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It's my first question on here so please go easy on me.

I am just starting with the forum and building up my wealth so apologies if the question has too many treats.

I am 34, single, no commitments, no debts, no properties, and a chunk of money sitting on my business bank account doing nothing. (I am a director of a Ltd company)

I've read few books related to financing and investing so far (A Random Walk Down Wall Street, The Little Book of Common Sense Investing, The Total Money Makeover, The Intelligent Investor, The Richest Man in Babilon, and two Kyiosaky books)

Knowing the Brexit is coming (not sure what the output will be but I am fairly confident I'm able to (and want) to work in the UK for the next 3-4 years)

Having said that, what would be the best for me to do with my savings?

  1. Withdraw all at once, get taxed 32.5% on it and put all into 25% deposit for buy-to-let property in London (this would burn all my money)
  2. Move half of it to a pension plan (index funds) and get 20% corporation tax relief on it, and withdrawal the other half.
    1. From the pension plan, I can withdrawal the funds when I am 55 (as a newbie I am not sure if I am comfortable with that)
    2. The other half would be taxed 32.5% but because I am getting the relief on the corporation tax, it balances the cost of it.
    3. I would invest the withdrawn (in the above subpoint 2) funds into index funds.
    4. Repeat subpoints 1-3 until I have enough for the 25% property deposit and at that point invest in buy-to-let property in London.
  3. Another variant would be to withdrawal the money (either using method 1 or 2) and buy 2 properties in my home country (Eastern Europe) all paid at once (no mortgages) and rent them. The downside is that the population in the country is dropping thus the properties prices are falling a bit too, so not sure if it is a good idea.
  4. Any other valuable suggestions?

I have not invested in anything yet in my life, I have some extra funds on my personal savings account and I have already chosen index funds I want to invest in (or keep it as an emergency fund eventually).

Thank you very much for reading the question, and hope I'll be contributing to the money.stackexchange on a regular basis :)

Any help greatly appreciated.

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Thanks for your question.

Of the top of my head, I would suggest that you look ate the different options on a spreadsheet and for each one look at the costs, expected gain and risks.

In general, you can gain some immediate advantages by taking advantage of the things that the tax rules give you:

  • Purchasing your own home. That may save you money from rent in the future and give you exposure to appreciation in the London property market. However, it is not like the US where you can deduct your mortgage interest against taxes, but interest rates tend to be more competitive.

  • Putting money into some kind of pension plan. The goal is that by the time you retire (55 to 65 or perhaps by the time you retire, 75 or 85!) you have enough income from the pension to support yourself. By paying less tax to contribute, and generally avoiding capital gains you can end up with a lot more at the end, but you need to be careful to keep the right balance if you might need money in the future.

    Many argue that the sooner you start contributing to a pension, the better, as it is much harder to build up a sizeable portfolio that can support you later on.

Rainy Days

Look at the negative side. What happens if you had an accident, got incapacitated and couldn't work. Would National Insurance pay enough to let you get by? If the market suddenly dried up and you couldn't find work for a year, would you be able to survive without going back to Eastern Europe? Many people don't consider these things, so when something happens, they are caught out. For the most part the UK has a good system, but there can be gaps which can easily be filled in with supplemental disability insurance etc.

Diversification

Secondly, the only 'free lunch' that you get in investing is through diversification. While index funds are themselves diversified they are still only one sector of the market. There are other sectors and ways to invest money (e.g. individual stocks, fixed income (though interest rates are low right now), real-estate). The mix will depend on how much time you have to spend on keeping up with that asset class and how soundly you want to sleep at night.

Fees

The quiet little leach within your financial portfolio is fees. Even small fees add up to a lot over time. You should find them and add them up - you might be surprised!

Financial Advisors

In the UK, you should be able to find an independent financial advisor who is not making commissions from selling you products you don't need. Given the amounts of money you may make or lose in the long run, it might be a good investment of a few hundred pounds. Many will be quite conservative, but hear them out. They should be able to help you with some projections of different approaches.

  • 1
    Thank you for the answer, renting vs buying is definitely something worth considering amongst the options I provided in the question. – matewilk Dec 10 '17 at 9:44
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    As of a financial advisor, I came across one so far recommended by an accountancy I work with, and the advisor was definitely trying to skin me off trying to talk me into a pension plan with a 3% charge for him. So it repealed me effectively. – matewilk Dec 10 '17 at 9:53
  • Yes - there are plenty of 'financial advisors'. Independent financial advisors should avoid these kinds of conflicts of interest... – xirt Dec 10 '17 at 14:01
  • @matewilk - Good - I think you should aim for 0.5-1% for pension charges. – nsandersen Dec 11 '17 at 10:03
  • @nsandersen actually I am looking to invest in pension myself using SIPP and cavendishonline (not sure if you have heard of them, but a lot of people recommend them) and using index funds to invest my pension money in, but this is probably a topic for a separate question – matewilk Dec 11 '17 at 11:02
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If you are unsure how long you will eventually stay in the UK and consider leaving the country at some point in the future (e.g. return to your home country in 3/5 years), one of the main factors to consider when making investment decisions is flexibility. How easy would it be to liquidate the investment or move it out of the UK in the future when leaving?

This would be an argument against buy to let or a pension.

In case of a pension plan, it is possible to transfer a pension to another country, but there are costs and paperwork involved (advisers love to do pension transfers, because the fees are very attractive - to them).

In case of property, you can of course always sell it when leaving the UK, but there will be costs and work involved. Question is if the money you earn on it in the meantime (relative to other investment alternatives) would be high enough to compensate for this cost. There will also be a lot of work running the buy to let, probably more than it would seem before you start. Question is whether the time spent on managing the buy to let wouldn't earn you more when spent working on your core IT business.

Make sure you read and understand these before starting a buy to let:

Renting out your property (England and Wales)

Income Tax when you let property: work out your rental income

The policy of the current UK Government (since Cameron/Osborne) has been more taxes and more restrictions on buy to let, in order to ease the UK's housing shortage.

I'm not saying buy to let is a bad investment, but make sure you know all the important things before committing your money.

If you have a big chunk of cash sitting on your business bank account, the following are the first things that come to mind:

1) Make sure you maximise the various allowances to get the money from your ltd company to your personal account. Pay yourself a salary at least up to the personal allowance (£11,500 for the tax year 2017/18). This also has the benefit that the related National Insurance Contributions make you eligible for UK State Pension, which may not be enough to live off in retirement, but if you are from Eastern Europe (like me), it is probably much higher than the State Pension in your home country.

2) Pay yourself dividends every year at least up to the dividend allowance (£5,000 per tax year). You may be already doing these, but make sure you maximise the allowances every tax year.

3) Claim home office expenses to reduce taxable profit for your ltd company.

See HMRC overview of all rates and allowances.

4) Regarding saving or investing your personal money (once they get out of the ltd company), have a look at ISAs. These allow you to put money into various kinds of investments (savings account, bonds, stocks, ETFs, mutual funds) and you don't pay any tax on the capital gains, dividends or interest. There are rules to follow to get and keep the tax-free status. There is again an annual ISA allowance, which you should use to the maximum every tax year. In 2017/18 you can invest £20,000 like this. See more details on ISAs by HMRC. It is after tax money in, tax-free money out. The advantages of ISA over pension is you can withdraw the money at any time, e.g. when buying property or when leaving the UK, no need to wait until retirement age (it will be tax-free, but withdrawing makes any reinvestments lose the tax-free status).

Disclaimer: I'm not a tax adviser and these things change frequently. But I am familiar with your situation from personal experience.

  • Is it necessary to transfer a pension to another country if you leave? Obviously your pension doesn't increase as much if you are no longer contributing, but the funds can still remain invested and you can still draw on them when you retire if you're in another country at retirement. – xirt Dec 10 '17 at 13:59
  • yes @xirt, I have the exact same thought, I guess it wouldn't make a lot of sense to transfer pension funds when moving countries if they can grow in the UK anyway, and just get them when the time comes by. – matewilk Dec 10 '17 at 14:27
  • Not technically necessary, but depends on how your future country of residence will treat income from a UK pension. This is obviously a very complex topic, plus there is the added uncertainty regarding UK's future relationship with the EU. Good source: pensionsadvisoryservice.org.uk/about-pensions/… – Petr H Dec 10 '17 at 14:38
  • Yes I used to live in London, and still have my pension there ticking away. I could have transferred it out to a SEP and tried to merge it with my (US) 401(k) but that is quite involved but the benefits of doing so are unclear. – xirt Dec 10 '17 at 14:40

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