Self employed and making up for lost time...

miss_marple

Hello,

I'm 40 and self-employed and until this year have had no pension other than the state one. This is mostly due to my ignorance around pensions. I only really want the equivalent of about £15-17k a year when I retire at 65.

My net income will be around £41k this year. I want to make up for lost time with my pension so I put in £20k into a Moneyfarm Pension a couple of months ago and received a £5k tax relief bonus Making it worth £25k.

Am I right in thinking that this year I could add another £12k as the limit for each tax year is £40k? I realise it's better to invest more gradually over time to allow for compounding, but I do feel I am trying to make up for lost time and to make the most of the tax relief. I wanted to ask if that's the best plan for this year and if my limit is indeed £40k a year (as long as I'm earning that much).

I also have a Nutmeg LISA where I've put £8k this (£10k inc bonus). I don't think this counts towards my annual Pension Contribution Allowance.

I did think about seeing an IFA but as it's not a huge amount of money for them and I'm starting fairly small I think Moneyfarm seems like a nice option and doesn't require me to be actively involved in the investment decisions which I know nothing about (this put me off SIPPs).

Next year I'm going to be adding around £800 monthly to continue making up for lost time as I haven't been taking advantage of any of the tax benefits for many years by not investing in a pension.

I wondered if anyone could tell me if my plan is naïve or if I am on the right track. Thank you!

xylophone

https://www.hl.co.uk/pensions/tax-relief/calculator

See panel on right concerning maximum tax relieved contributions.


Remember that you make contributions net of tax to a personal pension.

If you earn £30,000 a year and wish to contribute it all to a pension, you would make a payment of £24000 to the provider who would claim tax relief of £6000 and add it to your pot.

justme111

I am coming from knowing nothing about investments and pensions so I have been in a similar situation; funnily enough about the same age I started with investments 6 years ago. My understanding /opinion:
a) you may be pleasantly surprised, with this levels of contribution and requirements you may be able to retire earlier than you think
b)local public will tell you that there are options cheaper than moneyfarm which you can use without having knowledge of investments - those are details IMO, you can change your platform later - the important bit is you started

Albermarle

Although the max contribution allowance for a tax year is indeed £40K ( including the tax relief) you can carry forward unused allowance from previous two?years. So if you contributed nothing in the previous tax years then in theory you could contribute £120K.
However you can not contribute more than your gross pay in a tax year regardless of the above.
You do not say what your gross income is but if say it was £50K , you could contribute all that + £12.5K tax relief . You do not have to inform HMRC that you are using unused allowance from previous years , as they will know.

Peter314

Albermarle wrote: »

Although the max contribution allowance for a tax year is indeed £40K ( including the tax relief) you can carry forward unused allowance from previous two?years. So if you contributed nothing in the previous tax years then in theory you could contribute £120K ….

Only if you had a pension during the preceding years (unless this has changed..?)
OP didn't have a pension until this year.

miss_marple

Thank you for the replies! Yes that's right, I have not had a pension before but it's good to know that I can put in my £32,000 total for this year (which will result in £40,000 inc tax relief).

I was listening to Martin on Monday and he talked about stakeholder pensions being good for people like me who are self-employed and don't really understand investing, so I hope that the fact I went with Moneyfarm Private Pension instead wasn't a bad option. It seems to be working okay at the moment considering the bumpy ride we've had.

I appreciate the comments. Thank you!

Albermarle

Only if you had a pension during the preceding years (unless this has changed..?)

You might be right , I was not aware of that ,

so I hope that the fact I went with Moneyfarm Private Pension instead wasn't a bad option

The charge of around 1% for platform and funds together is not the cheapest but not excessive. It is not a dissimilar product to a stakeholder anyway .
I presume you had to pick a fund/risk level ? Normally if you are a long way from retirement it is better to go for the higher risk/potentially higher growth funds . Then even more importantly stick in them long term and don't panic if they go through a dip.

miss_marple

Albermarle wrote: »

You might be right , I was not aware of that ,

The charge of around 1% for platform and funds together is not the cheapest but not excessive. It is not a dissimilar product to a stakeholder anyway .
I presume you had to pick a fund/risk level ? Normally if you are a long way from retirement it is better to go for the higher risk/potentially higher growth funds . Then even more importantly stick in them long term and don't panic if they go through a dip.

That's very good to know that it's not excessive, I get the first year fees for free as I used the code to sign up, and I also got £200 topcashback, which has tracked and paid already.

Yes, I had to complete a questionnaire and it put me on risk level 4 of 6. But it recommended going for level 5 as it's over a long time for a pension. The advice on the phone was very helpful as well so I was quite impressed by them to be honest. As you near retirement age they also scale back the risk automatically which is good.

AlanP_2

miss_marple wrote: »

That's very good to know that it's not excessive, I get the first year fees for free as I used the code to sign up, and I also got £200 topcashback, which has tracked and paid already.

Yes, I had to complete a questionnaire and it put me on risk level 4 of 6. But it recommended going for level 5 as it's over a long time for a pension. The advice on the phone was very helpful as well so I was quite impressed by them to be honest. As you near retirement age they also scale back the risk automatically which is good.

Whilst this sounds good in theory and seems sensible it may not suit your retirement plans.

If you were going to take all the money out on your 66th birthday say and buy an annuity then scaling the risk level back over the last few years is sensible.

On the other hand if you intend to stay invested until you die (at say age 86) and withdraw an "income" each year you need to stay invested in riskier assets as you are still looking at 20 years or so.

I wouldn't worry about this for now as you have time to see where you are and decide on the "take an income" options nearer to the time but don't just let it drift into their default risk reduction approach without understanding what that means for you.

miss_marple

AlanP wrote: »

Whilst this sounds good in theory and seems sensible it may not suit your retirement plans.

If you were going to take all the money out on your 66th birthday say and buy an annuity then scaling the risk level back over the last few years is sensible.

That's a very good point, thank you for mentioning it as it hadn't occurred to me until now.