 years. That's part of the plan anyway. I'd imagine I'd probably do 1 day a week on those businesses (I do the marketing, HR, operations, policy updates, some admin, etc. etc. while my wife does the more hands on side of things but also liaison with Ofsted, compliance, curriculum, etc. etc.). All we need is a good manager in place. It worked well last year when we were out of the country for 3 months for family reasons. We just had fortnightly video meetings with the manager and supported remotely where needed. My business I'd naturally wind down and close at say 65 or so.

Screenshot of state pension eligibility, yes I believe this is the max.

What does it say immediately under the large green box...? That's what confirms whether or not the forecast is based on any future years of NI contributions.

general_piffle said:

I like the tip about a 'truly independent IFA' from @Linton, good point about not going with someone trying to sell their employer's products. I'll make sure to do that, and like I said earlier have reached out to my accountant to see if she can recommend an IFA. This is my next step.

An IFA is a very good idea, not least because they will do a full 'fact find' - and it's important you provide full and complete information (a point you've probably spotted already from reading the replies on this thread!), even if you think it isn't relevant. The devil is always in the detail.

You've not said much about your wife's pension position - hopefully that will come up during your discussions with the IFA, since if she's not triggered the MPAA, there is much more scope for her to make tax efficient contributions (or more accurately her company to do so).

general_piffle

Marcon said:

Thank you - I've edited my post to clarify that carry forward would still have been an option had OP decided to get a job which offers a DB scheme, given that the MPAA doesn't apply to DB schemes, but even then they would have limited their options if they weren't a member of a registered pension scheme for any of the years they'd want to use for carry forward purposes.

Thanks - but it'll never happen. Not for all the tea in China. Once you've run your own business I don't believe you can ever go back to working for someone else; at least I couldn't!

Marcon

general_piffle said:

Marcon said:

Thank you - I've edited my post to clarify that carry forward would still have been an option had OP decided to get a job which offers a DB scheme, given that the MPAA doesn't apply to DB schemes, but even then they would have limited their options if they weren't a member of a registered pension scheme for any of the years they'd want to use for carry forward purposes.

Thanks - but it'll never happen. Not for all the tea in China. Once you've run your own business I don't believe you can ever go back to working for someone else; at least I couldn't!

Couldn't agree more - but others who read this thread...

general_piffle

@Macron this is the bit below the big green box, just 3 more years of contributions:

Bostonerimus1

[Deleted User] said:

Bostonerimus1 said:

[Deleted User] said:

I don't think that your situation is that unusual, fairly typical for a small business I suspect.

First thing I noticed was the property.
£18,000 income on a property worth £700,000, produces a yield of around 2.5%

I'm guessing that you paid far less, but as it stands, it's a terrible not a good investment (unless the property has some unique qualities and is worth keeping regardless of the return).

But let's wind back a little bit, you asked about pensions way back in 2012, what happened?
https://forums.moneysavingexpert.com/discussion/4065465/self-employed-please-recommend-a-pension-scheme#latest

Working damn hard all your life is all well and good but you really need to work smarter.

If finances are not your strong point, I would say that it's essential to take professional advice.

With two businesses, you must have some involvement with accountants.
You're running limited companies, that gives you lots of tax efficient options (which you don't appear to be utilising).
I would be contacting my accountant (or finding a new one) for a chat asap.
They can guide you and will know an IFA to deal with pension planning (among other things).

I wouldn't leave it any longer as I fear that you're not currently making the best decisions....

You could think of the rent as a dividend and the main return on the property being the capital gain. For long term tenant and landlords the rise in house prices can often outpace increase in rents for various reasons. I own a one bedroom rental flat and keep the rent relatively stable for my long term tenant because she’s a good tenant and I don’t want to participate in the ridiculous rent inflation where I live. For companies or landlords with many properties that won’t be the case and maximizing return is the driving force. For me it’s more about having a trouble free tenant and providing a reasonably priced, comfortable and safe place to live.

I might have agreed with you quite a few years ago, when there was a good case for capital appreciation and when returns elsewhere were limited (or seen as high risk).
With increasing regulation and tax liabilities, comparable returns being available with no risk in a tax-free wrapper, or the tax benefits of pensions, I'm no longer a fan of BTL.
If OP shares the same mindset as you, they could buy a significantly cheaper property (freeing up equity), charge below market rent and still retain a similar level of income.
If they wanted to be ruthless, they could significantly improve their income, if they went to the limit and maxxed an HMO, the current £18,000 could easily become £50-60k per year. The house next door to my BTL is an HMO, it generates £48k per year and its value is far below OP's £700k property.

Yes, I wouldn't recommend starting a BTL today. Doing HMO type thing would not be for me as it makes things a lot more complicated and I like dealing with a single tenant which is why I just have the one bed flat. The OP has options and selling up and investing might give them better returns, but that depends on the housing markets relative to the stock and fixed income markets and HMO might be too much trouble and when you're 55 "trouble" is a big factor.