Sole Trader - ISA or Pension HELP ..

johnnytwoeyes

an anyone please give me some advice on my finances?

I am a 50-year-old sole trader who earns around £28-30k a year with no pension.

After years of renting, I had to move back in with my father after he took a few falls just before COVID. It was meant to be temporary, but years down the line, I am still here and some days feel I will never leave.

I have built up quite a bit in savings, which is (hopefully) for a house purchase, spread across a couple of current accounts earning around 5%.

A lump sum in a fixed ISA which ends in October, and for the last four years, I've been maxing out my ISA allowance to put into a S&S ISA.

My worry is that I do not have any sort of pension or property of my own. Is paying into the ISA the most efficient way to save, or should I be looking into a pension?

Being a sole trader, I have good and bad years with my income varying quite considerably, and the worrier in me always thought it was best to keep the funds handy rather than being tied up in a pension.

Any help would be much appreciated.

Dazed_and_C0nfused

johnnytwoeyes said:

an anyone please give me some advice on my finances?

I am a 50-year-old sole trader who earns around £28-30k a year with no pension.

After years of renting, I had to move back in with my father after he took a few falls just before COVID. It was meant to be temporary, but years down the line, I am still here and some days feel I will never leave.

I have built up quite a bit in savings, which is (hopefully) for a house purchase, spread across a couple of current accounts earning around 5%.

A lump sum in a fixed ISA which ends in October, and for the last four years, I've been maxing out my ISA allowance to put into a S&S ISA.

My worry is that I do not have any sort of pension or property of my own. Is paying into the ISA the most efficient way to save, or should I be looking into a pension?

Being a sole trader, I have good and bad years with my income varying quite considerably, and the worrier in me always thought it was best to keep the funds handy rather than being tied up in a pension.

Any help would be much appreciated.

A pension is going to beat a S&S ISA.

Ignoring investment gains (you can usually hold the same funds in S&S ISA's and pensions) you add say £5,000 to a S&S ISA and you eventually take £5,000 out with no tax to pay.

Add that £5,000 to a pension and the pension company will add £1,250 in basic rate tax relief (20% of the gross contribution) so you have a pension fund of £6,250.

When you take that out 25% (£1,562.50) can be taken as a tax free lump sum.  If the remaining £4,687.50 is taxed at the basic rate of 20% that leaves you with £3,750 after tax.  Plus the £1,562.50 TFLS is a total return of £5,312.50.

You have to show the pension contributions on your tax return but unless you are Scottish resident there won't be any personal tax saving, on your income level the benefit is all in the basic rate relief added to your pension fund.

dunstonh

My worry is that I do not have any sort of pension or property of my own. Is paying into the ISA the most efficient way to save, or should I be looking into a pension?

Pension beats ISA for retirement planning in the majority of cases.  

Being a sole trader, I have good and bad years with my income varying quite considerably, and the worrier in me always thought it was best to keep the funds handy rather than being tied up in a pension.

Having an emergency fund makes sense but how big do you need it?

johnnytwoeyes

Dazed_and_C0nfused said:

johnnytwoeyes said:

an anyone please give me some advice on my finances?

I am a 50-year-old sole trader who earns around £28-30k a year with no pension.

After years of renting, I had to move back in with my father after he took a few falls just before COVID. It was meant to be temporary, but years down the line, I am still here and some days feel I will never leave.

I have built up quite a bit in savings, which is (hopefully) for a house purchase, spread across a couple of current accounts earning around 5%.

A lump sum in a fixed ISA which ends in October, and for the last four years, I've been maxing out my ISA allowance to put into a S&S ISA.

My worry is that I do not have any sort of pension or property of my own. Is paying into the ISA the most efficient way to save, or should I be looking into a pension?

Being a sole trader, I have good and bad years with my income varying quite considerably, and the worrier in me always thought it was best to keep the funds handy rather than being tied up in a pension.

Any help would be much appreciated.

A pension is going to beat a S&S ISA.

Ignoring investment gains (you can usually hold the same funds in S&S ISA's and pensions) you add say £5,000 to a S&S ISA and you eventually take £5,000 out with no tax to pay.

Add that £5,000 to a pension and the pension company will add £1,250 in basic rate tax relief (20% of the gross contribution) so you have a pension fund of £6,250.

When you take that out 25% (£1,562.50) can be taken as a tax free lump sum.  If the remaining £4,687.50 is taxed at the basic rate of 20% that leaves you with £3,750 after tax.  Plus the £1,562.50 TFLS is a total return of £5,312.50.

You have to show the pension contributions on your tax return but unless you are Scottish resident there won't be any personal tax saving, on your income level the benefit is all in the basic rate relief added to your pension fund.

Thanks for the information.. so does the pension company add the contribution even though I am a self employed / sole trader ?. So in theory could I back date my contributions at 100% of my earnings for the last 4 years into a pension ?

4 years earnings works out approximately 100k invested which would result in another  25k from the pension company  which I could access at 55  , then if needed getting taxed only on the 75%  ? . 

Dazed_and_C0nfused

johnnytwoeyes said:

Dazed_and_C0nfused said:

johnnytwoeyes said:

an anyone please give me some advice on my finances?

I am a 50-year-old sole trader who earns around £28-30k a year with no pension.

After years of renting, I had to move back in with my father after he took a few falls just before COVID. It was meant to be temporary, but years down the line, I am still here and some days feel I will never leave.

I have built up quite a bit in savings, which is (hopefully) for a house purchase, spread across a couple of current accounts earning around 5%.

A lump sum in a fixed ISA which ends in October, and for the last four years, I've been maxing out my ISA allowance to put into a S&S ISA.

My worry is that I do not have any sort of pension or property of my own. Is paying into the ISA the most efficient way to save, or should I be looking into a pension?

Being a sole trader, I have good and bad years with my income varying quite considerably, and the worrier in me always thought it was best to keep the funds handy rather than being tied up in a pension.

Any help would be much appreciated.

A pension is going to beat a S&S ISA.

Ignoring investment gains (you can usually hold the same funds in S&S ISA's and pensions) you add say £5,000 to a S&S ISA and you eventually take £5,000 out with no tax to pay.

Add that £5,000 to a pension and the pension company will add £1,250 in basic rate tax relief (20% of the gross contribution) so you have a pension fund of £6,250.

When you take that out 25% (£1,562.50) can be taken as a tax free lump sum.  If the remaining £4,687.50 is taxed at the basic rate of 20% that leaves you with £3,750 after tax.  Plus the £1,562.50 TFLS is a total return of £5,312.50.

You have to show the pension contributions on your tax return but unless you are Scottish resident there won't be any personal tax saving, on your income level the benefit is all in the basic rate relief added to your pension fund.

Thanks for the information.. so does the pension company add the contribution even though I am a self employed / sole trader ?. So in theory could I back date my contributions at 100% of my earnings for the last 4 years into a pension ?

4 years earnings works out approximately 100k invested which would result in another  25k from the pension company  which I could access at 55  , then if needed getting taxed only on the 75%  ? . 

Yes, they get the basic rate relief from HMRC and add it to your pension fund.  You aren't involved in that at all, it is automatic.

You can never back date pension contributions.

There is the potential to use carry forward of unused annual (pension) allowance which allows larger contributions in the current tax year.  But you can only make use of that once you have used the current tax years allowance and as that is £60k it is of no use to you (you will be limited by your profit figure).

And you always work back from the gross contribution so if your taxable profit in the current tax year your maximum contribution in the current tax year is say £29k then that would be the maximum you could contribute.

Which would be a payment from you of £23,200 and the pension company will add £5,800 in basic rate tax relief.  You couldn't pay £29,000 and get £7,250 added as it would be a gross contribution of £36,250.

Marcon

johnnytwoeyes said:

Dazed_and_C0nfused said:

johnnytwoeyes said:

an anyone please give me some advice on my finances?

I am a 50-year-old sole trader who earns around £28-30k a year with no pension.

After years of renting, I had to move back in with my father after he took a few falls just before COVID. It was meant to be temporary, but years down the line, I am still here and some days feel I will never leave.

I have built up quite a bit in savings, which is (hopefully) for a house purchase, spread across a couple of current accounts earning around 5%.

A lump sum in a fixed ISA which ends in October, and for the last four years, I've been maxing out my ISA allowance to put into a S&S ISA.

My worry is that I do not have any sort of pension or property of my own. Is paying into the ISA the most efficient way to save, or should I be looking into a pension?

Being a sole trader, I have good and bad years with my income varying quite considerably, and the worrier in me always thought it was best to keep the funds handy rather than being tied up in a pension.

Any help would be much appreciated.

A pension is going to beat a S&S ISA.

Ignoring investment gains (you can usually hold the same funds in S&S ISA's and pensions) you add say £5,000 to a S&S ISA and you eventually take £5,000 out with no tax to pay.

Add that £5,000 to a pension and the pension company will add £1,250 in basic rate tax relief (20% of the gross contribution) so you have a pension fund of £6,250.

When you take that out 25% (£1,562.50) can be taken as a tax free lump sum.  If the remaining £4,687.50 is taxed at the basic rate of 20% that leaves you with £3,750 after tax.  Plus the £1,562.50 TFLS is a total return of £5,312.50.

You have to show the pension contributions on your tax return but unless you are Scottish resident there won't be any personal tax saving, on your income level the benefit is all in the basic rate relief added to your pension fund.

Thanks for the information.. so does the pension company add the contribution even though I am a self employed / sole trader ?. So in theory could I back date my contributions at 100% of my earnings for the last 4 years into a pension ?

4 years earnings works out approximately 100k invested which would result in another  25k from the pension company  which I could access at 55  , then if needed getting taxed only on the 75%  ? . 

You can't back date contributions.

'Carry forward' requires you to have enough earned income (in your case profits) for the tax year in which you make the contribution. You could only contribute £125K (gross - you'd pay £100K and the provider adds basic rate tax relief) if you earn that in the tax year in which you make the contribution.

I'm afraid there's another issue in your case: you say you have 'no pension'. You can only use carry forward if you were a member of a registered pension scheme during the relevant period, so on that basis, you can't use carry forward at all.

Just to add the final blow (sorry!), if you are 50 now, you won't be able to access your pension until you are 57. The minimum age increases from 55 to 57 on 6 April 2028. 

SacredStephan

Have you checked your state pension forecast, through your Govt gateway account?

johnnytwoeyes

Thanks again for all the advice and information; it is much appreciated. 

I really made a mess of it all, but it's my own fault, especially since I opened an AJ Bell SIPP account 2 years ago and

 never got around to using it.

Does the payment to a pension need to be made during the tax year when the profit was made? 

The issue is that I am unable to figure out what my exact profit will be until after the TAX year, as my income fluctuates week to week (I restore antiques/musical instruments) and has been as low as £17k and as high as £40k in the last 10 years.

Currently, I am just finishing my 2023-24 self-assessment tax return, and it's around £25k taxable (after mileage allowances, costs, but not including bank interest). So, has this year gone as far as contributing to a pension?

My State pension is for a forecast of a full state pension.

Thanks again 

Dazed_and_C0nfused

johnnytwoeyes said:

Thanks again for all the advice and information; it is much appreciated. 

I really made a mess of it all, but it's my own fault, especially since I opened an AJ Bell SIPP account 2 years ago and

 never got around to using it.

Does the payment to a pension need to be made during the tax year when the profit was made? 

The issue is that I am unable to figure out what my exact profit will be until after the TAX year, as my income fluctuates week to week (I restore antiques/musical instruments) and has been as low as £17k and as high as £40k in the last 10 years.

Currently, I am just finishing my 2023-24 self-assessment tax return, and it's around £25k taxable (after mileage allowances, costs, but not including bank interest). So, has this year gone as far as contributing to a pension?

My State pension is for a forecast of a full state pension.

Thanks again 

Last tax years profit is of no relevance.

You will need to estimate as best as you can what your profit will be in the current tax year to know how much you can contribute between now and 5 April 2025.

You can never back date pension contributions so you have missed the boat as far as 2023-24 is concerned.

Unless you were planning on contributing 100% of your profit you should be able to have a good idea if your contribution will be within the limits or not.

And don't forget you pay the net amount, so if your profit in 2024-25 is expected to be say £28,000 and you want to add £20k to the pension then you give the pension company £16k and they will add £4k (25% of what you pay) to make up the gross contribution of £20k (the £4k is 20% of the gross contribution).

johnnytwoeyes

Dazed_and_C0nfused said:

johnnytwoeyes said:

Thanks again for all the advice and information; it is much appreciated. 

I really made a mess of it all, but it's my own fault, especially since I opened an AJ Bell SIPP account 2 years ago and

 never got around to using it.

Does the payment to a pension need to be made during the tax year when the profit was made? 

The issue is that I am unable to figure out what my exact profit will be until after the TAX year, as my income fluctuates week to week (I restore antiques/musical instruments) and has been as low as £17k and as high as £40k in the last 10 years.

Currently, I am just finishing my 2023-24 self-assessment tax return, and it's around £25k taxable (after mileage allowances, costs, but not including bank interest). So, has this year gone as far as contributing to a pension?

My State pension is for a forecast of a full state pension.

Thanks again 

Last tax years profit is of no relevance.

You will need to estimate as best as you can what your profit will be in the current tax year to know how much you can contribute between now and 5 April 2025.

You can never back date pension contributions so you have missed the boat as far as 2023-24 is concerned.

Unless you were planning on contributing 100% of your profit you should be able to have a good idea if your contribution will be within the limits or not.

And don't forget you pay the net amount, so if your profit in 2024-25 is expected to be say £28,000 and you want to add £20k to the pension then you give the pension company £16k and they will add £4k (25% of what you pay) to make up the gross contribution of £20k (the £4k is 20% of the gross contribution).

Gutted but thanks again for taking the timeout respond , so the contribution to the pension can be done anytime within the TAX year  - I get a rought idea around December of approximately how much I am on course to make so could put in say 50% and then top up at the end of March if I keep on top of my files ?
  Would a SIPP through Fidelity be suitable ?

Dazed_and_C0nfused

johnnytwoeyes said:

Dazed_and_C0nfused said:

johnnytwoeyes said:

Thanks again for all the advice and information; it is much appreciated. 

I really made a mess of it all, but it's my own fault, especially since I opened an AJ Bell SIPP account 2 years ago and

 never got around to using it.

Does the payment to a pension need to be made during the tax year when the profit was made? 

The issue is that I am unable to figure out what my exact profit will be until after the TAX year, as my income fluctuates week to week (I restore antiques/musical instruments) and has been as low as £17k and as high as £40k in the last 10 years.

Currently, I am just finishing my 2023-24 self-assessment tax return, and it's around £25k taxable (after mileage allowances, costs, but not including bank interest). So, has this year gone as far as contributing to a pension?

My State pension is for a forecast of a full state pension.

Thanks again 

Last tax years profit is of no relevance.

You will need to estimate as best as you can what your profit will be in the current tax year to know how much you can contribute between now and 5 April 2025.

You can never back date pension contributions so you have missed the boat as far as 2023-24 is concerned.

Unless you were planning on contributing 100% of your profit you should be able to have a good idea if your contribution will be within the limits or not.

And don't forget you pay the net amount, so if your profit in 2024-25 is expected to be say £28,000 and you want to add £20k to the pension then you give the pension company £16k and they will add £4k (25% of what you pay) to make up the gross contribution of £20k (the £4k is 20% of the gross contribution).

Gutted but thanks again for taking the timeout respond , so the contribution to the pension can be done anytime within the TAX year  - I get a rought idea around December of approximately how much I am on course to make so could put in say 50% and then top up at the end of March if I keep on top of my files ?
  Would a SIPP through Fidelity be suitable ?

Yes.  You don't have to pay it in all in one go, you could make multiple payments, the final one being right at the end of the tax year.

There are lots of providers, you probably want to look at which investments you will be opting for and the fees.

Vanguard for example have fees at the lower end of the scale but only have their own funds to choose from which won't suit everyone.

I have no experience of Fidelity but it looks like you would need to make regular payments to keep fees down until you have £25,000 with them.  Not that that is necessarily a problem, you could make smallish regular payments and top up with larger ones once or twice a year.