Looking to boost pension and not pay tax on savings

born_again

 they haven't mentioned having a job so there is no pay to reduce.

1st line of OP.

self employed carpenter Is that not a job? One would expect that they are not working for free & taking some form of pay.

norealnamelol

I am still working and expect to earn £50000 for the few years.

If anyone was in my position what would you do with extra money?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81893777#Comment_81893777

Pension contribution methods for the self employed aren't the same as the majority of employee contributions so I don't see how the op could reduce their income by contributing to a pension (as a self employed individual).

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81893778#Comment_81893778

The thing is we don't really know your position. For example are you single or do you have a wife and seven kids to support? Do you rent or do you have your own place but with a massive mortgage?

There are all sorts of things other than your pension which could have first dibs on the extra money.

From a purely tax point of view contributing to your pension is a good idea.

From a where am I going to get money from when I no longer work point of view contributing to your pension is a good idea. Someone may even be along to tell you to check your state pension forecast to make sure you don't need to top that up.

We also don't know when you would like to retire. If you want to do that tomorrow then it is a bit late to be contributing to a pension but plenty of people ramp up their pension contributions as they get close to retirement. People have said that you need to be invested instead of in cash but normally the minimum time frame for investments is 5 - 10 years. So when do you think you might start to draw on the pension? And how long would you like it to last? You don't need me to tell you that for someone earning £50k pa a pension pot of just over £10k is not going to last long.

You do have a fair amount of cash with cahoot - that will generate some taxable interest and so getting yourself into basic rate tax territory will save you some tax (to get the £1k PSA instead of just £500). One thing to think about would be getting some of that cahoot money into an ISA - I know you have £20k in an ISA but was that this year's contribution or can you get some more in this tax year? If access is important there are plenty of easy access cash ISAs.

Secret2ndAccount

If your profit after expenses is £50,000 then pay £40,000 (or a bit less to be on the safe side) into your pension. This will be topped up by the taxman to £50,000. Use the other money you have to fund your living costs. Do this for several years to get the majority of the money into your pension. There are two benefits to this. First, it will keep you out of the 40% tax band. Secondly, 25% of it will be available tax free when you take your pension, potentially more if you retire before state pension age. Overall, you will be thousands better off than if you had just kept the money outside your pension.

The disadavantage is that you wouldn't want to withdraw it all in a big lump if you suddenly needed to make a large payment. If you did that, you would end up with a large tax bill, that could be more than you gained in the first place.

With a decent chunk of money in your pension, it makes sense to look for some investments, not just keep it in cash. Some of that money won't be needed for many years. Putting it into the stock market is likely to make returns that stay ahead of inflation and give you a wealthier retirement. There will be ups and downs, so maybe don't invest tomorrow's money, but invest what you won't need for a long time, as long as you have the stomach for it

norealnamelol

I am single and don't live with my partner.

I don't have mortgage and own the house I live in ,my kids are old enough to support themselves I help them out in emergencies only

Not sure amount when I will retire.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81893778#Comment_81893778

In your position (although I'm not, of course…), I'd do nothing until I understood more about pensions. For some basic reading see https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/pensions-for-self-employed-people

You might also think about a free appointment with PensionWise to help you get a better grasp of your options: https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81893943#Comment_81893943

So nothing else to spend it on?

It sounds as if you will be happy working until you're 67 at least so look at what your pension is invested in and whether you want what you now contribute to be invested in the same thing. I know nothing about the choices you are given by People's Pension.

Do check your state pension though voluntary contributions to that can be a good investment but of course you may have a full NI record and not need to do it.

One thing which people on here talk about doing as they approach retirement is to calculate "the number". There is a thread on it. Essentially it is to work out what you are likely to spend in retirement. So what do you spend now. What of that won't you spend when retired - eg commuting costs. What will you spend more on - eg world cruises. That should give you an idea of how much you need and then you work out where it will come from - eg your pension, the state pension, your other savings or a lottery win. (or more seriously you carrying on working when you might prefer not to be).

QrizB

At 56 you're a similar age to me, and hopefully only 10 or so years away from retirement. I'd suggest it's important to start saving for retirement now rather than putting it off any longer.

A common starting point, for someone with essentially no pension savings (and £10800 is't much of a pot at age 56), is to begin saving a % of your income equal to half your age. And then continue with that until retirement age.

Half of 56 is 28, and 28% of £50k is £14k.

So, to get you started and until you've got any better estimate of what you'll need in retirement, how about putting £14k into a pension next week and then £1200 a month after that?

How you choose to invest that money inside your pension is up to you, but the People's Pension "balanced" fund is their default and will probably be good enough for now.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81893758#Comment_81893758

We see on the forum from time to time that not all accountants are well informed about personal finance issues, pensions etc.

OP - Just be aware that in the world of personal finance, 'advice' has a specific meaning and can only be given by a regulated financial advisor, and you have to pay for that personalised advice. They are responsible that the advice is appropriate for you,

Anything else, such as anything you read on this forum, is just guidance/ a point in the right direction and with no comeback if it is wrong.