Highest Return/Lowest Risk Pension Options

Dazed_and_C0nfused

scrooge2008 said:

Hi Ady, 

This is going to sound really stupid, but does that mean that if I paid in my PAYE salary of £850.00 a month, to the SIPP that I would automatically get the 20% uplift and be able to withdraw £2040.00 (tax free) each year, plus anything extra the fund had made?  Would it make sense to pay myself more to maximise this - i.e. up to the tax free allowance?  I think I read something like this on one of the threads, but I couldn't get my head around it at the time.  That would be an effective interest rate of over 20%.  Seemed to good to be true?  I think I may have misunderstood your post.

Thank you.

This is where you need to speak to your accountant.

If you earn say £10,000 you can contribute £8,000 net and the pension provider adds £2,000 (25% of your contribution) in basic rate relief.  Irrespective of how much tax you have paid.

But that might not be the optimum way of getting the money into your pension with a limited company in the mix.

scrooge2008

Thanks D and C - it was the phrase rinse and repeat that I did not understand?  I wondered if that was because I was over 55 that I was able to take out a certain amount every year tax free?

TBH I can understand why a lot of people do not invest in their pensions, it seems extremely complicated to me, compared to other vehicles I have used.  Still I am on a mission to get my head around it.  Is there a good book I can read?

Pat38493

There are a few points that were already mentioned that are the reasons why people invest in pensions

- You get full tax relief on the money paid in.  As a couple of other posters said above, if you are the owner of a limited company, paying yourself a salary and putting that into the pension may well not be the best way to get money into the pension - if you are the director of the company, I think the company can make contributions on your behalf and this may be even better - this is where your company accountant should be able to help and if not you could engage an pensions IFA to advise as well.  However even doing it via a salary and contributions will still be advantageous compared to putting your money into an ISA or suchlike.

- As also mentioned above, the pension is just a tax wrapper for your money.  There is no obligation to put the money inside the pension wrapper into the stock market.  In fact, there is nothing to stop you from just keeping it as cash inside the pension wrapper, although this would be an unusual choice.  Or you can put it in bonds or money market funds which are roughly equivalent to a savings account.

There is a book that quite a few people recommend which I think is called DIY Pensions.  However as far as I can remember it doesn’t address some of the additional options that you would have as the owner of an Ltd company.

scrooge2008

Thanks Pat38493 - I will take a look at that book and pay for an IFA's advice if my accountant is not able to help.   I am beginning to see the advantages and opportunities that I have missed. I think my problem with DC pensions stems from my husband having paid into a company one for around 30 years and his pot being around £50,000.00 and it seems to have dropped a lot recently.  Whereas investing my money in properties, when they were cheap and my business seems to have provided a better and more secure return.

dunstonh

I take a wage of about £850.00 a month from the company and get paid dividends too. 

It should be higher than that.  The primary threshold rose in July 2022.   If you take a wage less than the primary threshold, you don't get state pension qualification in that year.

Did your accountant not tell you to raise your salary last July?

Am I correct in that I could put all my PAYE earnings into a pension wrapper, this year, and all my profit?

Your salary is irrelevant as you would make company contributions and they are not linked to your salary.  You have the full £60k available to you, providing your profit is enough to cover it.  (you can pay above net profit but you are after corp tax relief and you dont get that above your net profit).

 If this is the case I am not sure that I would want to use the one that the company has, 'SMART' pension as I have been looking at it and it does not seem to be very user friendly.  

Shareholding company directors wouldn't typically use the auto-enrolment scheme.  They would use an individual personal pension.  Much more choice and flexibility with those.

If I am putting money into the stock market, I would rather, put in a set monthly amount, for the next 11 years and would therefore be buying cheaply in the event of a market crash and not timing the market.  (Tracker Fund?)

I am also thinking of using a pension wrapper to buy a small commercial property, at some point,

Given the above is there a low cost pension provider that would be able to accommodate the above.

No.    Low cost for funds would be yes but if you want property inside a pension then you are looking at a full SIPP and a bunch of charges.

This is going to sound really stupid, but does that mean that if I paid in my PAYE salary of £850.00 a month, to the SIPP that I would automatically get the 20% uplift and be able to withdraw £2040.00 (tax free) each year, plus anything extra the fund had made?

This is going to sound really stupid, but does that mean that if I paid in my PAYE salary of £850.00 a month, to the SIPP that I would automatically get the 20% uplift and be able to withdraw £2040.00 (tax free) each year, plus anything extra the fund had made?

You wouldnt pay into a pension like that though.  It would not be tax efficient.

TBH I can understand why a lot of people do not invest in their pensions, it seems extremely complicated to me, compared to other vehicles I have used.  Still I am on a mission to get my head around it.  Is there a good book I can read?

It is more complicated to be a landlord, yet you do that.

 I think my problem with DC pensions stems from my husband having paid into a company one for around 30 years and his pot being around £50,000.00 and it seems to have dropped a lot recently.  Whereas investing my money in properties, when they were cheap and my business seems to have provided a better and more secure return.

2022 was a negative year.   Hence whey it went down.  As was 2018, 2008, 2002,2001,2000.   The rest were positive.   

Property goes down in value as well.    It went down by more than a stockmarket crash in the 90s.      If you invested in the stockmarket was it was cheap it would likely have provided a better return than property.  Historically, equities beat property.  However, every asset class will have discrete periods when it is better than the rest.   This is why you diversify.

scrooge2008

Thanks Dunstonh, really useful.  My wage slip says I earned £850.00 last month (March) and £10,200.00 for the year and employee NIC of £159.83.  Accountant never said anything in July 2022 (I will speak to them about this) and with regards to the SMART pension, historically they said they were not allowed to advise on it.  I have bought the book that Pat mentioned and will look at the Individual Personal Pension.   Is there a provider that you would recommend?

Dazed_and_C0nfused

I take a wage of about £850.00 a month from the company and get paid dividends too. 

It should be higher than that. The primary threshold rose in July 2022. If you take a wage less than the primary threshold, you don't get state pension qualification in that year.

Earning at the LEL is sufficient for NI purposes.  There may be other reasons why paying more is preferable but it isn't necessary for State Pension purposes.

dealyboy

... from gov.uk ...

1.2 Monthly thresholds

£ per month	2023 to 2024	6 July 2022 to 5 April 2023	6 April 2022 to 5 July 2022	2021 to 2022	2020 to 2021
Lower Earnings Limit (LEL) Employees do not pay National Insurance but get the benefits of paying	£533	£533	£533	£520	£520
Primary Threshold (PT) Employees start paying National Insurance	£1,048	£1,048	£823	£797	£792

Pat38493

I also found the book Smart Investing by Tim Hale very informative although it’s mainly about how to choose the investments inside the pension pot.

peterg1965

If you wanted to be risk averse in terms of what you invest your pension in, you could just find a SIPP/Pension Provider that permits access to SIPP deposit accounts, there are 2 year and 3 year fixed rate deposit bonds at 4% and 4.05% respectively. Admittedly these rates are less that the current level of inflation, but with that expected to fall quickly this year, it might be a consideration.