by Ian Cook, chartered financial planner at Quilter
Miss Nichol is in good shape. Almost all of their income needs are met from secure pensions from the age of 66. So, with the property giving him excess income after state retirement age, his savings are only supposed to make up for the shortfall.
Assuming, based on his savings and what he’s accumulated over the next two years, that his life expectancy is 86 and that income increases with inflation, he’ll have enough of it.
This excludes the need to sell the property, but we must not forget that if it sells, the income will be lost. When he retires at age 57, he can be tax-efficient by withdrawing an amount equal to £12,570 personal allowance from his pension, but there will be tax due if he retains the rental property.
Otherwise, he can get tax-free money from Isa or Premium Bonds. He must also keep cash for known expenses such as emergencies and bungalow renovations.
When he turns 65, he must close his pension withdrawals in favor of other cash savings, since his personal allowance will be used by the last salary pensioner. At this point, I hope he’s decided what he wants to do with the money and other assets left in his pension when he dies.
I don’t think it’s worth taking an annuity as he won’t get a meaningful rate at age 57 and pay much more income tax than he needs at 65 and 66 when other pensions are paid.
An alternative would be a temporary annuity paying a fixed income level from age 57 until secured income begins at age 65.
It is important to understand one’s need to take risks in relation to their current investments. Ms. Nichol says she’s open to investing in risky stocks and stocks, but she doesn’t need to.
Cash for urgent needs should be kept in secure assets that retain its value; this includes part of employer and personal pensions and part of Isa.
The rest should be invested from a “mid-term” perspective: a mix of different assets, including “alternatives” like stocks, bonds, and property. Because of the size of their savings, I would choose an actively managed fund, perhaps with an advisor to help manage it.
If he likes this option he should use the Legal & General Multi-Index 7 fund. This uses audience funds, but a manager monitors the asset allocation. It has a more fluid approach and is more responsive to market changes than the popular Vanguard LifeStrategy multi-asset series.
Avinav Nigam, co-founder of Immo
The current gross return on Ms. Nichol’s rental property is around 3 percent, which is not the best. However, this is based on a price of £450,000, whereas the return can also be calculated based on the purchase price, and £180,000 gives it a 7 percent return, which isn’t too bad.
A better way to decide if it’s worth it is to make sure it’s running at a gross throughput of 4pc to 6pc based on current value. This means that Ms Nichol must increase the rent to between £18,000 and £27,000 from her current gross income of £16,250.
Might be worth renovating to increase the rent. If it cannot raise the rent significantly from its current level, it should consider selling it. There is still much to consider. Selling now may not give Miss Nichol the price she wants. It may be useful to wait until June 2023, when interest rate increases may stop.
At the same time, average home prices have dropped 5 percent over the past four months and are expected to fall further. In addition, the tax-free capital gains allowance will fall from £12,300 to £6,000 in April. Therefore, he must now decide whether to sell at a lower price with a higher allowance, or to wait and pay more tax in hopes of a better price.
If it can sell for more than £465,000 (average of £450,000 to £480,000), it should do so. However, it is worth remembering that many deals in the later stages are currently unsuccessful.
If he gets an offer of just £6,300 (the difference between tax breaks) below his expectations, he’d be better off waiting at least until next year (or better, a few years) to sell; obtaining a higher rent.
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