Should my wife start contributing to a pension?

MikeFloutier

I am 61 and my wife is 56. We have both been self-employed Chauffeurs for many years and we are retiring in a few months.

My pension arrangements are straight-forward but I'd like a little help thinking about my wife's situation.

She has no pension at all at present. In the last 5 years she has been earning but her earnings have been below her tax allowance.

We are about to sell our house in the London area and move to Cornwall repaying our mortgage and releasing some equity. It will be some years before my old Barclays FS scheme pension steps up to a reasonable amount and even longer before my State Pension kicks in.

I am planning to use some of our realised equity to fund this temporary income gap over the next 3 - 4 years.

Since my wife will probably have no income when we retire (apart from lay preaching where she does receive gift offerings) I'm wondering if it would be effective for her to contribute some of our equity to a pension scheme and draw it down at a level within her tax allowance threshold thereby benefitting from the tax relief on her contributions.

Does this make sense?

Thanks for any help/suggestions.

jem16

MikeFloutier wrote: »

In the last 5 years she has been earning but her earnings have been below her tax allowance.

She would still have got tax relief on up to 100% of her earnings.

I'm wondering if it would be effective for her to contribute some of our equity to a pension scheme and draw it down at a level within her tax allowance threshold thereby benefitting from the tax relief on her contributions.

It would certainly make sense as she would get 20% tax relief going in and pay none coming out.

What would her earnings be for this tax year?

For future tax years she would be limited to a contribution of £3600 gross ( £ 2880 net ) if she has no earnings.

MikeFloutier

Thanks Jem,

Her income for this year will be around £5000 which is fairly typical for the last 5 years.

How far back can she base contributions on (and still qualify for relief)?

jem16

MikeFloutier wrote: »

How far back can she base contributions on (and still qualify for relief)?

Just this tax year I'm afraid.

With earnings of £5k over the last 5 years she would have been able to contribute £4k and get £1k tax relief each of those 5 years even though she was a non-taxpayer. Unfortunately that opportunity is lost now as she's limited to 100% of her earnings in the tax year the contribution is made.

MikeFloutier

Ok thanks Jem, so a couple of remaining practical issues:

1. Will it be ok to contribute the maximum over the 3 - 4 years (ie £5k this year then £3,600 for the next 3 years AND draw out during each of those years (within her allowance)? OR do contributions have to stop once drawdown begins?

2. Also, what's the best way to keep the costs down, bearing in mind that it will be a cash pot?

xylophone

1. Will it be ok to contribute the maximum over the 3 - 4 years (ie £5k this year then £3,600 for the next 3 years AND draw out during each of those years (within her allowance)? OR do contributions have to stop once drawdown begins?

2. Also, what's the best way to keep the costs down, bearing in mind that it will be a cash pot?

I'd suggest that your wife contacts HL - I think you've used them in the past?

She could open a SIPP with HL and could keep the money in cash ( no charge for this) - she needs not to close the accountin the first year to avoid closure fee!

http://www.hl.co.uk/pensions/sipp/charges-and-interest-rates

http://www.hl.co.uk/pensions/drawdown/faqs

If she has earned £5000 in this tax year she could pay in £4000 and the provider would reclaim £1000 in tax relief - http://www.accountingweb.co.uk/anyanswers/tax-relief-personal-pension-contributions-low-earner

She would contribute £2880 in non earning years and the provider would claim tax relief of £720.

xylophone

Re new state pension https://www.gov.uk/new-state-pension/overview

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447195/new-state-pension--effect-of-being-contracted-out.pdf

You can each obtain a statement to show your foundation amount under the new rules.

https://www.gov.uk/state-pension-statement

With regard to your Barclays pension, don't forget that after you reach GMP age (65), they are under no obligation to provide any increase on that part of your pension that relates to pre 88 GMP or anything above 3% on the part that relates to post 88 GMP.

The index linking on GMP that applied through state pension will no longer operate in the new state pension arrangement.

MikeFloutier

Many thanks Xylophone, what an amazing memory!

Still the King of the Links - so helpful.

Thanks again!

jamesd

MikeFloutier wrote: »

1. Will it be ok to contribute the maximum over the 3 - 4 years (ie £5k this year then £3,600 for the next 3 years AND draw out during each of those years (within her allowance)? OR do contributions have to stop once drawdown begins?

Yes, that's entirely fine. You can both do this every year until you reach your 75th birthday.

The first time a person takes out more than the 25% tax free lump sum their money purchase annual allowance for pension contributions is reduced from £40,000 to £10,000 a year but that's irrelevant for someone who can't pay in more than £10,000 anyway, it's just a limit for those earning more than £40,000 a year.

MikeFloutier wrote: »

2. Also, what's the best way to keep the costs down, bearing in mind that it will be a cash pot?

The Virgin pension has no charge for paying in or taking out the whole pot as a tax free lump sum. She really could pay in £4,000 this year and have tax relief added to get to her gross £5,000 of income, then a few weeks later take out all £5,000. And again in future years paying in £2880 net and taking out the £3,600 gross that ends up there after tax relief. The limit for relief is the grossed up income after the tax relief so if she's making £5,000 this year she wouldn't be entitled to pay in the whole £5,000, just the amount that will become £5,000 after 20% tax relief is added.

Hargreaves Lansdown have in their terms and conditions a clause that lets them close your account and charge you the early closure fee if the balance drops below £1,000 and it's not in whatever they define as drawdown. Best to stick to Virgin if the plan is to put the money in and take it out again as soon as you get the tax relief. And given her income being only £5,000 she won't pay income tax on the taxable 75% of the pension pot so there's no reason not to do it that way. She could, of course, leave more than £1,000 in the HL account if there was some reason for her to want to leave the money in cash rather than in the FTSE All Share Index tracker that the Virgin pension uses. Nothing wrong with doing that if it makes sense for her situation.

It's in clause D8: "If at any time you take a payment directly from a SIPP not in Drawdown which means less than £1000 will remain in the Account, we will close the SIPP Account and pay out the full amount, less any applicable taxes and closure fees".

However, it is of note that the clause specifies "not in drawdown" and it's unclear how they might define drawdown. It's possible that just arranging to take the remaining £1,000 as regular income would circumvent the closure and charging. It might be as simple as completing their drawdown forms.

If there is a desire to leave money invested the HL pension and its drawdown charges and range of investments are very good compared to most others for the sort of amounts being discussed here.

MikeFloutier

Ok, this may be a silly question but:

Can she contribute her maximum (usually £2,880) on 5 April and then draw it out on 6 April?

Seems too easy.

Thanks James!

jamesd

I'm not sure when Virgin credits the tax relief but in theory yes. HMRC pays the relief late in the month after the month of contribution. Some places credit the account without waiting, others like HL wait until they get the money from HMRC.