Is it too late to start a pension?

Secret2ndAccount

Suppose you earn 48k. You could earn 53k, but you don't like paying 40% tax. 
Earn the 53k. Pay 4k into a SIPP. That is quickly topped up, automatically to 5k. Free money.
When it is time to fill out your self assessment form, that 5k pension contrib will be added to your 50k tax threshold, raising it to 55k. So you don't pay any 40% tax as 53k is less than 55k. So, on the profit from 50k to 53k, you've saved another 20%, or £600. You completely avoid 40% tax.
When you take the money out of the pension, 1/4 is tax free. Seems likely you'll pay 20% tax on the rest, so that's an effective tax rate of 15%. As a 20% earner, paying in at 20% benefit, and taking out at 15% loss is nice, if not life changing. On that top part where you saved 40% and only pay 15% on the way out, it IS potentially life changing.

If you want to move some of your savings into your pension you can. Remember, 20% tax relief on the way in, and only 15% tax on the way out. You can get tax relief up to the extent of your entire profit this tax year. So, if your profit is 48k, you could live off savings, and pay say 36k into a SIPP. This is topped up to 45k. When you draw it out, at 15% tax, the 45k turns into 38,250. So you've turned 36k into >38k  just for cycling the money through your pension. If the money in your pension grows (at least part of it should be invested in equities) there is no dividend tax or capital gains tax, and no accounting to do. You only pay the 15% tax on the way out.

There is an annual limit of 60k for your payments into a pension. Doesn't appear you are in a position to hit that, since your profits aren't big enough. If the 60k becomes a problem, get back to us as there may be ways to put in more in future years.
All of this is per person. There's very little linkage between partners or spouses for personal pension rules.

eskbanker

sometime_soon said:

Have always remained a 20% tax payer and held off sales to stop going over the last few years

Aside from missing out on the tax benefits of using pensions, without knowing anything about your line of business and in particular the split between fixed and variable costs, is it really sensible to turn down sales that would 'only' deliver 60% of the incremental revenue instead of 80%?

sometime_soon

Thanks yes it absolutely was shirt sighted but this has literally happened in the last few years. The business has only come into itself in the last 5 years and prior to this we had zero money or savings so pensions were not ever possible. Every penny we earned from employment previously went into trying to get on the housing ladder and move up it. Yes that probably makes no sense to everyone , I completely understand but bear in mind we are the first generation in our families to ever own a car, let alone buy a house! We are now as tight as the ducks backside as you learn to hang on to everything just incase! 

sometime_soon

Thank you all again.Appreciate I probably seem like an absolute idiot! Most likely I am! It all makes perfect sense after the fact and yes we are disappointed in ourselves for not reaching the pension conclusion earlier ( especially tax wise!!) but it’s only been a few years now and health caution and some of the reasons mentioned meant we held ourselves back so we will just crack on with it now.! 

sometime_soon

Thankyou Secret2ndAccount for taking the time to respond . It is gratefully received and makes perfect sense. It’s rather embarrassing asking for help or advice ( not something we have ever done well as you just get on with it) hence didn’t feel wise enough to go and see a financial advisor to save looking like complete idiots at this stage of our life! 

MallyGirl

Please don't feel embarrassed about asking for help. We all bring different knowledge to this forum and offer our input (not advice) and suggestions happily. We were all novices once. 

LHW99

Also, if you are already 50 & 55, the older person will be able to access pension money in 2-3 years (if necessary), the younger in 8 or so. Little worse than taking out a normal 5 year fixed savings account, except with 20% tax relief, money in the pension gets an immediate 6.25% boost. You could put it straingth into a short term money market fund while you decide which equity funds you want to use, and get around 4% interest while you are thinking (and no wrries about going over the personal savings allowance, and paying tax on the interest).

For 40% taxed money it's even better.

penners324

Be absolutely crazy NOT to

Jemma01

sometime_soon said:

Thanks yes it absolutely was shirt sighted but this has literally happened in the last few years. The business has only come into itself in the last 5 years and prior to this we had zero money or savings so pensions were not ever possible. Every penny we earned from employment previously went into trying to get on the housing ladder and move up it. Yes that probably makes no sense to everyone , I completely understand but bear in mind we are the first generation in our families to ever own a car, let alone buy a house! We are now as tight as the ducks backside as you learn to hang on to everything just incase! 

I'm 40, I too paused my pension contributions in favour of clearing my mortgage debt. Is it a wise thing to do? Not really, but owning my house fully and not be kicked out because I couldn't make a living is my worst fear, esp being self-employed (ltd), you don't know when you'll lose your income or if it'll pay your bills. No one will understand what you're going through emotionally other than yourself. Don't beat yourself over it. You're in a good place to revisit your decision, and nothing is too late.

Grumpy_chap

Pensions are a bit like trees.

The best time to start a pension / plant a tree was 20 years ago.
The second best time is now.