Pension (SIPP/SSAS etc) versus BTL

[professor]

Basic facts:
a) Contractor X having >100K in Ltd Co account, earning 'nothing'. This could be transferred to Pension. This will result in corp tax savings as well

b) X also has a re-payment BTL for 72K for the next 14 years. Pays £500 monthly towards this loan from personal a/c.

The question:
is whether to contribute to pension OR pay off the BTL, which is beneficial for wealth transfer to the next generation at a) in 14 years and b) also when X dies. Calculation follows:

1. Paying off BTL:
To pay off BTL, X has to withdraw 72K from the company as dividend. This 72K will suffer 25% tax. Therefore the total money taken from the company a/c will be 96K. Once BTL is paid off, X can save £500 monthly (say in an ISA) that is otherwise paid to BTL.

Taking the interest received is 4% for next 14 years. In 14 years, X will receive 85K+29K = 114K in cash. This is in addition to the property. The cash in hand can be spend without incurring a death tax. No fees need be paid to pension mgnt companies.

When X dies, no IHT applies as the property is below IHT threshold (even if IHT applies this will be same in case (2) below and therefore can be taken out of the equation I guess).

While this option looks reasonable, the tax payments now (24K additional tax on dividend and 20K potential corp tax saving= 44K), looks a bit on the high considering the flexibility available to the Ltd co.

1.b. An interest only BTL is not foreseen as the property is not expected to sky rocket in the next 14 years. Therefore the idea of saving tax by deducting 'interest expense' is not considered important.

2. Paying to Pension:
As the money taken out from the company is 96K in case (1), this amount is taken as the reference amt transferred to pension. This option will enjoy a corp tax saving of 21% (albeit on future earnings). Therefore the total money saved due to pension is 116K. Say the pension returns 4% interest for next 14 years. In 14 years, X will have 116K+87K = 203K in pension cash. Say a total of 15% fee is paid to pension mgnt companies. The pot will still have 173K. This is about 60K more than (1) and therefore impressive. This is in addition to the property which would have paid by itself.

However, when X dies, 55% tax on pension pot kicks in and the wealth transferred will be 173K-95K = 78K. This is 36K less than (1). Not so impressive. Drawing down the pension in order to avoid the 55% death tax will not work as X does not have any other pension, cannot meet the 20K minimum pension and therefore the whole of the money will have to be left over in the pension.

3. There is a third option to sell the BTL property and take the money and put it in long term savings. This will give X cash in 14 years but no property. Due to the initial high cash input, advantage from tax free savings will not be as much as in (1). There fore the total wealth will be less than (1) as the rental income will be higher than interest rates.
4. The fourth option is to close the company and take the money, put it in long term savings/ pay off BTL. This will incur 10% tax plus fees which might be another 5%. The difference is only 10% (i.e. 9.6K now and 17K in 14 years) for all that hassle, in comparison with (1). Therefore not sure that is worth the while.

Most people say investing in pension is the best. But for the given scenario it appears solution (1) i.e. paying off BTL is economically superior. What are we missing?

Are there any better solutions out there? say Trusts etc (X is not interested in gimmicks like 'loan backs' etc though)

[northernladuk]

Buy gold.. (™ Dimprawn)

[Wmnr]

a few points to consider (in no particular order):-

leaving money in the company - this can be invested just like it can outside the company although tax needs to be considered

not an expert on btl - but consider the tax paid on rent received

"When X dies, no IHT applies as the property is below IHT threshold" - presumably you don't own the property you currently live in (or the combined value is below iht threshhold)

what are you going to live off when you retire (presumbly savings+state pension as you have no other pension)?

if you pay 96k directly into pension from comapny then your pension pot will be 96k (not 116k). this will save you the corp tax on the 96k (it is included in the 96k, not over and above)

you need to consider tax, investment growth, risk, asset allocation (not just cash and btl) and the purpose of each investment

[Wmnr]

"Drawing down the pension in order to avoid the 55% death tax will not work as X does not have any other pension, cannot meet the 20K minimum pension and therefore the whole of the money will have to be left over in the pension."

look into capped drawdown or annuities.

[IR35 Avoider]

By 15% "fee" on the pension I think you meant "15% average income tax". It isn't necessary to pay any (significant) fees on a pension, though you can pay a lot if you are careless. From your 200K pension you take 50K tax-free at age 55, or later if your prefer. If you pay basic rate income tax on the rest that will be 20% of 150K = 30K which equates to the 15%/30K you deducted.

This calculation is only an approximation, you can't take the rest all at once, so the overall income and tax will be higher because you take the income over time, during which you continue to earn taxable returns.

Your assumption that you will pay 55% on death assumes you will have taken nothing out as income. (You could (in a probabilistic sense) guarantee to take out 100% as income via an annuity, so you have the option to not pay this tax at all.) Even if you pay it, and have taken the tax-free lump sum but no other income, the income after death tax will be 45%*150K = 67.5K, leaving you with 50K + 67.5K = 117.5K in cash, slightly better off than the non-pension option.

So the worst-case scenario will leave you slightly better of than the first option, to the extent you actually took some income you could be considerably better off.

[SimonMac]

I am doing a mixture of both, I am on an intertest only BTL at the moment (as the property is empty due to renovating), so dividends up to the maximum are withdrawn and a large chuck is taken from the capital each year, the remaining is put in to a SIPP.

It may not be the most cost effective, but its how I feel most comfortable playing it.

[IR35 Avoider]

To give an example of not paying much fees, consider this scenario


1. You open an account with Sippdeal. Cost £0.
2. You invest 116K in Vanguard FTSE 100 tracker ETF. This costs £10 deal fee.
3. The ETF charges 0.1% a year, however you would pay this same fee outside a pension, so not sure it should count. Also this riskier investment should (from current levels) return 7%+inflation, with average luck, so you should be a lot better off. (I calculate the ten year average of profits on FTSE is north of 7%, and profits should keep up with inflation, therefore I assume 7% return plus inflation.)
4. You set up a order to reinvest your dividends, this costs £1.50 brokerage fee each quarter/year (depending how often dividends are paid, haven't checked.)
5. You take tax-free lump sum and income from your pension, a one-off £150+VAT admin charge from Sippdeal. Also £75+VAT annual admin charge until age 75, then £250+VAT after that.

See
SIPP, stocks and shares investment ISA and online share dealing. Investment and retirement opportunities | Sippdeal (cheap place to hold a pension)
www.vanguard.co.uk (managers of worlds cheapest tracker funds, can be held inside Sippdeal account.)

If you want a very safe investment, one that returns 4% - inflation instead of 7% + inflation, look at the other Vanguard funds for something more suitable.

[DonkeyRhubarb]

To give an example of not paying much fees, consider this scenario


1. You open an account with Sippdeal. Cost £0.
2. You invest 116K in Vanguard FTSE 100 tracker ETF. This costs £10 deal fee.
3. The ETF charges 0.1% a year, however you would pay this same fee outside a pension, so not sure it should count. Also this riskier investment should (from current levels) return 7%+inflation, with average luck, so you should be a lot better off. (I calculate the ten year average of profits on FTSE is north of 7%, and profits should keep up with inflation, therefore I assume 7% return plus inflation.)
4. You set up a order to reinvest your dividends, this costs £1.50 brokerage fee each quarter/year (depending how often dividends are paid, haven't checked.)
5. You take tax-free lump sum and income from your pension, a one-off £150+VAT admin charge from Sippdeal. Also £75+VAT annual admin charge until age 75, then £250+VAT after that.

See
SIPP, stocks and shares investment ISA and online share dealing. Investment and retirement opportunities | Sippdeal (cheap place to hold a pension)
www.vanguard.co.uk (managers of worlds cheapest tracker funds, can be held inside Sippdeal account.)

If you want a very safe investment, one that returns 4% - inflation instead of 7% + inflation, look at the other Vanguard funds for something more suitable.

I'm with SIPPdeal and can highly recommend them.

As for investments, my preference is Gold/Silver (ETFs) but DYOR.

[professor]

..sippdeal... vanguard ..held inside Sippdeal account...

Thank you for the references, those providers indeed seem very economical. They will work if the returns are say 7%. However rental property is inflation protected with stable returns. Therefore I still don't see the reason for starting a SIPP/SSAS.
Having said that I kind of feel attracted to starting a SIPP just for the heck of it. If I start one now, perhaps I can make use of it years down the line e.g. the clause '40K allowance for last three years' if I see any use for pension at the time. Say I transfer 1K per year or say £50 per month regularly to Sippdeal and just hold it in cash, I take that there will be no charges for this operation and there is no 'non-activity charge' involved. Is my understanding correct? What happens once I get to pension age, will I be charged then to withdraw the monies?

[elster]

little bit confused here guys, probably need to read up alot more on SIPPS
if i am running my own contracting company and intend to use my 50k allowance to pay into a pension to help reduce down my corp tax bill (i dont need the money as divvies this year) do i still need to set up a PAYE scheme via the company (at the moment I dont have one for myself - as I dont pay any salary) ... how can I transfer funds into the SIPP .. is this allowable directly from the business if so is this via PAYE?

thanks