self emplyed pensions options?

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dunstonh wrote:

Not all of the 75% may be taxable. You have an increased personal allowance after age 65 and then the 10% tax band. A couple looking at their retirement should look at both of them and not go top heavy with one of them. If both utilise the personal allowance, then that is 14k (in todays) per annum tax free. So a basic rate tax payer can easily pay into a pension, get tax relief and pay no tax in retirement.

Pension contributions can also reduce your earnings for working/childrens tax credits allowing you to receive more of those meaning in effect, you are getting more than 22% tax relief.

Not forgetting the other side of the coin. When you retire, the Government may penalise your private pension income by at least 40% if you are among the three quarters of pensioners who will be entitled to pension credit.

This also penalises ISA income, but the big factor in favour of ISAs is that your family or your favourite charity inherits the money if you cop it, whereas once you have been forced to purchase a lowly yielding annuity it is the insurance company that benefits from your early demise.

Debt_Free_Chick

Editor wrote:

Hi cyclops,

Personal pensions with no employer contributions tend not to be a very good deal for basic rate taxpayers.

But this thread is entitled "Self Employed Pensions Options" so there is no employer to contribute.

OK .. one might consider that someone who is self-employed IS the employer .... but I don't think that's what you meant.

ISAs can help to provide funds, which may assist with retirement planning ... but they don't necessarily provide a pension, in the way that most people understand.

The examples you gave, of the investments once can hold in an ISA, are also available inside a pensions wrapper. So which would you suggest? Those funds in an ISA or those funds in a pension?

Debt_Free_Chick

Reporter wrote:

Not forgetting the other side of the coin. When you retire, the Government may penalise your private pension income by at least 40% if you are among the three quarters of pensioners who will be entitled to pension credit.

no, no no! this is spin .... the Pension Credit is a means-tested state income, to top up those who have low pension income. Before it was introduced, there was only Income Support. Now, the Pensions Credit means that those who previously had no State top-up actually get something in addition.

So where is the 40% penalty? If you mean that they are only getting a reduced top-up, because they have a private pension income in addition to their State pension, then "wake up!". That's what means testing is all about - it's nothing to do with private pensions.

This also penalises ISA income, but the big factor in favour of ISAs is that your family or your favourite charity inherits the money if you cop it, whereas once you have been forced to purchase a lowly yielding annuity it is the insurance company that benefits from your early demise.

And the big benefit from an annuity is that if you live to a ripe old age, then it (the annuity) keeps paying you a monthly income. Try getting that guarantee from your ISA.

ReportInvestor

Debt_Free_Chick wrote:

no, no no! this is spin .... the Pension Credit is a means-tested state income, to top up those who have low pension income. Before it was introduced, there was only Income Support. Now, the Pensions Credit means that those who previously had no State top-up actually get something in addition.

So where is the 40% penalty? If you mean that they are only getting a reduced top-up, because they have a private pension income in addition to their State pension, then "wake up!". That's what means testing is all about - it's nothing to do with private pensions.

Means testing is inextricably linked to private pensions and retirement savings.

It is partly my fault. I should have mentioned the "Savings Credit" which works alongside the "Pension Credit" in the same system. You get the picture. It's so complex that even IFAs have to constantly check their tables to work it out in individual cases .

Help the Aged paints the bigger picture

You can normally get [pension] guarantee credit if your weekly income is less than:

£109.45 if you are single; or
£167.05 between you if you are married (or live as a couple).

Guarantee credit should bring your income up to these amounts.

To get savings credit your income must be above the level of the basic State Retirement Pension (£82.05 if you are single; or £131.20 between you if you are a couple).

You can normally get savings credit if your weekly income is more than these amounts and less than:

£150.55 if you are single; or
£220.83 between you if you are married or live as a couple."

So a starting point is to make sure that any pension savings will beat these figures. Then you at least know that every £1 that you save is £1 from which you can benefit in full.

Unless the goalposts change yet again. Which they will.

Ros Altmann always makes for interesting reading, especially since she has her foot in the door of No. 10 - Here she is addressing the Treasury Select Committee

"The effect of pension credit on pension suitability is not well-described. Pension credit has made pensions ‘unsuitable’ for most basic rate taxpayers. It is not true that pension credit will always reward savings and perhaps the Treasury Select Committee was not correctly informed about how this benefit works. In fact, most women would lose all their pension savings £ for £, even with pension credit, because the complex calculation of the benefit assumes that individuals have a full basic state pension. The vast majority of women do not. So if a woman has only say, £69 basic state pension, rather than the normal £79.45 per week, the first £10 a week or so of her pension savings will be completely wasted and she will receive no pension credit for this. Thus, the woman could have saved £20,000 in a pension, which would generate an income of £10 per week, but that whole £20,000 would be wasted and she would have been better off if she had not put that money into a pension, but saved in a different form. Since over three quarters of people will be entitled to pension credit in coming years (already nearly 60% are entitled) this means most people should not put money into pensions at all."

EdInvestor

Debt_Free_Chick wrote:

ISAs can help to provide funds, which may assist with retirement planning ... but they don't necessarily provide a pension, in the way that most people understand.

What is a pension? It's a retirement income, right?. Now if you accumulate a pot of money in a pension, what happens when you come up to retirement is that the insurance company takes this pot of capital you have saved up and in return pays you an income for life at a current rate for a 60 year old man of 6.4% - and this is taxed.

If you however accumulate the same pot of money in an ISA, you can keep all the capital and invest it yourself for a tax free return. At current annuity rates it is not hard to beat the annuity and you get to keep the money.

While someone will probably mention the tax relief you get topping up the pension , you need to remember that pension charges are much higher - 1 to 1.5% minimum pa,which mounts up over 30 years to tens of thousands of pounds, whereas you can get an ISA for a flat 25 quid a year.[Charges are very much lower in company pension schemes, another reason apart from the free money they are worthwhile compared with personal pensions.]

As I said before, IMHO personal pensions without an employer's contributionare poor value for basic rate taxpayers. But if Cyclops wants to, under the new rules starting next year, he can take his ISA money and put it in a pension and get tax relief on the whole lump sum immediately if he wants - all that earnings limit stuff is being abolished, so he won;t miss out on anything by using the ISA now.But he can't do it the other way round: once in the pension it's locked up forever, he can never get the capital back, only the income from age 50 (later going up to 55).

So, since he already got good savings in a top class pension, if I were him I'd max out the ISA allowance for now.

The goal is to save a pot of money for retirement which will then generate an income, that's all, it doesn't have to be in a pension format.

Many people have it in a "BTL format" these days.

isasmurf

Editor wrote:

But if Cyclops wants to, under the new rules starting next year, he can take his ISA money and put it in a pension and get tax relief on the whole lump sum immediately if he wants - all that earnings limit stuff is being abolished.

Only if his ISA is less than his earnings. There is still an earnings limit, it's just more generous then it is now.

Debt_Free_Chick

Editor wrote:

What is a pension? It's a retirement income, right?

that was why I used the phrase "a pension, in the way that most people understand". When people generally refer to a pension, they mean the tax wrapper. I agree that a pension is a retirement income - but we're talking about "a pension" rather than "a retirement income".

Now if you accumulate a pot of money in a pension, what happens when you come up to retirement is that the insurance company takes this pot of capital you have saved up and in return pays you an income for life at a current rate for a 60 year old man of 6.4% - and this is taxed.

If you however accumulate the same pot of money in an ISA, you can keep all the capital and invest it yourself for a tax free return. At current annuity rates it is not hard to beat the annuity and you get to keep the money.

Can you give an example of how one might achieve a return that is guaranteed to be at least 6.4%, tax-free - and guaranteed to be paid for life? For a 60 year old, that needs to be at least a 20 year guarantee - at least ... and preferably a 40 year guarantee.

And what about inflation over that period?

dunstonh

While someone will probably mention the tax relief you get topping up the pension , you need to remember that pension charges are much higher - 1 to 1.5% minimum pa,which mounts up over 30 years to tens of thousands of pounds, whereas you can get an ISA for a flat 25 quid a year

ISA charges and pension charges are much the same. Indeed, on consumer terms, the charges on a personal/stakeholder would be lower than an ISA.

Editor, its not what you are saying, its the way you are saying it. If its your opinion, then you should state so. You shouldnt just say pensions are a bad thing for basic rate tax payers. That is clearly incorrect.

You cannot give advice unless you are authorised and even then you cant give advice on the forums based on what you think is right without knowing anything about the individual. Just because you are not authorised, it doesn't exempt you from these rules.

There is a good chance that ISAs may be good value for the OP. Equally, pensions could be much better. We just don't know enough.

so he won;t miss out on anything by using the ISA now

What about compound growth on the tax relief on the pension?
What about potential increased working/childrens tax credits?
What about access to commercial property funds tax free (cant do that on an ISA)?

Now if you accumulate a pot of money in a pension, what happens when you come up to retirement is that the insurance company takes this pot of capital you have saved up and in return pays you an income for life at a current rate for a 60 year old man of 6.4% - and this is taxed.

Does the OP have a partner?
Why not consider pension for her?
She may be a tax payer but have no provision. If she doesnt qualify for a state pension in her own right, then she can get tax relief on her contributions and be a non tax payer in retirement by aiming to get an income to match the personal allowance. In which case your comment about the 6.4% being taxed is wrong.

cyclops

here is a list of what we are doing so far (tho its probably not extensive)

my wife allready pays into a private pension (dont know the amount) and she works for the NHS (nurse) 30hours per week
she also has life assurance with friends provident
our two children have savings accounts that she pays into monthly (one is 7 the other is 4)
mortgage will be paid for in 13 yrs
she does get some child credits buts its a real pittance
and has paid in full so far NI so does qualify for a state pension

i as has been said erlier have a council pension that was for 15yrs which is now frozen
pay into friends provident for life assurance with a cash in value now of £1800 but with this i have shares for which i get a cheque every so often and pays £50000 if i die or become seriosly ill (illness dependant)
now self employed as a driving instructor (3 weeks)
paid in full NI in previous job and am going to pay self employed rates when the DD form comes in post

any other info needed please ask

again all info is very much appreciated

ReportInvestor

How many years NI contributions has your wife missed?

Is she in the royal national pension fund for nurses?