Mortgage Free But No Pension

stef_saving

Hi all,

Thanks in advance for some advice on my situation. 

Some background: I am 38 and earn around £28k per year working for a charity. My job is fairly secure and I hope to increase my earnings over the next two decades. My husband is 48 and self employed. His work has been significantly impacted by the pandemic and he now earns roughly £30k per year, but it is very variable through the year. My mother in law moved in with us six months ago, so my husband also cares for her and she contributes £300 per month for household expenses. We have two primary school age children. We own a house in Brighton and are mortgage free and we have a £10k emergency fund in a savings account.

Our main issue: We have next to no pension. 

My husband has never contributed to a private pension, preferring to save (hence no mortgage). I have contributed sporadically, but took a five year career break with kids and up until recently worked part time, so they are worth very little. I now have a workplace pension (I contribute 5%, work contributes 3% = £191 per month). I know that people will comment that this is not enough, but I am not in a position to increase my pension contributions, because mine is the only consistent source of income.

We currently live quite comfortably on my salary, bolstered by my mother in law's contributions and child benefit - this covers all our essential and non essential spending each month, bills etc and some short term savings for holidays and home repairs. 

My husband's income is more sporadic, but when it does come in we can use this to invest. But what is the best way to do this? We are fairly frugal and don't want a particularly spendy retirement, but of course value financial security. We will definitely downsize when we retire in order to release equity in our property, but I would like to think we would have some money put away to draw on. Is a private pension the best option for him? Or a S&S ISA such as the one Vanguard offers? Or is there something I am missing?

Thanks all.

xylophone

Vanguard also offer a pension which might well suit your husband.

El_Torro

If the investments from your husband's income won't be needed until your husband is over 55 then the most tax efficient thing he can do is pay what he can into a pension. Maybe put some of the money in your pension since two small pensions in two different people's names is better than 1 large pension in one person's name (for tax purposes). 

If your employer contributes to your pension with salary sacrifice then this is even more tax efficient so worth considering. I know you don't want to put more of your salary into a pension, something to consider though.

From what you say I guess your husband doesn't have his own limited company? If he does then contributions into a pension directly from his company would also be very tax efficient.

One other thing that stands out to me, a £10k emergency fund for a couple with two small kids sounds small to me. You may want to consider upping this, especially since your husband's income is sporadic.

DairyQueen

Has your OH checked his state pension forecast? Is he paying Class 2 NI contributions? If not, I suggest he gets right onto it. 

Probably a good idea to check your SP forecast too. 

stef_saving

El_Torro said:

If the investments from your husband's income won't be needed until your husband is over 55 then the most tax efficient thing he can do is pay what he can into a pension. Maybe put some of the money in your pension since two small pensions in two different people's names is better than 1 large pension in one person's name (for tax purposes). 

If your employer contributes to your pension with salary sacrifice then this is even more tax efficient so worth considering. I know you don't want to put more of your salary into a pension, something to consider though.

From what you say I guess your husband doesn't have his own limited company? If he does then contributions into a pension directly from his company would also be very tax efficient.

One other thing that stands out to me, a £10k emergency fund for a couple with two small kids sounds small to me. You may want to consider upping this, especially since your husband's income is sporadic.

Thank you for your reply! Until recently he had a limited company (no employees), but switched back to being self employed as his earnings had dropped. We will definitely look into pensions for him though, as the plan is very much to invest any of his earnings and leave them until we both retire.

I don't think my pension is with salary sacrifice, but can certainly look into it - what is the benefit?

Agreed on the emergency fund - it took a hit when we paid off the mortgage. Will definitely try to build this back up as well, but the pension / investment bit feels more urgent? 

stef_saving

DairyQueen said:

Has your OH checked his state pension forecast? Is he paying Class 2 NI contributions? If not, I suggest he gets right onto it. 

Probably a good idea to check your SP forecast too. 

Good tip - I didn't know I could do this! Just checked and mine is £9,371 per year and I would imagine his would be too, as he's always paid NI. Probably a stupid question, but will this increase with inflation or is this the actual figure I will receive? A joint income of £18k with no income tax on it in today's money sounds pretty reasonable to me!

eskbanker

stef_saving said:
Probably a stupid question, but will this increase with inflation or is this the actual figure I will receive?

Better still, it'll increase via the triple-lock mechanism, as per https://www.gov.uk/state-pension

The basic State Pension increases every year by whichever is the highest of the following:

• earnings - the average percentage growth in wages (in Great Britain)
• prices - the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5%

kidmugsy

You are younger than 40 so open a Lifetime ISA (LISA).  Once it's open you can contribute at any time up till age 50: for every £4 you add the taxpayers add another £1.  Then you can take the money out tax-free at 60 or if you are terminally ill.  If you need the money in an emergency the penalty is annoying but not horrendous.

Pension contributions using salary sacrifice, though, are a better bet though lacking flexibility for someone your age.  If your employer doesn't offer salary sacrifice then the LISA might suit you better than extra pension contributions.

This might make a good back-up to your husband's pension contributions.

For him a rough calculation would be that, at your most ambitious, he should aim to contribute enough to avoid income tax altogether. I've never done the sums for a self-employed person so if I get this wrong we'll hope for correction from somebody.
 
£30,000 (approx earnings less expenses) - £12,570 (the Personal Allowance against income tax) =  approx £17,500.  To make that gross contribution he pays the pension provider a net £14,000.  The provider then claims the difference - £3,500 -  from the taxman and adds it to your husband's pot.

So your husband has accumulated approx £17,500 in his pension pot and has a tax-free £12,570 left over.  He'll need to deduct a small amount for Class 2 NICs.  If you are both hell bent on saving for retirement then part of that money left over can be used to fund, say, your LISA.

If you can conceive that your husband and his mother would consent to work together to use her financial position to generate a bit more income for the household, then do tell me (i) her age (ii) the date she qualified for State Pension (iii) her income.  That last question is  one that the two of you might decide you'd not be prepared to ask her.

barnstar2077

kidmugsy said:

You are younger than 40 so open a Lifetime ISA (LISA).  Once it's open you can contribute at any time up till age 50: for every £4 you add the taxpayers add another £1.  Then you can take the money out tax-free at 60 or if you are terminally ill.  If you need the money in an emergency the penalty is annoying but not horrendous.

Pension contributions using salary sacrifice, though, are a better bet though lacking flexibility for someone your age.  If your employer doesn't offer salary sacrifice then the LISA might suit you better than extra pension contributions.

This might make a good back-up to your husband's pension contributions.

For him a rough calculation would be that, at your most ambitious, he should aim to contribute enough to avoid income tax altogether. I've never done the sums for a self-employed person so if I get this wrong we'll hope for correction from somebody.
 
£30,000 (approx earnings less expenses) - £12,570 (the Personal Allowance against income tax) =  approx £17,500.  To make that gross contribution he pays the pension provider a net £14,000.  The provider then claims the difference - £3,500 -  from the taxman and adds it to your husband's pot.

So your husband has accumulated approx £17,500 in his pension pot and has a tax-free £12,570 left over.  He'll need to deduct a small amount for Class 2 NICs.  If you are both hell bent on saving for retirement then part of that money left over can be used to fund, say, your LISA.

If you can conceive that your husband and his mother would consent to work together to use her financial position to generate a bit more income for the household, then do tell me (i) her age (ii) the date she qualified for State Pension (iii) her income.  That last question is  one that the two of you might decide you'd not be prepared to ask her.

As they already own their own home wouldn't a pension be better than the LISA, because you get the same bonus 25% but it could be accessed earlier?

stef_saving

£30,000 (approx earnings less expenses) - £12,570 (the Personal Allowance against income tax) =  approx £17,500.  To make that gross contribution he pays the pension provider a net £14,000.  The provider then claims the difference - £3,500 -  from the taxman and adds it to your husband's pot.

So your husband has accumulated approx £17,500 in his pension pot and has a tax-free £12,570 left over.  He'll need to deduct a small amount for Class 2 NICs.  If you are both hell bent on saving for retirement then part of that money left over can be used to fund, say, your LISA.

This is extremely helpful, thank you and I was wondering if this was possible. Gotta say, for someone who has never looked into pensions beyond the very basics I am very pleasantly surprised at how much support there is for saving for retirement.

Edit: I originally gave a poorly worded answer to the question about my MIL, which you can see quoted on the next page. I am editing to clarify that my MIL's finances are absolutely not factored into our retirement plans, as you can from my original post. I was asked a direct question about it and tried to provide some information. Please believe me when I say I have no qualms about trying to provide the best possible care for her and that how her illness impacts any potential inheritance is at the very bottom of the list of my concerns in this situation.

kidmugsy

stef_saving said:

 She is 80 this year

That of itself puts the kibosh on the idea I was about to explain.  Anyway, best of luck with your retirement planning.