Buying a Property for Pension - To Do It or Not to Do It ?

Rickycowslip

Ok naivety filter off, here we go... all this below is based on knowledge gleaned purely from the Sunday paper articles and last night's Newsnight

we've got our Rpoints cashback, stoozed some credit card companies, had a few free bets at the bookies and even got a pretty good mortgage deal. Now its time to use these newly acquired skills to make some real money...

These new pension rules from the government - 'buy a villa in Spain and they'll pay 40% of the cost' you may have seen the ads. Most articles I've read are by experts flabbergasted at the new govt rules, and how they favour the more financially astute - yet the governemnt are pressing ahead. Now I read this as 'loophole', and that's what we're all about…

Why do I think there’s money to be made ?

• Govt wants to fill the pension hole – it therefore has to be attractive
• Potential if it catches on that house prices will be inflated long term (see 1989)
• Experts are saying its crazy
• Financial advisers are rubbing hands together with glee

So – how do we make our cut before they stop it ?

My naïve calculations are as follows:

I buy a house for £140k, £100k on mortgage, £40k back from HM Govt thank you kindly…
My pension fund then rents the house @ £400/month, I meanwhile pay the interest only mortgage pmts of around £420/mnth
After 20yrs, assuming ‘real’ house price inflation of 4% a year and I make 2% real interest on the rent payments, my fund is worth £420k (in today’s money). I pay off the £100k mortgage from the lump sum facility, and I buy an annuity for me and the Mrs giving me £500/mnth after tax for the rest of our lives

Alternatively I just invest £420/mnth in a pension for 20yrs – same cost as above. At 2% real growth per year the fund, plus the govt’s rebate (thank you kindly), my fund grows to £170k, giving me and the Mrs £250/mnth for the rest of our lives

Quick sums – an extra £250/mnth in retirement for a bit of shennigans today. Such an annuity would cost £170k – hence profit and your incentive to figure out what the heck I’m on about is £170k !

Where's this extra money come from ? The fact that you get the £40k up front from the govt to earn interest on for the next 20yrs, plus the rental return.
The risks - house prices do not rise at a real rate of 4% per year. I would suggest this is a prudent guess with the possibility the scheme will actually fuel a higher figure (see 1989)

Naivety filter back on – what am I missing ??

rizla01

definitely something fishy though I cant see what but then again I havent read the report.

Why on earth would our government want to encourage buying in a foreign country? Backhanders, maybe?

Problem is, as I see it that too many people own props in Spain as it is, and are having increasing difficulties realising the full rental yeald, so are having to rent out for less. When it comes to selling up I imagine that the market will be flooded and not enough buyers to sustain a high yeald on that either. (At the mo prop prices are rising by 12% - 15% and sales are at 9%)

The only ones that will probably benefit are the very wealthy that can buy the super high priced Villas that there are few of, and they will cash in big time.

What are Spain giving our government in return?

Is this just a way of emptying Britain of the British so that there is no-one to contest the influx of foreigners?

Just my musings.

Riz

Rickycowslip

No, no, the 'villa in Spain' reference is the bit that hits the headlines to illustrate the ludicrousness of it all - fact is you can do this with the house next door (if the neighbours don't mind ha ha) or a luxury yacht, or a pile of BT shares - almost anything. Whereas before you could only do it with cash, or I believe possibly commercial property, up to a maximum of 15% of your annual salary - these two restrictions are being removed. This has lead to the Spanish Villa headlines.

EdInvestor

Your SIPP pension fund can only borrow 50% of its value.

Next year you will be able to contribute an amount equal to your annual taxable salary capped at 215k into said pension fund.

Does that change things?

rizla01

ha ha,


That'll teach me to read the article before passing comment.

Rickycowslip

ahhh Edinvestor - that could be the missing piece of the jigsaw... so if I'm on a salary of £40k I could invest £40k, get a further £16k tax rebate, then the fund borrows half again £28k making £84k. I then find an appreciating asset for £84k yes ?

This being the case when they suggest people can buy the oft quoted Spanish Villa, they're talking about people on a minimum of about £70k annual salary ? (assuming villas cost around £150k)

blindman

Have you read this thread and its links?

whiteflag_3

This being the case when they suggest people can buy the oft quoted Spanish Villa, they're talking about people on a minimum of about £70k annual salary ? (assuming villas cost around £150k)

NO - they arepeople who have saved in pension plans over the years and built up a fund of say £100k . They will then covert to a Sipp and borrow the other 50%

Rickycowslip excuse my naiveity but if you earn £40k per annum how would you fund a £40k pension conribution? Also £40 k is the gross amount therefore £40 k would be invested which would then recieve tax relief not £40 + £16.

Your calculations and assumptions on how a SIPP would work are way off the mark.

Finally would you really want to sink all your plans for retirement into a single asset.

Rickycowslip

Blindman - thanks for the link. I'd listened to the Inside Money article which suggested that only the rich could do this, but my interest was rekindled by the Newsnight article last night where a govt minister was claiming otherwise - saying its for all (though maybe not suggesting to the point of buying property). He denied it favoured the rich.

Whiteflag - thanks for clarifying that, which means that a lot more people should therefore be interested. I'm in a company scheme, don't know the equivilent fund value.
As to the max contribution, my thought would be to fund the contribution from savings or loan, so as to tap into the tax rebate. This also prompts the question - why limit people to their salary ? Doesn't this agian suggest it favours the rich, and also penalises those later on in life who want to make up for their lack of provision ?
As to the single asset - I have a company scheme, which I suppose again would impact on my contribution limit. You're right, all eggs one basket must be considered...
As before, the crucial bit is the max cointribution based on salary. If this was a Tory govt introducing this they'd be lynched, can't see what Gordon's playing at... Is anyone earning under say £30k expecting to do anything different ?

I still maintain however that there's got to be some clever mechanism to tap into it, its just a case of finding it without having to pay someone a brokers fees for doing it on my behalf...

whiteflag_3

I still maintain however that there's got to be some clever mechanism to tap into it, its just a case of finding it without having to pay someone a brokers fees for doing it on my behalf

...


There are ..................but I think you will have to pay someone to tell you!

EdInvestor

BTW, there will be a "lifetime limit" on how much you can put in your pension and get tax relief from next year - the limit is something like 1.3m, going up to 1.8m, IIRC.

In the year before you retire, you can put as much as you like into your pension and get the tax relief (up to this lifetime limit.).

Not much point in tying money down in pensions before that then.:)