Pension provision for part time worker

hugo15

I'm looking to sort out the pension provision for my wife as she has recently change jobs.

She works part time for a small business with only 5 employees. There is no company pension provision. She also does not pay any tax or NI contributions due to the amount she earns.

My thoughts are that we should take advantage of the 20% tax relief and open up a SIPP to contribute £2880 per year. I've got a S&S ISA direct with Vanguard. Was proposing to use them with a Lifestyle Tracker Fund for a fit and forget approach. Any reasons this isn't a sound idea?

I'm unsure as to the impact on her state pension. our youngest child has turned 13 so she will not receive any credit via receipt of Child Benefit. I've read that she could make voluntary contributions. Is this a good idea or are there other options to consider?

Thanks!

molerat

Regards NI / SP.  How much does she earn per week ? If in excess of £120 she will be credited with NI. Has she got a state pension forecast ? Never too early and will give a full NI record as well. https://www.gov.uk/check-state-pension

hugo15

She earns just over £120 per week. Does she need to do anything to get the credit or does it happen automatically?

Thanks for the link. I'll check this out.

Dazed_and_C0nfused

hugo15 said:

She earns just over £120 per week. Does she need to do anything to get the credit or does it happen automatically?

Thanks for the link. I'll check this out.

If she earns enough she will get it automatically providing her employer is filing Real Time Information reports to HMRC.

She can check this on her Personal Tax Account on gov.uk.

Have you picked £2,880 because that is all she can afford/wishes to contribute or have you misunderstood what low earners can contribute?

hugo15

Dazed_and_C0nfused said:

Have you picked £2,880 because that is all she can afford/wishes to contribute or have you misunderstood what low earners can contribute?

Probably the later! I thought that this was the maximum a amount a non-tax payer could contribute and receive tax credit for.

Dazed_and_C0nfused

No, where have you read that?

£2,880 is the maximum for a non earner.

If your "just over £120" was say £122/week then she could contribute £5,075 and the pension company would add basic rate relief giving her a pension fund of £6,343.75.

Affording it might be another matter of course.

£122 x 52 = £6,344.

zagfles

Dazed_and_C0nfused said:

No, where have you read that?

£2,880 is the maximum for a non earner.

If your "just over £120" was say £122/week then she could contribute £5,075 and the pension company would add basic rate relief giving her a pension fund of £6,343.75.

Affording it might be another matter of course.

£122 x 52 = £6,344.

I've seen it all over the place, even on gov.uk in the past. Confusion between "non-taxpayer" and "non-earner".

Even this current gov.uk page https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief is a bit contradictory, saying (correctly) at the start that "You can get tax relief on private pension contributions worth up to 100% of your annual earnings." but then near the end misleading implying that if you're a non taxpayer you're limited to £2880.

hugo15

Ah, my mis-understanding of what I have read. 
So rather than paying into the S&S ISA it would be better to get the basic tax relief as we are up 20% immediately. I guess the downside is that the pension is tied up for the next 7 years until she is 55.

Albermarle

hugo15 said:

Ah, my mis-understanding of what I have read. 
So rather than paying into the S&S ISA it would be better to get the basic tax relief as we are up 20% immediately. I guess the downside is that the pension is tied up for the next 7 years until she is 55.

Yes that is the trade off but 
1) She is getting tax relief on tax she has not even paid . so quite a good deal !
2) Normally you do want to be making investments on a time scale of less than 7 years anyway 
 When she gets to 55 , you do not have to take the pension just because you can. Many people keep contributing and/or just leave it alone to keep growing ( hopefully) until it is needed.

Dazed_and_C0nfused

hugo15 said:

Ah, my mis-understanding of what I have read. 
So rather than paying into the S&S ISA it would be better to get the basic tax relief as we are up 20% immediately. I guess the downside is that the pension is tied up for the next 7 years until she is 55.

It's better than that.  It is 20% tax relief which means the actual uplift is 25%.

Contribute £5,000 and £1,250 tax relief is added giving a gross contribution of £6.250.

£6,250 x 20% = £1,250

Brynsam

Dazed_and_C0nfused said:

No, where have you read that?

£2,880 is the maximum for a non earner.

Probably on any number of websites! Far too many cheerily state that non-taxpayers can pay a maximum of £2,880. Even the MoneyAdviceService uses that as the heading (no mention of what happens if you earn more than £3,600 a year but don't pay tax):

Tax relief if you’re a non-taxpayer

If you have no earnings or earn less than £3,600 a year, you can still pay into a pension scheme and qualify to have tax relief added to your contributions up to a certain amount.The maximum you can pay is £2,880 a year. Tax relief is added to your contribution so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this or have no income at all.This applies if you pay into a personal or stakeholder pension yourself (so not through an employer’s scheme) and with some workplace pension schemes – but not all. The way some workplace pension schemes give tax relief mean that people earning less than the personal allowance (£12,500 in the 2020-21 tax year) won’t get tax relief.