How big should my pension pot be?

How big should my pension pot be?

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Discussion

Stevemr

540 posts

155 months

Friday 30th January 2015
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"I inherited a house in the north east in 2002 and sold it in 2003 and it is worth less today than it was in 2002 and when you adjust for inflation, in 2032 it could well be worth less than its 2002 value."

But the rent will likely keep pace with inflation!

SkinnyPete

1,411 posts

148 months

Friday 30th January 2015
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BoRED S2upid said:
SkinnyPete said:
I wouldn't be the first to ask this, but increase pension payments or overpay the mortgage?
Depends how quickly you can pay off the mortgage then start on the pension pot.

Say you mortgage is £1000 month when it's gone then that grand a month can be put to good use building up a nest egg.
I pay both at the minute but both are small.

I have just received my annual pension statement, I really ought to quadruple my payments if I want any sort of disposable income by the time I'm 65.

At the moment I'm still in my 20's and like blasting my cash hehe

nct001

733 posts

132 months

Friday 30th January 2015
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Stevemr said:
"I inherited a house in the north east in 2002 and sold it in 2003 and it is worth less today than it was in 2002 and when you adjust for inflation, in 2032 it could well be worth less than its 2002 value."

But the rent will likely keep pace with inflation!
I'm being kind of with you with as I would have liked to have kept it and see similar properties bought, renovated and rented on homes under the hammer.. and in this case I'm afraid the rental yield is irrelevant, the value of the property has fallen, the maintenance of property that is replacement carpets, damp repairs, windows and boiler every 10 years, re doing kitchen and bathroom etc etc and then agent fees

All that for £70 a week rent, I'm being kind as in 2002 we were talking £55 a week.

The kind of tenants it was to attract, dss and addicts.

A waste of time, then multiply it by 30 if you are not careful and you can understand why council rents to you.

Rental yield on these cheap properties is irrelevant, it ignores costs of rental, repairs and the fact that most of these properties will never be traditional owner occupation properties so have to be sold at a discount or sold at auction, so ultimately what is the point?

andrewh

457 posts

258 months

Friday 30th January 2015
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I'd buy in a reasonable student area and rent 3/4 rooms out, maybe cheap conversion into multiple rooms, although these property's tend to start around the £120k mark, reasonable owner occupier demand also from city workers/couples.

pensions I'd personally leave unless it's an company one, as those tend to have lower fees and some can be quite generous giving 2x your own contribution, the stakeholder one I opened in 2005 hasn't done much, just about kept pace with inflation.

Stevemr

540 posts

155 months

Saturday 31st January 2015
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nct101.

I agree some areas and houses are to be avoided.

I am talking about 90K houses in reasonable areas in west yorkshire, which rent out at around 450 - 475. ( You can buy houses for 25K, but I wouldnt for the reasons you state.) Go too cheap and you are correct in what you say the rent will not cover the maintenance etc.

What gets me with pensions is they quote unrealistic returns and do not seem to allow for inflation on the "pot/ pension" at the end.

Put it another way EVERYONE I know who has private pensions is unhappy with them. Everyone I know with small property portfolios is happy with them.

I have never seen a rental cost against inflation index, but bearing in mind the shortage of living accomodation in this country I would imagine that rents must pretty much keep up with inflation, would you not think?

Zigster

1,636 posts

143 months

Saturday 31st January 2015
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andrewh said:
pensions I'd personally leave unless it's an company one, as those tend to have lower fees and some can be quite generous giving 2x your own contribution, the stakeholder one I opened in 2005 hasn't done much, just about kept pace with inflation.
I tend to be sceptical with these claims. The Ftse All Share has shown a total return of more than 100% since 2005 so just investing in a simple tracker would have meant you would have doubled your money. I get that to be pretty close to a 9% pa return. Inflation hasn't been anywhere near those levels in that period.

mike9009

6,917 posts

242 months

Saturday 31st January 2015
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Zigster said:
andrewh said:
pensions I'd personally leave unless it's an company one, as those tend to have lower fees and some can be quite generous giving 2x your own contribution, the stakeholder one I opened in 2005 hasn't done much, just about kept pace with inflation.
I tend to be sceptical with these claims. The Ftse All Share has shown a total return of more than 100% since 2005 so just investing in a simple tracker would have meant you would have doubled your money. I get that to be pretty close to a 9% pa return. Inflation hasn't been anywhere near those levels in that period.
Just to reinforce what others have said too. Not only have returns been good since 2005 (although over a slightly longer time period the returns have not been so good, FTSE250 would have been better - aahhhh hindsight.....).

A pension will give you another 40% return over BTL investments if you are a higher rate tax payer. And additionally, your company 'may' match your investment giving another 100%.

This starts mounting up to a fairly big return compared to a BTL investment coming from your net income.

BTL have very tangible gains (at the moment!) which can relatively easily be quantified - pensions are not so crystal clear. I am sure some clever spark could do a side by side comparison in terms of cost versus return over the last ten years? (I cannot be bothered!)

As always spreading risk is best - unfortunately I have not heeded my own advise on this aspect and only have a company pension and a smallish ISA. Any 'other' bonuses etc. are being used to pay off the mortgage or buying cars smilewink


Mike

Riff Raff

5,086 posts

194 months

Saturday 31st January 2015
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mike9009 said:
A pension will give you another 40% return over BTL investments if you are a higher rate tax payer. And additionally, your company 'may' match your investment giving another 100%.

This starts mounting up to a fairly big return compared to a BTL investment coming from your net income.
Mike
Not to mention the fact that on retirement, you can take 25% of the fund in cash, tax free. The drawdown from the remaining fund (assuming you don't convert it to an annuity) is taxed at your marginal tax rate.

Selling any of your BTL's (which you funded out of income after tax, and the net income from which is taxable each year) will crystalise a Capital Gain. OK, part of that will be sheltered by the tax free allowance, but even so.....

GT03ROB

13,207 posts

220 months

Saturday 31st January 2015
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The reality is that whatever you do, putting all your eggs in one basket, be it property or whatever is a high risk strategy. BTLs 'can' produce decent long term returns, as can stocks/shares. Is property a sure fire strategy? Highly unlikely. It can require an active involvement or you pay high management fees.It does require costs to maintain. Any sort of capital gain will be taxed. I also full expect the tax regime surrounding BTLs to be tightened reducing returns. Some property, no problems, only property a potential problem. For many of us normal pensions are good value. As a starter for for every 6 I put in tax relief takes it up to 10, then my company takes that up to 17. I virtually triple my investment on day 1.

bogie

16,342 posts

271 months

Saturday 31st January 2015
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GT03ROB said:
The reality is that whatever you do, putting all your eggs in one basket, be it property or whatever is a high risk strategy. BTLs 'can' produce decent long term returns, as can stocks/shares. Is property a sure fire strategy? Highly unlikely. It can require an active involvement or you pay high management fees.It does require costs to maintain. Any sort of capital gain will be taxed. I also full expect the tax regime surrounding BTLs to be tightened reducing returns. Some property, no problems, only property a potential problem. For many of us normal pensions are good value. As a starter for for every 6 I put in tax relief takes it up to 10, then my company takes that up to 17. I virtually triple my investment on day 1.
Exactly, it all depends on circumstance and how involved you want to be in your investments

My firm do a 1.6 match, and im a 40%+ taxpayer ...like you, ive tripled my money before any gain from the investment in equity funds. I cant beat that and gave up trying to gamble my own money in the markets

I guess the answer is to do both and hedge your bets ...and of course work on the root cause ; earn more and spend less smile

trowelhead

1,867 posts

120 months

Saturday 31st January 2015
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I'm following a similar path as to what Stevemr described.

Here's why:

Run my own company so no employer contribution to pension
I want to access my cash / returns before I'm 55
There are plenty of properties up north with 10% gross yields and 15-20% cash on cash returns with a mortgage.
I can force appreciation with a refurb, I can buy below market value
I like the monthly cashflow property provides
I buy for the rental income, any capital appreciation is a bonus. Let's say my return is 10%, the property pays for itself in 10 years.

I do hold some global trackers 60% equities 40% bonds inside isas for some diversification. I expect there to return 7-8% p/a over time tax free.

OP you can hold a commercial property inside a SIPP and then collect rent tax free. You can mortgage it to 50% LTV. This could be a really tax efficient strategy for you. No tax going in. Rents roll up tax free.

trowelhead

1,867 posts

120 months

Saturday 31st January 2015
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nct001

733 posts

132 months

Saturday 31st January 2015
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Stevemr said:
nct101.

I agree some areas and houses are to be avoided.

I am talking about 90K houses in reasonable areas in west yorkshire, which rent out at around 450 - 475. ( You can buy houses for 25K, but I wouldnt for the reasons you state.) Go too cheap and you are correct in what you say the rent will not cover the maintenance etc.

What gets me with pensions is they quote unrealistic returns and do not seem to allow for inflation on the "pot/ pension" at the end.

Put it another way EVERYONE I know who has private pensions is unhappy with them. Everyone I know with small property portfolios is happy with them.

I just wish I had received this information from a young age, I'm no fool I work at a major pic as a group buyer, msc economics and social policy.

I have never seen a rental cost against inflation index, but bearing in mind the shortage of living accomodation in this country I would imagine that rents must pretty much keep up with inflation, would you not think?
Shrewd buy to let investment is key... you cannot just buy, buy, buy cheap properties and expect an income. People need to realise, despite your initial comments, not all properties appreciate in value and (relative) high returns on investment are irrelevant.

When buying investment property you need to make sure you can re sell to a private individual, who can pay full market value as a consumer, as many properties will never become end user owner occupation properties so have to be sold at significant discount so often maintenance is neglected and it's a negative spiral for the area.

Adjusting properties values for inflation is essential, do this for yourself.

Correctly research an area for buy to let demand against consumer demand for purchase will show phenomenal long term return.

I have a few buy to let properties for example 2006 purchase modern 3 bed semi low yield at 4.5 per cent, but I do not want yield I want capital growth, these properties have each risen over £90k since and have each earned £7k a year profit after mortgage thanks to low interest rates.

You don't need many of them to set you up for life let alone a pension plan. All things being equal, including overpayments by myself they will be paid for in 12 years.

Despite my background msc economics I just wish I could have been given advise on this matter earlier.


SkinnyPete

1,411 posts

148 months

Saturday 31st January 2015
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Speaking of pensions, whats the point in joining your employers scheme if they are not going to make contributions despite deducting it from your salary.

Received my annual statement the other day and I'm missing about 30% of my contributions.

mike9009

6,917 posts

242 months

Saturday 31st January 2015
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trowelhead said:
Well done!

gregf40

1,114 posts

115 months

Saturday 31st January 2015
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trowelhead said:
What a shocking chart...no years mentioned...no initial amount mentioned...no mention of dividend reinvestment...

It's basically pointless.

trowelhead

1,867 posts

120 months

Saturday 31st January 2015
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gregf40 said:
What a shocking chart...no years mentioned...no initial amount mentioned...no mention of dividend reinvestment...

It's basically pointless.
Source:
http://www.telegraph.co.uk/finance/personalfinance...

Initial amount of £1000 from 1996 - 2014. Article mentions rental income is reinvested into more properties, so I'm assuming the comparison is with an ftse all share accumulation tracker dividends reinvested - although it does not actually say.

Obviously to be taken with a pinch of salt but interesting nonetheless.

trowelhead

1,867 posts

120 months

Saturday 31st January 2015
quotequote all
Ok so I was wondering if someone can tell me if I'm wrong here...

Let's say I was in theory to recieve 500k pre tax and I wanted to decide to invest in pension or property...

If I was to put it into pension over multiple years, I would be investing pre tax and thus would have 500k invested.

Let's say I invest into a global tracker returning 7% per year. In 25 years I would have £2.7 million in the pot.

Alternatively if I was to pay 40% tax on my 500k then invest 300k into property yielding 10%, I would have £3.25m in 25 years if I bought for cash. If I used 75% mortgages and my cash return was 15% I would end up with £9.8 million.

This is forgetting that returns in the second scenario are taxable at 20% if run via a ltd company - but surely you would come out ahead?


EddieSteadyGo

11,717 posts

202 months

Saturday 31st January 2015
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trowelhead said:
Let's say I invest into a global tracker returning 7% per year. In 25 years I would have £2.7 million in the pot.

Alternatively if I was to pay 40% tax on my 500k then invest 300k into property yielding 10%, I would have £3.25m in 25 years if I bought for cash.
10% yield on property after taking account all your costs is a little ambitious in my experience.

Unless you adding value ie. buying an old building and developing it etc. But this option adds risk and takes your time.

If you modify the rate of return to take into account your time and all costs, I don't think your comparison would give the same results.

Missingbadly

198 posts

110 months

Saturday 31st January 2015
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Mines not big enough to piss in.