Pension for unemployed partner

Elika0215

Long story short - I'm trying to help a friend with some finances as they've recently had an inheritance. One is unemployed due to illness which is ongoing.

I was advised that the unemployed partner can start a pension with an annual contribution of £2880.

1. Can they pay £2880 in a lump sum before April 6th and then another lump sum of £2880 after or does it have to be a monthly premium?

2. Is there a benefit (in terms of investment performance) to pay a lump sum over monthly installments?

3. Is this right too; as it stands, they can withdraw 25% tax free at 55 or all of it, subject to 20% on the remaining 75%. They are currently 49.

4. Should they get a stakeholder pension or ppp if they want the flexibility to change how much they pay in if their circumstances change? Also, they want low-risk and appreciate the return will be lower too.

5. Finally, any recommendations for a pension provider worth looking in to? Should I just be starting with L&G, Scottish Widows, Prudential etc..?

Thank you. I was so embarrassed with my lack of knowledge on all things financial but this site and forum has been amazing.

Albermarle

https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired

Happy Reading !

Dazed_and_confused

1. Can they pay £2880 in a lump sum before April 6th and then another lump sum of £2880 after or does it have to be a monthly premium?

Doesn't have to be monthly premium. That may not be the case for all all providers but the ones most often mentioned on here, and probably all, accept lump sums.

2. Is there a benefit (in terms of investment performance) to pay a lump sum over monthly installments?

You can pay into the pension wrapper as a lump sum and then choose how to invest that within the pension. Probably best to do a bit more reading on the investment side of things and you may come across the phrase that it's time in the market which counts, not timing the market

3. Is this right too; as it stands, they can withdraw 25% tax free at 55 or all of it, subject to 20% on the remaining 75%. They are currently 49.

25% tax free yes (possibly changing to 57 or 10 years before State Retirement age but don't think this has been legislated for as yet).

Subject to 20% tax no. It depends entirely on their total taxable income. So if they had say £4000 taxable Jobseeker's Allowance, £5,000 taxable pension income and no other taxable income then no tax would be payable as the total income was covered by their Personal Allowance (£12,500 from 6 April 2019).

Elika0215

Albermarle wrote: »

https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired

Happy Reading !

Thanks - I have read that but struggle with my own concentration so find it hard to apply it to this particular situation.

Paul_Herring

Elika0215 wrote: »

Long story short - I'm trying to help a friend with some finances as they've recently had an inheritance. One is unemployed due to illness which is ongoing.

I was advised that the unemployed partner can start a pension with an annual contribution of £2880.

Correct, with a tax rebate of £720 to round it up to £3,600 when it hits the pension fund.

1. Can they pay £2880 in a lump sum before April 6th and then another lump sum of £2880 after or does it have to be a monthly premium?

Lump sums, as postulated, are fine.

2. Is there a benefit (in terms of investment performance) to pay a lump sum over monthly installments?

Only in as much as things like 'pound cost averaging' and other opinions of lump sum/regular deposits hold when investing - pensions aren't special in this regard.

Anyway, you could still send the money as a lump sum over to be held as cash, and within the pension fund purchase over the year. Given the amounts and timescale (6 years from #3 below,) I don't think there'd be much difference here.

3. Is this right too; as it stands, they can withdraw 25% tax free at 55 or all of it, subject to 20% on the remaining 75%. They are currently 49.

A one-off 25% tax free, the remainder is taxed as income in the year it is taken, so you have to take the tax-free allowance into account as well - they could potentially take (based on 2019/2020 figures) another £12,500 tax free out if they're not actually earning.

And if that's all they take out that tax year, and there's some left, they can take another sum out tax free based on the allowance the following year.

kidmugsy

Providers who often get praise here include Hargreaves Lansdown, Cavendish Online, and AJ Bell/Youinvest.

Elika0215

So if you've read some of my other posts, you'll note that they are concerned with the risk of investing in any way, shape or form.

Based on them investing £2880 (each year as a lump sum) for 6 years. Will there be protection in place in case the pension pot becomes worthless?

I have no idea what worse case scenario along with chances of that happening could be. I guess nobody does - but views would be appreciated.

Paul_Herring

Worse case for leaving it all in cash (which is what most people think about as 'not investing in any way.') within the pension would be whatever the difference would be between inflation (2%? 3%?) and whatever interest rate you could get for cash within the pension (somewhere not far away from what you'd get in a typical savings account - about 0%.)

So, if you're thinking about cash, you're probably looking at a guestimated 8%[1] reduction in value before you even think about doing anything adventurous with the money.

---

[1] Presuming an average inflation rate of 2.5% for 6 years gives (1.025^6) 16%, half it on a similar theory of a regular savings account only paying half the cited interest rate on the whole amount over the period.

Brynsam

Elika0215 wrote: »

Based on them investing £2880 (each year as a lump sum) for 6 years. Will there be protection in place in case the pension pot becomes worthless?

No. It's up to the investor to choose where to invest - and if the risk they most fear is loss of capital, they need to pick funds which offer the best protection of that capital. In theory you could have a SIPP with a negative balance if fees outweigh cash invested + returns.

Elika0215

Thanks for all the replies.

I can't get my head round the most suitable pension based on their circumstances.

To refresh, the aim is to have low risk, little or no management on their (the investor's) part as they know even less than I do and the flexibility of changing or pausing the amount being invested by tax year.

The options seem to be a stakeholder, person pension and self-invested personal pension. Are these generally alike or is there a significant difference that applies to individual circumstances?

xylophone

Well, he could just contribute the cash annually to the SIPP, not invest at all and just regard the tax relief as generous "interest" on the money.

Hargreaves Lansdown do not charge to hold cash - they also pay a tiny amount of interest on the cash held in the account.