Money Makeover: 'Should I sell my buy-to-let to pay for retirement?'
Lucy Stevens's rental property provides a nice boost to her income – but is it worth hanging on to?
Lucy Stevens is considering retiring five years early from the police force CREDIT: David Rose
Landlords have had it tough in recent years and many have sold up as tax perks have been steadily eroded.
Casual and “accidental” landlords in particular face diminishing returns after repeated cuts to tax relief on mortgage interest and changes to capital gains tax and stamp duty rules.
One such landlord is Lucy Stevens, 45, from Essex, a police officer with a buy-to-let home in Chelmsford that generates around £700 a month after expenses and is financed by an interest-only mortgage.
Ms Stevens, whose name has been changed, is 15 years away from retirement but has the option of retiring five years early with a reduced pension. With two young daughters and a £340,000 mortgage on her main home, Ms Stevens now faces the same dilemma as many landlords: sell her buy-to-let and pay off the mortgage on her own home, or stick with it and use the income to supplement her pension in retirement.
A self-confessed cautious investor, Ms Stevens holds around £11,000 in a stocks and shares Isa and £4,000 in cash. She expects to receive a £159,000 lump sum from her “defined benefit” police pension when she retires.
She is also a qualified personal trainer and is considering a second career to supplement her retirement income when she eventually hangs up her handcuffs. .
Hayley North, chartered financial planner at Rose & North
Amyr Rocha-Lima, partner at wealth manager Holland Hahn & Wills
It is advantageous to hold different types of asset, such as property, cash savings, pensions and investments, as it means one is not forced to take income from an investment if the timing is not right.
Ms Stevens’s rental income would continue even if she were unable to work and this, along with the life and critical illness policies she has taken out, makes her current situation more secure, protecting her family with income and a lump sum in the worst-case scenario.
The rental property is another asset to pass on to her children and might be useful to generate capital to help her daughters buy their own homes in the future.
Renting out a property can present problems such as finding and managing tenants. That said, Ms Stevens says she can easily find quality tenants and, as the property is managed by an agent, it is unlikely to be causing her undue stress. Although she is happy to work into retirement, this should not be necessary to maintain the income she needs to meet her expenses, whether she retires at 55 or 60.
She should also have excess income she can use towards repaying the buy-to-let mortgage if she wishes. The lump sum she will receive should be almost enough to repay the outstanding mortgage on her main home at age 55 and her income will also be sufficient into retirement to keep up the repayments until the end of the mortgage term.
Paying off her mortgage early might give Ms Stevens peace of mind but it is not essential and will result in a similar longer-term outcome to letting the mortgage run its course. Selling her rental property, however, could have a significant negative impact on her longer-term security and wealth if the sale proceeds were not reinvested.
Ms Stevens would also benefit from diversifying her investment portfolio away from individual shares into a broader range of investment funds and saving excess income into her stocks and shares Isa.
Her portfolio is more risky than average, with a lot invested in emerging market funds and mining companies, whose share prices can swing violently. This is not an issue now as she only invests money she can afford to lose. But it could mean her portfolio is not suitable as she gets closer to retirement and wants to use it to supplement her income.
Investment-based Junior Isas for the children would also be a good way to help provide for her daughters.
Funding retirement is a difficult task, even when one is lucky enough to have a defined benefit pension. As things stand, Ms Stevens’s final salary pension is expected to pay her £21,000 a year.
Her current monthly expenditure is £700. If we assume the same amount will afford her the retirement she wants, she is in a good place. She could quite easily retire at 55 and not have to take a second job to top up her income.
Moreover, Ms Stevens’s pension will increase in-line with inflation, which again should give her some peace of mind that her secure income will broadly retain its purchasing power. It is worth bearing in mind that she is in the Police Pension Scheme, which requires 30 years’ service in order for the member to obtain a maximum pension.
Therefore, if at 55 she has fewer than 30 years’ service and she still wants to retire, there might be a reduction to her pension income. However, based on today’s tax rates, her full pension would pay around £1,700 net income per month – giving her a healthy buffer from which to make an informed decision about her retirement date.
With regards to her buy-to-let property, it does seem to be a good low-maintenance investment. However, as this property is financed with an interest-only mortgage, Ms Stevens will have to find the money to repay this debt at maturity – and it isn’t likely that her savings and investments will grow enough to cover the debt.
Of course, she could sell her buy-to-let to pay off the outstanding sum. However, it she sells it for more than she bought it for, it will be subject to capital gains tax. Therefore, she may want to hold on to it for now and use the surplus income generated from it to invest further into a diversified investment portfolio, shielding it from tax by making use of her annual Isa allowance.
As to whether property is a better investment than the stock market, I can’t see the case where a commodity – rented out to heaven knows whom – would offer either a higher return or lower risk than a diversified portfolio of the largest, best financed, most innovative corporations in the world.
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