Setting up a self employed personal pension plan

NeilDS

I thought I would ask on here, as this may help other people. My daughter is 35 and has no previous pension contributions. She is now self employed and will be in the 40% tax bracket. She may have more to put in, but I originally thought she may have £ 4 k to start a pension and avoid the 40% tax rate.

Contacted find your local Financial Advisor, and they are not interested (and to be honest we don't really want to pay one).. My own FA wanted £1200 to set the scheme up, and I believe a similar amount each time a contribution is made!! The FCA told me Prudential and Aviva do schemes you can join online. I have spoken to a Prudential FA who was very helpful, suggested a stakeholder pension, but you can't do one with them without Financial Advice..

I have spoken to AVIVa, and the person on the phone seemed to know less than me! This appears to be a catch 22 situation, which must put off a lot of people from starting their own scheme.

So far the only scheme I have found which I believe you can join online is Legal and General. Are there any other options (presumably NEST)? I now believe she will have £8k to put in. I need to contact HMRC, about how the tax saving will work too. Any help appreciated!

Dazed_and_confused

I'm sure others will be along to confirm but you/your daughter should be able to open a personal pension (certainly a SIPP and probably a stakeholder) online in a few minutes.

Not for everyone but I have done it with Hargreaves Lansdown without any hassle whatsoever. Other providers are available

As far as the tax relief is concerned there is absolutely no need to contact HMRC, in fact doing so may complicate matters.

All your daughter needs to do is enter details of the pension contributions on her self assessment tax return and then any additional tax relief due will be incorporated into her annual tax calculation.

The tax relief is given by her basic rate tax band being extended so she can pay more 20% tax and as a consequence she will pay less less 40% tax (assuming she does have a high enough taxable income).

So if she handed over £4k to the pension company they would add £1k basic rate tax relief so she has £5k in the pension fund. She shows this on her return and the amount of income which can be taxed at the basic rate of 20% is increased by £5,000.

£5,000 taxed at 40% would be £2,000 but if taxed at 20% just £1,000 so a tax saving of £1,000. This benefits her by the reduced tax bill, it does not go into her pension fund but she may of course then be able to make an additional pension contributions and claim further tax relief.

Will be slightly different if she lives in Scotland.

kinger101

A SIPP is the right product. I'd go 100% equities. Probably in a tracker fund (or a few).

The amount she needs to put away depends on the type of retirement she wants, and what other income she may have during retirement. Avoiding the higher rate of tax is great, but £4K of contributions is less than 10%. It's too low in my opinion. 20% would be better if she could afford it. Put a lump sum in before 5 April to avoid 40% tax. Make regular payments thereafter if income is steady.

atush

She can set up a Sipp online at Hargreeves Lansdown (HL) or by going to Cavendish online- which has a number of different pension companies.

She could look to initially pay in her income over the HRT threshhold less BRT (ie if 5 K over pay in 4K and the provider gets the extra 1K from Hmrc). Then she contacts Hmrc herself to get back the extra HRT paid. This can be done by phone, or thru her self assessment. The provider wont do the Hrt for you.

But if this is her first pension, then she is way behind so should probably pay more in if she can evern if it gets only BRT relief.

Things change if she isnt self employed, but has a limited company.

Dazed_and_confused

I don't think she can claim anything back from HMRC via a telephone call, it has to be done via her self assessment tax return.

Assuming the op has not missed some vital info such as she's employed as well as being self employed.

NeilDS

Thanks for your help. I worked as an Accountant in industry, including operating an auto-enrolment pension scheme. I am no pension expert, but I have a pretty good basic understanding of employed schemes. Still coming to terms doing the self employed accounts though!. The 40% band kicks in at £45k , so if she earns £8k over we would only need to pay in £6.4k then to avoid the 40% tax band for this year? Next year I will try to get her to make monthly contributions too.

As I have said, I do find this unnecessarily complicated. I do feel sorry for those people with no financial knowlege reading twenty pages of which funds you can invest in , at the only company I could find (L & G).

The phone call to HMRC was just to find out how the tax works (explained above thanks), as any claim will come through the self assessment accounts.

Dazed_and_confused

Aviva popped up on the first page of a Google search (not a recommendation, just an example) and I'm sure with the numbers now being self employed most pension companies will cater for self employed even if just via a SIPP.

https://www.aviva.co.uk/retirement/shape-my-future/plan-my-future/article/self-employed-your-pension-questions-answered/

If the main/only consideration is minimising 40% tax then a net payment of £6.4k looks ok but she could get basic rate relief on a larger amount and don't forget her tax position isn't based just on self employed profits but her total taxable income for the year so if she had employment in the year before becoming self employed or savings interest, dividends, rental income etc then that needs to be considered when calculating her total taxable income.

kinger101

NeilDS wrote: »

Thanks for your help. I worked as an Accountant in industry, including operating an auto-enrolment pension scheme. I am no pension expert, but I have a pretty good basic understanding of employed schemes. Still coming to terms doing the self employed accounts though!. The 40% band kicks in at £45k , so if she earns £8k over we would only need to pay in £6.4k then to avoid the 40% tax band for this year? Next year I will try to get her to make monthly contributions too.

As I have said, I do find this unnecessarily complicated. I do feel sorry for those people with no financial knowlege reading twenty pages of which funds you can invest in , at the only company I could find (L & G).

The phone call to HMRC was just to find out how the tax works (explained above thanks), as any claim will come through the self assessment accounts.

Yes. She pays in £6400. The SIPP adds the other £1,600 couple of months later. £1,600 is then claimed back from HMRC.

Dazed_and_confused

As a self employed person you cannot claim higher rate tax relief in that way from HMRC.

You benefit by getting a smaller self assessment tax bill, not a refund of higher rate tax relief.

The overall benefit is the same really but it is wrong to say you contact HMRC and they send you x refund because they don't.

Brynsam

Sounds as if you need help on both the self-employment and the pensions side of things? If so, try:

https://www.gov.uk/working-for-yourself
and
https://www.pensionsadvisoryservice.org.uk/about-pensions/pensions-basics/contract-based-schemes
https://www.moneyadviceservice.org.uk/en/articles/your-first-pension-the-options

SIPPS seem to have become the flavour of the month, but look carefully at the charges before making a decision. A simple personal/stakeholder pension may be all that's needed at this stage (your daughter can always change to a SIPP later in her career).

dunstonh

The FCA told me Prudential and Aviva do schemes you can join online. I have spoken to a Prudential FA who was very helpful, suggested a stakeholder pension, but you can't do one with them without Financial Advice..

The FCA should be doing no such thing. Especially when they cant get the info right.

The problem here is that you are looking at providers who supply the intermediary market. Not the DIY market. Plus, a few of the providers you have mentioned are running rather dated products that independents would not likely use. And if you buy direct from one of these, the cost could actually be more than using an IFA despite there being no fee. IFAs don't take a commission. It is fee-based. Direct providers can still take a commission. So, the annual charges are higher to faciliate the commission. So, there is a breakeven point (often around 4 years) where the IFA option becomes cheaper than the provider option. Plus, the IFA product is likely to be better.

However, if you looked at the DIY providers instead, you will find them much more cost effective if you get it right.

There is no difference between self employed pensions and employed pensions. The status hasn't mattered since 2001.