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I have been reading a book called Pension Magic and the more I read the more I like Pensions
I am Landlord who has made a lot of money from BTL over the past 30 years and I have no regrets investing in the BTL world but as we all know the govt is mind set on Taxing our assets as much as they can
So I have looked at a number of other investment routes and I have found some interesting ways of investing cash I would have used for deposits in BTL
I have tried to see comparisons which is difficult to see at times and there are a number of factors which are pluses on one hand and negative on the other
I am not saying the route I have chosen is for every one but If you are a Higher rate tax payer the example below me show you what can be achieved away from BTL
My Starting point is have a cash sum of £24000 which I would have used to buy a 3 bed house with a mortgage the house purchase price would have been around £85000 and a rental income of £595 Pcm
I wont go into how much profit I would have made If the property had been rented but If work on a gross profit of around £3200 per year gross with 100% occupancy No Repairs and no Management fees and If I was doing this via a company and drawing dividends my net income would be around 50% tax leaving net £1600 for my £24000 investment all taxs paid and I have also ignored the fact that on my purchase I would have paid 3% Stamp duty £2550
So lets see how pension Magic works for higher rate tax payers
I invest £24000 gross but my investment attracts 40% Tax relief
so my gross investment is now £33600
I am 59 and I invest for only 7 year till my 66 birthday
Using a 8% growth rate my £24000 net gross £33600 invested would grow to a fund of money £58,700
The fig is more than double my £24000 initial investment and it has grown tax free as say 8% growth per year
So what are my options with the £58,700
First I take 25% of the fund Tax free £14,675
If I take the 25% £14,675 from my initial investment the investment so far has cost me £9325
The retained fund I have left to draw an income after 25% tax free sum is now £49,375
I than opt to take an income of 5% draw down which works out at £2468 per year taxable at 40% which net is £1480
BTL would have given me a net income of £1600
Personal Pension give be £1480 at 5% from the pension fund but I also have the Tax free lump sum of £14675
Of course the pension fund may grow at more than 5% and if it is the funds will grow more until I pass away and then my wife can have the pension fund transferred to her
The question is do I buy further property with the figs I can achieve in Pension
Is BTL worth the effort of management and all the negs of being a Landlord
I fully realise that the bold around us may say BTL has capital growth in coming years and you are right
but the longer you hold a BTL investment repairs ,insurance ,voids ,Non Payers will also happen and that's why I have not looked at capital growth
I feel today its a close run race between Pensions and BTL investment for the higher rate tax payer
and a great number of us may well be higher rate tax payers due to S24
With pension Freedom there are some great tax brakes when estate planning is used to avoid IHT
This is just working out on the back of a fag packet so it may not be 100% correct so please nit pick the figs its the principle that counts
Learn Change and Adapt ?????
This is very useful and thought provoking article - thank you! I am 47, with 3 kids and have been BTL landlord for 14 years.So just like you after been hit by clause 24 thinking and looking for better ways to invest for growth and cash flow thinking of what I can do for my children. Though the subject of capital growth in BTL investment is arguable another point I would like to raise is whether you can do it with OPM like you can do with BTL when investing in pention?And what type of pention finds would you use? Can we drill down a bit on this?Thanks again for a good subject!Alex
I have to say the OPM angel is a strong one or should I say was If you are investing in your own name
You and I have identified the problem Now
You do raise a very interesting point if you are providing for your children
The New Pension rules allow you to pass Pension funds to children keeping I believe the tax free status of the fund and avoiding IHT because when you use a pension fund it
is in trust to start with and you nominate who you want the funds to go to on death and this is paid to them direct without IHT
But You would need to clarify this point with an IFA
I now like a foot in both camps I will keep my BTL one way or another but use my company and my earning's to invest in Pension too
I have spent a long time looking at funds and understanding how they work
My own thoughts are its hard to time a market so I opt to put cash into investments on a monthly basis so if the market falls I am buying at a lower price if it rises its good too of course but over a time period the longer the better money is made
I will list one of my own pension holdings and it will give you a flavour of my investments
The feeling I have picked up at present is the USA has done very well and is now its time to move
The talk is Europe and Japan are the next areas with greatest opportunity so I have moved some funds to reflect this in my selection of fund managers
If you want to start you could use tracker funds which mirror the Index of a country's major shares there cheep and easy to understand
I find the more I learn the more I get interested in the subject but I was the same with BTL started with one and then I learned more and grew from there
I hope this helps you a little
Unicorn UK Income B Inc (GB00B00Z1R87
I am not sure borrowing cash to invest But If you are investing in Pension your
are getting a tax brake of 40% when you invest so possibly it could work
of course the tax charged on borrowings is not allowed against income tax just like S24
I personally will not borrow to invest in Pensions or ISA
This is brilliant! thank you for such a detailed reply. This gives me some material to study too as I feel you are right and this should certainly provide a good way to diversify my investment strategy. The big issue for me has been - is there anything better than BTL? Just like you, I have started changing BTL from private ownership to Ltd. This pension route is also a route to savvy financial planning especially for a family with IHT issues, etc. I will study this material and let you know if I have any more questions. Thank you for what you shared so far! Alex
Best of Luck and thank you for the kind comments
You will note very few landlords support my views on this issue and either say You Cant beat BTL ?????????
But I think the Playing field has changed so much that Landlords need to think outside the BTL Box
Looking good so far, keep up the hard work!
Thanks adam Life is strange at time I became a Landlord because I did not like pensions ??? Now I am using BTL income to pay for my pension ???????
How about ~£4k a year for £1200 investment?
Like the title it is misleading as it does not mention the delay before the first payment In my example the delay is about 35 years as it refers to one of my oldest pensions (which has a guaranteed annuity rate of 10.6% if I take it in 2019). Modern pensions are nice and flexible, but the right older ones pay more. I have two pensions with such GARs, a final salary one with a linked AVC one, and one with a final salary underpin which will apply. Only my most recent defined contribution one was worth converting into a flexible one.
I agree that Pension Magic is good..
I have a Final Salary pension from Local Govt Pension Scheme which was awarded to me at age 40 after an accident at work
They in pension terms are gold dust so yes I can agree some old pension schemes were good
The issue I found when I worked in Local Govt that a great number turned down the opportunity because it was long term planning
But Pensions are Magic if you fully understand them
I see great opportunity with them today but the negative press in the past has made them less desirable
There is a saying what is the difference between and old man and a Gentleman ?? the answer Money ??
Compound interest + time = magic
Add in tax relief (pension or ISA) and luck and the results can be MAGIC
As an example of luck in the 80s I worked for a company that only had a pension scheme for managers. I was earning quite a lot of overtime so I decided to put some of it in a private pension. I happened to go with Norwich Union, now Aviva. I got a GAR without really noticing. Many people went to Equitable Life for such pensions. It sold too many and could not meet its guarantees so folded.
Sadly, I have two pension policies with Equitable Life.
Both are more or less worthless.
Fortunately, I didn't invest too much money in them.
I also have some endowment policies which were supposed to pay off IO mortgages.
Needless to say, they won't come anywhere near to doing that.