Official. Property is better for retirement than a pension.

[Ginge R]

It must be true, the Chief Economist at the Bank of England says so. In fact, the very same 'Chief Economist at the Bank of England' who confessed the other month that he didn't understand pensions. I mean, seriously. Anyway, whether or not anyone on here has actually considered the merits of a Buy to Let (anyone?) over a conventional pension to fund retirement, it's all good mill for the grist on PistonHeads!

http://www.thetimes.co.uk/article/property-is-a-be...

[Ginge R]

His DB pension (£85k) would cost somewhere in the region of £2/2.5 million to buy. I wonder if he could let us know how he intends to own a Buy to Let portfolio (paid off) to that value when he retires.

[Ginge R]

Ozzie Osmond said:

Question: If I recall correctly HMRC values DB pension on a multiplier of x20 per £ putting the HMRC value of his £85k pension at £1.7 million. The current maximum amount allowed by HMRC is around £1m. Nice work if you can get it.

[NB: Ginge's figures are correct for the real-world cost of pension. Very curiously MPs and civil servants, who just happen to have the most generous DB pensions, are happy for HMRC to continue applying an unrealistically low multiplier. Strange, isn't it.....]

Correct, and you also add the tax free cash to that - typically three times the annual income. Given gilt yields right now, I added a bit on top for, as you say, real world transfer values.

[Ginge R]

sidicks said:

Looking at the best annuity rates on the FT website, for a 60-year old, a single life annuity escalating at RPI, a £100k premium would get you a starting pension of just over £2,000 p.a.

Making his £85k pension worth over £4m (the Times article linked to, refers to £3.5m, provided by HL).

Edited by sidicks on Sunday 28th August 12:05

Staggering, isn't it? SCAPE lives in a fur lined, fluffy world.

[Ginge R]

JulianPH said:

Right, some quick and simple calculations. I have used round numbers and not factored in NI payments (which would worsen the BTL position).

Assume a higher rate taxpayer puts down a £40k deposit on a £100k BTL and repays the £60k mortgage by paying a further £3k a year over 20 years (with the rent covering the interest and all other costs - such as 20 years worth of maintenance to keep it constantly rented over this period).

In 20 years time (assuming an average 6% annual growth of the property - and assuming interest rate rises are matched by increased rental yields) the BTL would be worth £320k with no mortgage remaining.

If the same person made the gross equivalent of the same net sums as above as pension/SIPP contributions - and assuming the same 6% average annual return over the same 20 year period - the pension/SIPP would be worth £400k.

If they could both draw a 5% income in retirement the BTL would get £16k a year and the pension/SIPP would provide £20k a year.

If they wanted to sell for a lump sum the BTL would face CGT (28% currently) on the £220k profit (leaving £261,500 after taking into account the personal CGT allowance) and the pension/SIPP 30% (factoring in the 25% tax free element and assuming 40% on the balance) leaving a £280k profit.

If they wanted a smaller lump sum and an income the pension would allow up to £100k tax free and at a 5% withdrawal rate still provide £15k a year. The BTL does not give this option.

You also have IHT benefits with the pension/SIPP.

Please correct me if I have made any wrong assumptions here!

A nice juxtaposition. Now, if you're really bored (!) place the property in a Ltd property company instead. Transferring an existing portfolio in would be a disposal for capital gains tax purposes, so you'd be hit with a hefty tax bill and there'd be stamp duty for anything worth over £125,000. So, it's probably too difficult for existing held property, but for new purchases it has possibilities. Especially when growing the portfolio by reinvesting profits (instead of drawing dividends) and bringing trusted family members onboard for continuity planning.

[Ginge R]

Jockman said:

Ginge R said:

A nice juxtaposition. Now, if you're really bored (!) place the property in a Ltd property company instead. Transferring an existing portfolio in would be a disposal for capital gains tax purposes, so you'd be hit with a hefty tax bill and there'd be stamp duty for anything worth over £125,000. So, it's probably too difficult for existing held property, but for new purchases it has possibilities. Especially when growing the portfolio by reinvesting profits (instead of drawing dividends) and bringing trusted family members onboard for continuity planning.

Ginge you would need to keep your eye on whether the company would be an investment one or a trading one.

I'm sure Eric mentioned something in previous posts but I'm not sure of the exact detail.

Agreed, there are many subtle distinctions than can make or break the deal. If you have one or two properties that you intend to sell soon, it's probably always going to be much better to suck up higher personal tax on rental income, but benefit from lower CGT when you sell. It's most certainly mad, in most cases, to transfer existing stock in. If the strategy though, is to build a portfolio over decades, possibly as an intergenerational strategy, the company structure can help.

As you and Eric imply, having clarity about the trading status is also key (you won't get IHT Business Relief on an unlisted company trading in land or properties for instance), but there can be advantages in retaining or dispensing cash to shareholders (the kids). And if the managing director (mum or dad?) don't need the excessive income - it can significantly reduce a higher personal tax bill. As always, there's no one size fits all, and many decisions will be finely balanced between the two.

But, for some folk who have a clear view of the strategy, there may be significant benefits by opting for one over the other.

[Ginge R]

At the moment, particularly, diversifying into bricks and mortar makes even more sense for some people - I'm thinking of it. My issue is one of striking the right price at the right time; I've always bought in a crash or a slump. Yeah yeah, never try to time the market, I know, but it's all about the negotiation.

[Ginge R]

New legislation changed things slightly, the other year. Pensions no longer need be passed 'down' in the accepted sense. You can now leave them to any nominated beneficiary, not just someone in your bloodline. This still applies after the age of 75, with the application of tax at the beneficiaries marginal rates - hence, why not nominate numerous beneficiaries to reduce the tax slice? There's zero tax if you are considerate enough to die before aged 75, just make sure the beneficiary takes it within two years.

If you think you're going to die imminently, or within a couple of years, don't bother packing the pension just to get the tax relief and a larger pot to bequeath, HMRC will probably challenge it. Although it does leave the interesting notion of putting money into the pension wrapper without collection of tax relief. I've yet to find a provider who will take contributions 'net' (ie, without tax relief being collected), and although I'm quite certain it would be challenged under avoidance measures, it is an intriguing inheritance tax avoidance measure.

Julian - any thoughts mate.. and do you know anyone?

[Ginge R]

Andrew Bailey (FCA) spoke on this, this afternoon.

http://citywire.co.uk/new-model-adviser/news/fca-c...

You may be subject to a paywall with this one..

http://www.telegraph.co.uk/news/2016/09/16/city-wa...