The Lemon Fool

Hi

I plan to retire a few years from now and was wondering if I could get some advice from the wise lemons.

I have a buy to let property with some equity. I was planning to use the equity to buy another property but after doing my sums not so sure.

Would I be better taking that equity and putting it into my pension. The plan being to take advantage of the 20% uplift, buy some high yielding ITs and take the yearly dividends.

The property would return £4000 per year profit whereas 4% on high yielding ITs with the extra 20% could generate £3000 per year.

Kind Regards
Trent

Your challenge is that you are not comparing investments with the same risk, so comparing them isn't fair.

There are limits on what you can pay into a pension each year, so you may not be able to pay all the equity in at once.

The tax relief you get is merely delayed tax, as the drawdown from a pension is taxable. (You may get a benefit if you're in a lower tax bracket when you draw).

There are other benefits of course, the 25% tax free lump sum, and potential inheritance tax benefits.

Scott.

swill453 wrote:There are limits on what you can pay into a pension each year, so you may not be able to pay all the equity in at once.

The tax relief you get is merely delayed tax, as the drawdown from a pension is taxable. (You may get a benefit if you're in a lower tax bracket when you draw).

There are other benefits of course, the 25% tax free lump sum, and potential inheritance tax benefits.

Scott.

And it's not as if the income from buy to let was tax free. From an investment point of view there is no hassle with ITs in a SIPP. Furthermore a SIPP is outside of IHT on death. OTOH the OP used the term a 'pension' A pension can take many forms and he could use an ISA as a pension, as I do. I got the impression that he was rather seeking advice on a buy to let as an investment or a number of ITs. he used the expression 'Investment Conundrum' not SIPP conundrum. Perhaps he could clarify.

Dod

Trent wrote:
Would I be better taking that equity and putting it into my pension.

Define "better". Until then I doubt anyone can give you the advice you seek.

Without a further definition of better, or more information on risk appetite, my only observation would be that the alternative to another BTL would be wise if for no other reason than avoiding a concentration of risk.

staffordian wrote: my only observation would be that the alternative to another BTL would be wise if for no other reason than avoiding a concentration of risk.

The other observation being that were it necessary to convert capital into immediate income, selling ITs can be done instantly and to raise as large or small amount as desired. That's not something possible with BTLs.

Thanks for the replies and would like to answer each as best as I can

Both investments would have risks - house prices can fluctuate just as share prices and I know from the boards that there has been plenty of chat about which is the better investment - thats why I have both.

The pension limits would be negated through investing half this tax year and the other half after April. Both the 25% tax free lump sum and the potential inheritance tax benefits are a bonus.

I have factored in the tax implications of both investments when coming to the numbers so ignore any tax issues. I should have mentioned that I have a SIPP and would be adding to this. I also have an ISA, the plan being to put the 25% lump sum into it, adding more high shares and living off the dividends tax free.

By "better" I really meant - was the buy to let £1000 extra a year worth the hassle over the IT purchases. I can see how another BTL would seem a concentration of risk but I would be pretty balanced between BTLs and stock market investment.

Kind Regards
Trent

Apart from any other considerations two fundamental differences between BTL and Equity investment is that BTL is a geared investment (I assume the BTL is partly funded by borrowing as you refer to 'some equity') whereas normally people do not borrow to buy shares. The other difference is the illiquidity of property and that you can't easily sell part of it. That also means CGT can arise which cannot be spread over several tax years, whereas a successful equity investment can be realised to maximise the use of CGT allowances.

They are really so different in nature that it is very hard to compare

I would think that a lot of your question is based around the hassle factor of being a landlord, which varies from minimal to nightmare. Investment is not so different, except you don't get sworn at. March 2020 with a plummeting stock market was pretty nightmare-ish, but 9 months later normality has returned. (to an extent). A bit like an eviction process in terms of stress. I don't do BTL anymore because of the problems with tenants, but freely admit that the stock market investments that replaced it give me stress in a different way. If I were in your position, I would be inclined to diversify, keeping the one property and investing in the stock market for income.