How can a 39-year-old father with no pensions but an inheritance of £75,000 save for retirement? Kay Ingram, director of public policy at national IFA firm, LEBC Group gives her thoughts.
As you have no pensions to date, I assume you must be self-employed or you have opted out of your employer’s pension scheme. If the former, you can start a pension plan and can get tax relief on contributions made into it at the highest rate of income tax you pay.
The amount you can save and get tax relief on will be limited to the lower of your taxable profits for the year or £40,000. If your taxable income is in excess of £150,000 the amount you can pay in with tax relief may be less than £40,000.
As you are late starting your pension saving, you should kick start it now with the highest lump sum possible and then pay an affordable regular monthly amount from now on.
“The amount you can save and get tax relief on will be limited to the lower of your taxable profits for the year or £40,000.”
If you are employed and have earnings of more than £10,000 per annum, you should have been offered membership of an employer’s pension scheme.
You will need to pay in 4% of your salary (up to £50,000) and your employer and the tax relief will double this to 8% in total. If you have not been offered a pension scheme, your employer is breaking the law and needs to set one up with possible backdating of any due contributions.
Failure to do this will result in a heavy fine from the Pensions Regulator. If you opted out in the past you can join now and should do so as not being in the scheme means giving up free money from your employer and HMRC.
Pension funds are invested with no tax to pay on the growth or income they make while invested. They can also be left to loved ones on your death outside of your estate for inheritance tax. When you draw funds from the pension up to 25% can be taken as a tax-free lump sum after age 55, the balance of funds withdrawn are taxed as income.
Lifetime ISA (LISA)
If you don’t yet own your home, you are eligible to save in a Lifetime ISA but you may need to be quick as once you hit 40 you cannot start one. From now to age 50 you could save up to £4,000 a year and the government will add up to £1,000 a year.
This could mean saving £44,000 of your own money and getting an £11,000 boost added over that time. The LISA rolls up tax free and can be used for a deposit for a first home or can be left invested till after age 60 when it can provide a tax- free income. If you access the fund for any other purpose you will pay a 25% penalty on the money withdrawn.
Individual Savings Account (ISA)
The LISA investment comes out of the £20,000 annual allowance for ISA investments, leaving a further £16,000 which can be paid in each year to a cash or equity and bond ISA. ISAs roll up tax free and pay tax free income, they can be accessed at any time for any purpose. There is no tax relief added to your investment each year.
Pension, LISA or ISA?
If a higher rate taxpayer now (income over £50,000) a pension will give more tax relief now but 75% of the withdrawal will be taxed later.
If a basic rate taxpayer and not a homeowner the LISA is attractive as it gets the equivalent of 20% tax relief at least till age 50, the income from it is tax free. So, maxing the LISA till 50 and then putting more into pension and ISA later could be a good compromise.
As you are married you could also fund a pension, LISA and ISA for your wife. The amount that can be paid into a pension, if she is not earning, is £3,600 a year but this only cost £2,880 as the rest it is topped up with tax relief.
She could only have a LISA if still under 40. If you both have income in retirement, you can each use up your personal income tax allowances. A couple can receive more net income this way, compared to one of you having all the income, with the other’s tax allowances wasted.