UKH

A family member worked all her life and paid all her NI contributions so will receive state pension, but they never signed up to a private/employers pension.

They have some cash available and wondered if it would be worth putting into a pension or SIPP.

If I’ve read it correctly they can put in £2,880 per tax year which would then get a top up of £720 as tax relief.

Is this correct?

And if so how soon could it be withdrawn? They are already old enough to draw down a SIPP/private pension.

Can a spouse also pay in to a SIPP/pension for them? If so, would there be any additional tax relief available?

Not taking huge sums here, but times are tight for them and they are thinking of any ways to get a little extra income when they retire soon.

 Any advice would be appreciated!

This is my understand. 

Yes, you don't need to be earning to qualify for that top-up.

Straight away I believe. Up to that limit I don't think there's anything stopping you withdrawing and paying into the pension at the same time.

This is why there is that limit to prevent you from making too much free money.

Although, if they are over the £12k tax threshold and being taxed on the pension, it will balance out. If not being taxed, then it could be worth withdrawing what you can tax free, and paying in to get the top up. Stick the rest in an ISA which you can always access tax free.

I'm surprised they haven't closed this loophole. Take advantage before they do.

Not sure on this one, but if they give the cash to this family memeber, surely they can just pay it in and get the benefit. Or would this be over the £2880 limit? If so, I didn't think there would be any top up, but could be wrong on this.

There's long been a debate as to whether it's better to put money into an ISA or a pension. ISA is tax free once in, and when you take out, and more flexible.  A pension gets tax relief on the way in but may get taxed when taken out, and probably has more rules/admin/restrictions attached to it.  In the case of someone not working, the pension limit would be net £2880/yr (as you have noted), the annual ISA contribution limit is £20k for anyone (i.e. a bigger tax shelter per year).  The investment types (managed, self-managed) and the range of investments (funds, shares, cash etc) is extensive in both cases.

Then it depends how the person wants to take the extra generated income, do they want to manage it themselves or do they e.g. want an annuity (guaranteed income).  Annuities are a big area and there's quite a debate about whether it's the right time to purchase an annuity or not, and constant debate about the level of annuity returns.

If someone else wants to make contributions on their behalf, you may need to be mindful of the gifting rules for IHT purposes, although there's an annual allowance of £3k per person for gifts. And inter-spouse gifts are IHT free.

HTH.  I am not a financial adviser.  It may be worth getting a little bit of financial advice to set you right (but it doesn't normally come free...). 

25% of what you withdraw will be tax free, so if you are over the 12k the tax benefit isn't as great but still significant. 

Caveat: I am not a financial advisor or accountant, just an ordinary joe. 

"If I’ve read it correctly they can put in £2,880 per tax year which would then get a top up of £720 as tax relief." As I understand it this is correct. Worth noting that the deadline to put money in for the 2023-4 tax year is 5 April 2024. If your relative wants to make a contribution for 2023-4 and has not yet opened a private pension account then best get moving. 

Re. when one can withdraw from a private pension the CAB has advice here https://www.citizensadvice.org.uk/debt-and-money/pensions/nearing-retiremen... . It looks as though (for those in England) someone can usually start withdrawing it at age 55. 

As yorkshire_lad2 notes, the £20,000 yearly share ISA allowance is useful. This allows someone who is not working to put more money each year aside in a tax-efficient way, and gives them control over where to invest it. There is info here on share ISAs https://www.moneysavingexpert.com/savings/stocks-shares-isas/ . One of the simplest ways to use a share ISA is to put the money into an index fund. Worth noting that the deadline to put money in for the 2023-4 tax year is 5 April 2024, so if your relative wants to use their 2023-4 share ISA allowance and hasn't opened a share ISA account yet then again best get moving. 

Re. limitations of private pensions: worth bearing in mind that pension funds take into account someone's age when deciding where to invest their money and as they approach retirement age the pension fund tends to move their investments into "lower risk" categories like government bonds. If, however, those bonds make a far lower rate of return than equities (e.g. an S&P 500 index fund) then this can lead to a significant decrease in the value of someone's pension . There was an FT article in this recently https://www.ft.com/content/ab059105-b9f5-4e7e-8896-dbdede87c3af . 

Think I am right in saying you can "carry forward", so if you miss contributions on year, you can add them to  your allowance in the following year, so possibly not so urgent.

And if they were working during those previous three years, that allowance will be what they earned each year, if that was more than £2880. Although that might make the need to act swiftly, more urgent? 

https://forums.moneysavingexpert.com/discussion/6475718/2880-to-sipp-for-wi...

Absolutely can do this. Good thread here.

£720 tax relief gets added after about 6 weeks. Just don't take it all out in month 1 (April) or they will tax it as if you will earn that amount every month and you'll have to claim it back

Had a chance to read through your post and the replies properly.

Firstly I'm a retired teacher not a financial adviser 

Just a few things to add, you imply they are still working or have been until recently. This might affect the amount they can pay in significantly. As MG pointed out the allowance is backdated for 3 years. So, since you say they haven't paid into a pension during this time, the limit on what they can pay in at the moment is what they have earned over this time.

There is no problem with the spouse contributing towards this payment, many will have joint accounts. There is some rule about if they have been given tax free gifts from other sources there is a limits on how much they can put into a pension but it is at least a few thousand (7.5k?). The rules are pretty complicated but I don't think it will be a problem in this case. It's more designed to stop people putting a tax free lump sum they get when taking a DB pension, directly into a SIPP

IHT is mentioned, there isn't any when passing assets  onto a spouse. A pension isn't considered part of the estate when passing it onto dependants. If you pass away before 75 they get it all tax free, if older they pay tax as if it were extra income. As it isn't part of the estate, it isn't 

ISA's and other investments have been mentioned, for a younger person they might be worth considering, but you say the family member is near retirement age, I think they will be less advantageous in the short term.

There is obviously a bit of hassle involved in paying into and then withdrawing from a pension and I tend to look at in terms of an hourly rate (being sad I do this a lot, van insurance etc.) As we've already got a pensions set up, transferring money in takes a few seconds, although predictably getting it out a few weeks later takes a bit longer. Now Mrs J hasn't worked for over 3 years and her DB pension takes her above the personal allowance its £180 for a few minutes work, as others have explained it might be that your family member would benefit to the tune of £720, although this might involve  hassle and delay getting the tax back off HMRC, as they will probably only give you 25% tax free initially. Tax relief on contributions to a SIPP stop when you are 75. Depending on how much they have earned in the last three years and how much they have saved, the sums involved could be considerably larger. Although if it's more than 30k it will no longer be classed as a small pot pension, so you have a bit more hassle, but no real problem or expense, withdrawing the money. 

My take on choosing a pension over an ISA for the not-working limit of £2880 (as well as using an ISA for any other money you get), is simply to get the (hopefully) investment gains on the gov's £720 contribution for the period you have it invested. 

That same £2880 in an ISA would be missing the £720 up front, so would grow less over time.  Then hopefully there is a substantial tax free limit when you do end up taking it all out.

Maybe my thinking is wrong, but I've recently decided to start using the £2880 pension allowance, (as well as an ISA) for any savings.  Of course it depends on where you get any of this "extra" money from, and how that is taxed.

From an investment perspective I would suggest you really have to be looking at a 10 year plus period in investing that pension in a fund before its worth drawing down on that pension.

If they are not prepared to wait for 10 years plus then I would suggest there is little real advantage in puttng money in a pension.

ISA- even a cash one say fixed for 2 years would also be less risky. Again on the basis that stock markets drop and they will not want to bear that risk and ride out the down turns.

But that time issue applies equally to any investment, no?  Or are you suggesting a pension has other short-term disadvantages versus an ISA S&S?  I get that the cash ISA is always more secure short term.

I would suggest the Posters family member's tolerance for a drop in the value of the investment in a stocks and shares isa or say through a pension fund is extremely low.They have not got much money and any loss would be catastrophic in their eyes. You really need to be able to sit out these drops and accept them over something like a 10 year plus period( it is something like 1 in every 3 years there is a drop in stocks and share values..that is a rough figure). These investments are really for the long term where you can afford to sit and wait and not be bothered.. Cash ISA for them will be more secure and lead to less nervousness.It also means they can easily dip in where necessary especially when their finances are very tight.For them every £ is critical, they cannot afford to run with a drop in the value.So they need an option which is " safe" and less likely to lose them money.Even bonds- inflation linked gilts for example - are too risky for them.

Cheers!  Yes.  Understand that.  I thought in your orig comment you were implying that a pension had other time-based disadvantages compared with ISA S&S.  But obviously that's not what you meant.  Thanks again.

I hope somebody does not suggest Bitcoin......

I agree with your assessment of risk. I recently cashed in a small pension pot as it appeared to be going nowhere and fluctuating down too often for me. The money's gone into a fixed rate account and/or cash ISA. I'm off to get an echocardiogram shortly. A useful reminder of the potential fragility of life.

Thank you for all of the replies. It has been interesting reading through them, for myself and family member.

On reflection, I don’t think that it would be worthwhile for them, due to starting to receive state pension very soon. That would take them close to the tax-free threshold, so if they put money into a pension, and then drew down on it, they would likely pay 20% tax on most of it, so the net benefit would be very small. 

If they had been doing it for the past years then they would have benefited, due to being under the tax free allowance, but now it wouldn’t make sense. 
 

They are already utilising some ISA/savings accounts, and I thought this would be a way for them to get a higher return on a proportion of their savings.

Thanks to all who took some time to answer.

Putting money into a pension and then with drawing gives a gain of 6.25% if taxed at lower rate. As an almost immediate return this is not to be sniffed at. Any growth within the pension is in addition to this.

As I understand it, when making contributions to a pension you can only carry-forward unused pension allowance from the previous 3 years IF you were already a member of a registered pension scheme during those previous 3 years. You can't carry forward anything from the period before you opened a pension. This makes it imperative to OPEN a pension early, even if you don't pay anything into it until subsequent tax years.