Official. Property is better for retirement than a pension.
Discussion
Countdown said:
To be fair, if and when you pop your clogs how much of your pension will be available to your wife, and then after she passes on, your kids?
There are pros and cons for all methods of investment. Nothing wrong with BTL as long as you understand these.
Don't get me wrong I have nothing against BTLs. I have a problem with people assuming this is the answer to any question of finances. A lot of BTLers have finances built on sand: Interest only; highly geared; low interest rates; no provision for any hiccup. Yet they feel they are doing well. They don't really know what they are doing, it's luck, not skill & yet they are financial geniuses.The market will turn, people will get burnt badly. There are pros and cons for all methods of investment. Nothing wrong with BTL as long as you understand these.
As part of a balanced portfolio of investment vehicles it has it's place. I have 2 BTLs. I have 23 yrs worth of final salary pension accrual, I have another DC scheme with a chunk in. I have an ISA with another chunk in. Hell I even have a GT3
. I'd have fine wines but that would all get drunk! The BTls are only part of a total package, each component of which has different tax advantages on drawing, different risk profiles & because of my current tax status different benfits today. Edited by GT03ROB on Sunday 28th August 14:38
Edited by GT03ROB on Sunday 28th August 14:38
GT03ROB said:
Don't get me wrong I have nothing against BTLs. I have a problem with people assuming this is the answer to any question of finances. A lot of BTLers have finances built on sand: Interest only; highly geared; low interest rates; no provision for any hiccup. Yet they feel they are doing well. They don't really know what they are doing, it's luck, not skill & yet they are financial geniuses.The market will turn, people will get burnt badly.
As part of a balanced portfolio of investment vehicles it has it's place. I have 2. I have 23 yrs worth of final salary pension accrual, I have another DC scheme with a chunk in. I have an ISA with another chunk in. Hell I even have a GT3. I'd have fine wines but that would all get drunk! The BTls are only part of a total package, each component of which has different tax advantages on drawing, different risk profiles & because of my current tax status different benfits today.
An excellent summary of my views too!As part of a balanced portfolio of investment vehicles it has it's place. I have 2. I have 23 yrs worth of final salary pension accrual, I have another DC scheme with a chunk in. I have an ISA with another chunk in. Hell I even have a GT3
. I'd have fine wines but that would all get drunk! The BTls are only part of a total package, each component of which has different tax advantages on drawing, different risk profiles & because of my current tax status different benfits today. 
ellroy said:
Countdown said:
To be fair, if and when you pop your clogs how much of your pension will be available to your wife, and then after she passes on, your kids?
There are pros and cons for all methods of investment. Nothing wrong with BTL as long as you understand these.
Assuming IHT applies you'd be significantly better off with the pension.There are pros and cons for all methods of investment. Nothing wrong with BTL as long as you understand these.
I'm sure there's a flaw in my plan somewhere....
Countdown said:
Hypothetically - sell the BTLs to the kids - they buy you out by repaying you £500pcm per property. It saves them getting a mortgage and corresponding interest. It saves you having to pay IHT, Income tax, or CGT. It gives you and your wife a reasonable retirement income.
I'm sure there's a flaw in my plan somewhere....
If you've sold the BTL, why wouldn't CGT be due?I'm sure there's a flaw in my plan somewhere....
sidicks said:
GT03ROB said:
Don't get me wrong I have nothing against BTLs. I have a problem with people assuming this is the answer to any question of finances. A lot of BTLers have finances built on sand: Interest only; highly geared; low interest rates; no provision for any hiccup. Yet they feel they are doing well. They don't really know what they are doing, it's luck, not skill & yet they are financial geniuses.The market will turn, people will get burnt badly.
As part of a balanced portfolio of investment vehicles it has it's place. I have 2. I have 23 yrs worth of final salary pension accrual, I have another DC scheme with a chunk in. I have an ISA with another chunk in. Hell I even have a GT3. I'd have fine wines but that would all get drunk! The BTls are only part of a total package, each component of which has different tax advantages on drawing, different risk profiles & because of my current tax status different benfits today.
An excellent summary of my views too!As part of a balanced portfolio of investment vehicles it has it's place. I have 2. I have 23 yrs worth of final salary pension accrual, I have another DC scheme with a chunk in. I have an ISA with another chunk in. Hell I even have a GT3
. I'd have fine wines but that would all get drunk! The BTls are only part of a total package, each component of which has different tax advantages on drawing, different risk profiles & because of my current tax status different benfits today. 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!
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!
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!
I haven;t checked the numbers, but that's an interesting comparison, thanks for this.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!
I think my two comments would be:
1) for the pension product, 6% after tax would be an aggressive assumption given where interest rates are currently. Although not optimistic if the economy returns to what was considered 'normal' 8+ years ago.
2) for the BTL approach, I think many people would argue that rent only covering interest and maintenance (i.e. no additional income left over after expenses) might be considered pessimistic.
This might close the gap between the two and potentially push the BTL ahead.
What is clear is that things aren't clear cut, there are advantages and disadvantages of different approaches and that diversification of risk is the key.
GT03ROB said:
Jockman said:
GT03ROB said:
Don't forget that scam where my employer throws money at me & doubles whatever I put in then adds a bit more for luck....
Lol. Hope you're enjoying the Kuwati beaches Rob !!
Shangrila?? It better be good.
Countdown said:
Hypothetically - sell the BTLs to the kids - they buy you out by repaying you £500pcm per property. It saves them getting a mortgage and corresponding interest. It saves you having to pay IHT, Income tax, or CGT. It gives you and your wife a reasonable retirement income.
I'm sure there's a flaw in my plan somewhere....
Stamp duty? There will be a change of ownership? Would HMRC not tax the parents on the market rent rather than the rent received?I'm sure there's a flaw in my plan somewhere....
IHT and income tax would only be avoided with certain assumptions fulfilled.
sidicks said:
I haven;t checked the numbers, but that's an interesting comparison, thanks for this.
I think my two comments would be:
1) for the pension product, 6% after tax would be an aggressive assumption given where interest rates are currently. Although not optimistic if the economy returns to what was considered 'normal' 8+ years ago.
2) for the BTL approach, I think many people would argue that rent only covering interest and maintenance (i.e. no additional income left over after expenses) might be considered pessimistic.
This might close the gap between the two and potentially push the BTL ahead.
What is clear is that things aren't clear cut, there are advantages and disadvantages of different approaches and that diversification of risk is the key.
Cheers. I ran the numbers on a spreadsheet and double checked them on an online calculator, so believe they are right.I think my two comments would be:
1) for the pension product, 6% after tax would be an aggressive assumption given where interest rates are currently. Although not optimistic if the economy returns to what was considered 'normal' 8+ years ago.
2) for the BTL approach, I think many people would argue that rent only covering interest and maintenance (i.e. no additional income left over after expenses) might be considered pessimistic.
This might close the gap between the two and potentially push the BTL ahead.
What is clear is that things aren't clear cut, there are advantages and disadvantages of different approaches and that diversification of risk is the key.
For the pension it is obviously a gross return as there is no tax (well, there is the lack of dividend tax credit - thanks Mr Brown) and I was assuming a balanced equity portfolio (with some bond exposure during the later years). Nothing to do with interest rates on cash deposits.
Things certainly are not clear cut but the gearing of a BTL seems to be outdone by the pension tax relief (for higher rate taxpayers at least). For basic rate taxpayers I imagine it is very close with BTL probably winning, but as been said already - you can't sell the bathroom if you need to access some cash!
Like others here, a have a mixture of different assets - direct share holdings/a global DFM portfolio invested in low cost ETF's/residential property/commercial property/land/art - and used to try and get whatever was permissible into my SIPP for the tax advantages. The Lifetime Allowance has buggered that for me though!
Jockman said:
Wife is about to fly to Dubai so she can go to Oman with the Emirates cabin crew lot.
Shangrila?? It better be good.
Not been to the Shangrila Dubai, but used to go the Shangrila Abu Dhabi from desert of Habshan for a proper feed & beers midweek. Food excellent & it looked a good place.Shangrila?? It better be good.
JulianPH said:
Cheers. I ran the numbers on a spreadsheet and double checked them on an online calculator, so believe they are right.
For the pension it is obviously a gross return as there is no tax (well, there is the lack of dividend tax credit - thanks Mr Brown) and I was assuming a balanced equity portfolio (with some bond exposure during the later years). Nothing to do with interest rates on cash deposits.
Sorry, you misunderstand my point - with long-dated bond returns at 3%, a 300bps risk premium (400-450bps after management fees?) feels high to me, particularly if you are proposing (sensibly) to reduce the risk in the portfolio as retirement approaches.For the pension it is obviously a gross return as there is no tax (well, there is the lack of dividend tax credit - thanks Mr Brown) and I was assuming a balanced equity portfolio (with some bond exposure during the later years). Nothing to do with interest rates on cash deposits.
JulianPH said:
Things certainly are not clear cut but the gearing of a BTL seems to be outdone by the pension tax relief (for higher rate taxpayers at least). For basic rate taxpayers I imagine it is very close with BTL probably winning, but as been said already - you can't sell the bathroom if you need to access some cash!
Like others here, a have a mixture of different assets - direct share holdings/a global DFM portfolio invested in low cost ETF's/residential property/commercial property/land/art - and used to try and get whatever was permissible into my SIPP for the tax advantages. The Lifetime Allowance has buggered that for me though!
Yes, the lifetime allowance that discourages higher earning private sector employees to save via a pension, compared to public sector ones!!Like others here, a have a mixture of different assets - direct share holdings/a global DFM portfolio invested in low cost ETF's/residential property/commercial property/land/art - and used to try and get whatever was permissible into my SIPP for the tax advantages. The Lifetime Allowance has buggered that for me though!
GT03ROB said:
Jockman said:
Wife is about to fly to Dubai so she can go to Oman with the Emirates cabin crew lot.
Shangrila?? It better be good.
Not been to the Shangrila Dubai, but used to go the Shangrila Abu Dhabi from desert of Habshan for a proper feed & beers midweek. Food excellent & it looked a good place.Shangrila?? It better be good.
Jockman said:
Stamp duty? There will be a change of ownership? Would HMRC not tax the parents on the market rent rather than the rent received?
IHT and income tax would only be avoided with certain assumptions fulfilled.
You are right Phil. If there is a change of ownership then the costs are all the same.IHT and income tax would only be avoided with certain assumptions fulfilled.
I believe what is being suggested though is in effect a partial sale of equity over a long period of time. So if the property was worth, for example (and a round number), £200k, then the parents could sell 10% a year over 10 years well within each other's annual CGT allowance (or 5% a year for 20 years within one person's allowance).
I don't know how Stamp Duty would be calculated though as each purchase/sale would not be eligible for SD under the current residential property rules (unless HMRC take the view that the whole property is being sold in increments after the first instalment is made - which may be likely). There might be a loophole here though!
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. 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!
sidicks said:
Sorry, you misunderstand my point - with long-dated bond returns at 3%, a 300bps risk premium (400-450bps after management fees?) feels high to me, particularly if you are proposing (sensibly) to reduce the risk in the portfolio as retirement approaches.
Sorry, I did misunderstand. I was trying to show like for like returns to examine the theory of pension tax treatment vs BTL gearing. I have been getting a 6% annual return after fees from my equity (and creeping bond) portfolio for a long time so applied that. I have also found the rental income only covers overhead and capital growth is the main factor with BTL. Others will have different experiences, I am sure.sidicks said:
Yes, the lifetime allowance that discourages higher earning private sector employees to save via a pension, compared to public sector ones!!
The biggest joke, right up there with employers NI (a tax on job creation). I can understand the annual allowance, but penalising someone for successful investment returns is simply wrong. Sheer envy put in place by people who have completely different rules for their pensions...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.
JulianPH said:
I don't know how Stamp Duty would be calculated though as each purchase/sale would not be eligible for SD under the current residential property rules (unless HMRC take the view that the whole property is being sold in increments after the first instalment is made - which may be likely). There might be a loophole here though!
I'm not sure either matey. Seems a bit long winded. Why not just gift it?Gassing Station | Finance | Top of Page | What's New | My Stuff