I am a non-earner. Is it even worth it for me to take out a SIPP?

eightbo

I'd like to start investing a small % of my money each year. I was pointed to some content online (by Author & ex-Hedge fund manager Lars Kroijer) which suggests a combination of low-risk bonds and investing in global equity market index trackers makes for a simple but effective portfolio.

However, I have 2 concerns.
1) My income is not taxable, meaning I'm a non-earner who can only contribute £2,880/yr (£3,600) which is too low in terms of % versus my yearly income.
2) If I've understood pensions correctly, I won't be able to access the funds until I'm around 60 - Absolute nightmare. I'm all for compound returns but if I can't access them to help buy a property outright when I want to, what's the point?

Now, I can see it would be worthwhile to open a SIPP if I was on a standard, taxable salary because of the 20%/40% which gets added, but assuming my situation does not change, should I either:

A) Just invest into a global index tracker(s) privately.
Open a SIPP and put in the max amount each year and add to my position further privately.
C) Open only the SIPP and deposit the maximum amount, and invest further elsewhere (??)
D) None of the above -- Please explain.

This is all very confusing to me so apologies if these are not even sensible options -- first time exploring pensions/stocks. Cheers.

enthusiasticsaver

Certainly £3600 is not a huge amount but it will all help to grow the pension pot and £720 of free money. You can access a SIPP from 55.

I am confused about your goals. Are you saving for retirement or to buy a property?

How old are you, do you have any other savings and do you have sufficient to support yourself. Investing is a medium to long term savings plan. If you want to buy a property in the next few years then maybe high interest current accounts and help to buy isa would be better.

AnotherJoe

You need to decide if you are saving for a house [STRIKE]deposit[/STRIKE] (in which case open a LISA or HTB ISA) or a Pension.

Which is it?

[STRIKE]Though if you are saving to buy a property, then generally, if your income isn't taxable, a mortgage will be problematic, to say the least.[/STRIKE] EDIT; Oops I see you said it was an outright purchase. So, a SIPP would be wholly innapropriate for this purpose. A LISA would seem to be better but if it's within a few years, investments would be a high risk strategy and few would say that's a good idea irrespective where they are.

NotSkint

eightbo wrote: »

However, I have 2 concerns.
1) My income is not taxable, meaning I'm a non-earner who can only contribute £2,880/yr (£3,600) which is too low in terms of % versus my yearly income.
2) If I've understood pensions correctly, I won't be able to access the funds until I'm around 60 - Absolute nightmare. I'm all for compound returns but if I can't access them to help buy a property outright when I want to, what's the point?

1) Can you clarify; you have an income which is not taxable but you are a non-earner? What is the source of your income as that may raise the contribution limit. i.e. a non tax payer can still contribute up to their yearly income and have tax relief added, even though they don't pay any tax. The income has to be "relevant earnings"
2) A pension is for retirement, which is why there are rules upon the age of access! It isn't designed as a savings vehicle for property. You should be looking at S&S ISA or LISA; but again you should only be investing if your timescale is long enough, 10 years or more, investments can and do go down as well as up!

Aretnap

eightbo wrote: »

However, I have 2 concerns.
1) My income is not taxable, meaning I'm a non-earner who can only contribute £2,880/yr (£3,600) which is too low in terms of % versus my yearly income.

You still get tax relief (ie 25% added) even if you're not paying tax. That works out as £720 of free money each year (plus tax-free growth, as you'd get in an ISA or similar). Maybe £720 is not a huge amount in the grand scheme of things - but it's still better than not getting £720 of free money.

2) If I've understood pensions correctly, I won't be able to access the funds until I'm around 60 - Absolute nightmare. I'm all for compound returns but if I can't access them to help buy a property outright when I want to, what's the point?

As above you can currently access it at 55. There is no legislation in place to increase that yet, though the likelihood is that it will rise in future at roughly the same rate as the state pension age. So if you're in your 20s or 30s then you should probably assume that you'll be closer to 60 than 55 by the time you can access it.

The main point of a pension is to provide you with an income in retirement (that's why it's called a pension). That's why you can't access them until a certain age, and why the tax system is set up so that it's far more advantageous to withdraw them gradually over a number of years rather than in one lump sum. If your primary goal is to buy a house then they're not suitable for that.

On the other hand, will you continue to have your tax free income until the end of your days? If not, you need to make some plans for what happens when you no longer have it; and a pension should be part of that plan - even if it isn't the whole of the plan.

dunstonh

I was pointed to some content online (by Author & ex-Hedge fund manager Lars Kroijer) which suggests a combination of low-risk bonds and investing in global equity market index trackers makes for a simple but effective portfolio.

What was his definition of low-risk bonds?
Why did it not include property?
What weightings did you suggest would be right for your risk profile and capacity for loss?

However, I have 2 concerns.
1) My income is not taxable, meaning I'm a non-earner who can only contribute £2,880/yr (£3,600) which is too low in terms of % versus my yearly income.
2) If I've understood pensions correctly, I won't be able to access the funds until I'm around 60 - Absolute nightmare. I'm all for compound returns but if I can't access them to help buy a property outright when I want to, what's the point?

1 - not an issue
2 - What's the point? The clue is in the name. It is called pension because it is there for your retirement. That is the point. The UK has a number of tax wrappers to cater for different people and needs. Pension is not meant for people to access under age 55. That is why it gets such favourable tax treatment.

You need to take a few steps back. What are your objectives? Then you look at solutions to fit those objectives. Not look at solutions first that may or may not be appropriate.

kidmugsy

NotSkint wrote: »

a non tax payer can still contribute up to their yearly income and have tax relief added

No. A non tax payer can still contribute up to their yearly EARNINGS and have tax relief added.

eightbo

Thank you for your interest and inquiries guys. Here's some information in response to your questions -- just reading your own section is fine:

@enthusiasticsaver

I am confused about your goals. Are you saving for retirement or to buy a property?

My main goal is to simply build expected wealth that is relatively accessible as the years go by (so that I'm not tied up if I decide to switch it up drastically). I was going to decide how much I may need/want for myself in the short-medium term and pursue low-risk investments, e.g. ISA / high-interest current accounts, to satisfy such an amount. Any excess would go to the higher-risk global index tracker which I plan to hold for medium-long term. I'll monitor "how much I'll need/want in the short-medium term" and if it changes I'll adjust how much I am putting in to the current accounts. Is this a sensible plan?

How old are you, do you have any other savings and do you have sufficient to support yourself

I'm 24. I've made a plan whereby first I'll make sure I'm covering my food/rent/essential bills, then I'll be contributing some to building an 'emergency fund', after which I'll pay any non-essential bills, and finally the remainder being classed as 'discretionary income'. I will get the emergency fund to a decent size before investing anything from discretionary income towards any low-risk/high-risk investments (mentioned in my reply to enthusiasticsaver above). Once the emergency fund reaches a good size, I'll considerably reduce how much I am contributing to the emergency fund. I'll be putting everything into my current account to be safe until I'm 100% sure about my investment plan, which as there is clearly a lot to understand, could take me a while.
I'll be putting this plan of paying the food > rent > utilities > essentials > emergency fund > non-essentials > arrive at discretionary income in place next month and I have not done something like this before, does this sound reasonable?

@AnotherJoe

a SIPP would be wholly inappropriate for an outright purchase of a house. A LISA would seem to be better but if it's within a few years, investments would be a high risk strategy and few would say that's a good idea irrespective where they are.

My main goal is to build expected wealth and I understand the chance of loss through higher risk investments. I will make sure a minimum is met for what I can foresee myself needing/wanting (including a little leniancy) through low-risk investments before considering high-risk options, which in combination with my 'emergency fund' (mentioned in my reply above to enthusiasticsaver) should be fine. Saying that, I would eventually like to buy a property. I have no specific time requirements for that. I was just going to rent whilst continuing to save until I have enough £ for a property. I'm aware that's slightly inefficient but I would prefer the freedom of being able to hand in my notice and start renting/living somewhere else easily. Is this a naive plan?

Regarding the LISA, so far I only have the information of "If you are saving to buy your first home, consider saving via a Help to Buy: ISA/LISA" -- Is this the only use for the LISA? I will have to go away and read up on this.

@NotSkint

Can you clarify; you have an income which is not taxable but you are a non-earner.
...The income has to be "relevant earnings".

Correct. Thank you for the bit on relevant earnings, I have checked and as per an article from rossmartin called "Relevant earnings for pensions purposes" (Sorry new account won't let me link it, easy to find on google though), my income is not categorised as "relevant earnings".

A pension is for retirement, which is why there are rules upon the age of access! It isn't designed as a savings vehicle for property. You should be looking at S&S ISA or LISA.

Thanks for the information you have given. The use of pensions are becoming clearer now. Could you confirm that the S&S ISA / LISA is the same as the 'Help to Buy ISA/LISA' which I have mentioned in my above reply to AnotherJoe? If not can you explain any basic differences? Any information on this would be great.

@Aretnap

Will you continue to have your tax free income until the end of your days? If not, you need to make some plans for what happens when you no longer have it; and a pension should be part of that plan - even if it isn't the whole of the plan.

This question is always unknowable to some degree, so no. Whilst I may always have access to the tax-free income, it's unlikely that it will be my only source of income as I seek to pursue other avenues which will no doubt be taxable and as such I agree I should definitely plan for the scenario.

Let's say my circumstances change regarding taxable income: If I start a scalable business selling products online and can do well in that space, I may make it my primary focus. If this happens or I switch to a standard, taxable 9-5 salary for an employer, does it become the sensible option to start pursuing the SIPP as the primary focus? You mention that pensions should be a part of the plan, even if not the primary focus, could you give an example or two of where the pension plays only a minor role in the plan?

Assume that all the while I still have access to the tax-free income.

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I'll return to the thread at some point within the next couple of days, thanks again.
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NotSkint

kidmugsy wrote: »

No. A non tax payer can still contribute up to their yearly EARNINGS and have tax relief added.

Kidmugsy, you have partially quoted me and then said I am incorrect.
Sorry, but if you read my reply and go past the comma you will see that I have already said relevant earnings, which is true :)

bigadaj

NotSkint wrote: »

Kidmugsy, you have partially quoted me and then said I am incorrect.
Sorry, but if you read my reply and go past the comma you will see that I have already said relevant earnings, which is true :)

Though that is actually wrong.

Total contributions are limited to earnings where that exceeds £3600, the tax relief is included in that amount, so a non taxpayer would contribute 80% of their earnings, which would be gross duo by the pension provider.

They'd then get to keep the remaining 20%.

NotSkint

bigadaj wrote: »

Though that is actually wrong.

Total contributions are limited to earnings where that exceeds £3600, the tax relief is included in that amount, so a non taxpayer would contribute 80% of their earnings, which would be gross duo by the pension provider.

They'd then get to keep the remaining 20%.

Bigadj, ok my original post was badly worded; I should have been clearer. However, being pedantic, Kidmugsy's post is also incorrect and was only partially quoting me