Pension and dividends

[lukemg]

1. Don't go near an IFA, learn what you need to do this yourself, it it not that complicated and will be the best investment you ever make.
2. I chuck a chunk in straight from co because I use it to get it out of the co account, naturally this does not get topped up. In addition I am considering chucking in from personal funds equal to annual salary which will get topped up.
HTH

[unixman]

Thanks to Craig and others for replies. Following is a summary of my original questions and answers, in case anybody comes searching here. NB needless to say I am not responsible in any way for the accuracy of this information; use entirely at your own risk.

Regarding Personal Payments into Personal Pensions:

1. Can I pay dividend income into a pension ? No. You cannot legally pay money from dividends you have paid yourself into pension. This is because dividends are not "qualifying income" for pensions.

2. Can I pay my salary into a pension ? Yes of course. You may pay into your pension any amount up to the level of your salary.

3. Are there tax advantages to paying salary into a pension ? Yes. Your higher rate tax threshold will increase by whatever sum you paid into the pension. Thus for example you may avoid corresponding dividend tax at the higher rate, if you have paid yourself dividends which would otherwise exceed the HR threshold. Also depends on your other personal circumstances.

Extra explanation: Tax avoided or reclaimed as a result of pension payments should more accurately be thought of as a government incentive for pensions. The "reclaim" is available even when tax has not been paid, as would be the case of a contractor (who follows the low salary/high dividend model) making personal payments into a personal pension. Having paid no basic rate tax on salary, he/she can nevertheless avoid/reclaim higher rate dividend tax, if any is due, on dividends equivalent to the sum invested.

Web pages such as this HM Revenue & Customs: Tax relief on pension contributions - state that there is a £3600 (gross) limit on "reclaiming" tax that has not been paid, but the limit actually applies to people who have no earnings, rather than those who have paid no basic rate tax.

There are 3 limits for what can be paid into your pension fund personally (all expressed as gross amounts):

£3,600 - if you have no earned income
100% of your earned income
£40,000 - if your earned income exceeds £40,000 (this one applies to total payments into the fund, made up of both personal and employers contributions)


Regarding Payments from your Company into your Pension:

4. Isn't it better to have my Ltd company pay directly into my pension ? Yes probably, but not always (see posts above). It also allows you to pay more into the pension and potentially save more tax. If you make such an arrangement, observe the limits above and the comment from Contreras on page 1 of this thread, viz: "The cheque or bank transfer must go direct from YourCo to PensionsCo and they must be told it's an employer contribution being made gross (so you don't end up getting double tax relief on it)."

[taxguru]

Thanks to Craig and others for replies. Following is a summary of my original questions and answers, in case anybody comes searching here. NB needless to say I am not responsible in any way for the accuracy of this information; use entirely at your own risk.

Regarding Personal Payments into Personal Pensions:

1. Can I pay dividend income into a pension ? No. You cannot legally pay money from dividends you have paid yourself into pension. This is because dividends are not "qualifying income" for pensions.

2. Can I pay my salary into a pension ? Yes of course. You may pay into your pension any amount up to the level of your salary.

3. Are there tax advantages to paying salary into a pension ? Yes. Your higher rate tax threshold will increase by whatever sum you paid into the pension. Thus for example you may avoid corresponding dividend tax at the higher rate, if you have paid yourself dividends which would otherwise exceed the HR threshold. Also depends on your other personal circumstances.

Extra explanation: Tax avoided or reclaimed as a result of pension payments should more accurately be thought of as a government incentive for pensions. The "reclaim" is available even when tax has not been paid, as would be the case of a contractor (who follows the low salary/high dividend model) making personal payments into a personal pension. Having paid no basic rate tax on salary, he/she can nevertheless avoid/reclaim higher rate dividend tax, if any is due, on dividends equivalent to the sum invested.

Web pages such as this HM Revenue & Customs: Tax relief on pension contributions - state that there is a £3600 (gross) limit on "reclaiming" tax that has not been paid, but the limit actually applies to people who have no earnings, rather than those who have paid no basic rate tax.

There are 3 limits for what can be paid into your pension fund personally (all expressed as gross amounts):

£3,600 - if you have no earned income
100% of your earned income
£40,000 - if your earned income exceeds £40,000 (this one applies to total payments into the fund, made up of both personal and employers contributions)


Regarding Payments from your Company into your Pension:

4. Isn't it better to have my Ltd company pay directly into my pension ? Yes probably, but not always (see posts above). It also allows you to pay more into the pension and potentially save more tax. If you make such an arrangement, observe the limits above and the comment from Contreras on page 1 of this thread, viz: "The cheque or bank transfer must go direct from YourCo to PensionsCo and they must be told it's an employer contribution being made gross (so you don't end up getting double tax relief on it)."

This is all fine; just to add the total contributions in a year shouldn't exceed your annual allowance which for 2014-15 is £40k

[Boubou]

Thanks to Craig and others for replies. Following is a summary of my original questions and answers, in case anybody comes searching here. NB needless to say I am not responsible in any way for the accuracy of this information; use entirely at your own risk.

Regarding Personal Payments into Personal Pensions:

1. Can I pay dividend income into a pension ? No. You cannot legally pay money from dividends you have paid yourself into pension. This is because dividends are not "qualifying income" for pensions.

2. Can I pay my salary into a pension ? Yes of course. You may pay into your pension any amount up to the level of your salary.

3. Are there tax advantages to paying salary into a pension ? Yes. Your higher rate tax threshold will increase by whatever sum you paid into the pension. Thus for example you may avoid corresponding dividend tax at the higher rate, if you have paid yourself dividends which would otherwise exceed the HR threshold. Also depends on your other personal circumstances.

Extra explanation: Tax avoided or reclaimed as a result of pension payments should more accurately be thought of as a government incentive for pensions. The "reclaim" is available even when tax has not been paid, as would be the case of a contractor (who follows the low salary/high dividend model) making personal payments into a personal pension. Having paid no basic rate tax on salary, he/she can nevertheless avoid/reclaim higher rate dividend tax, if any is due, on dividends equivalent to the sum invested.

Web pages such as this HM Revenue & Customs: Tax relief on pension contributions - state that there is a £3600 (gross) limit on "reclaiming" tax that has not been paid, but the limit actually applies to people who have no earnings, rather than those who have paid no basic rate tax.

There are 3 limits for what can be paid into your pension fund personally (all expressed as gross amounts):

£3,600 - if you have no earned income
100% of your earned income
£40,000 - if your earned income exceeds £40,000 (this one applies to total payments into the fund, made up of both personal and employers contributions)


Regarding Payments from your Company into your Pension:

4. Isn't it better to have my Ltd company pay directly into my pension ? Yes probably, but not always (see posts above). It also allows you to pay more into the pension and potentially save more tax. If you make such an arrangement, observe the limits above and the comment from Contreras on page 1 of this thread, viz: "The cheque or bank transfer must go direct from YourCo to PensionsCo and they must be told it's an employer contribution being made gross (so you don't end up getting double tax relief on it)."

The HMRC link says £3,600 limit is if you don't pay tax, not if you have no earned income. Can you please clarify.

What happens if you don't pay tax?
If you don't pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20%) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.

[Zero Liability]

1. Don't go near an IFA, learn what you need to do this yourself, it it not that complicated and will be the best investment you ever make.
2. I chuck a chunk in straight from co because I use it to get it out of the co account, naturally this does not get topped up. In addition I am considering chucking in from personal funds equal to annual salary which will get topped up.
HTH

Re 1, any decent sources on this? IIRC, you previously mentioned Vanguard's funds.

[Craig at Nixon Williams]

The HMRC link says £3,600 limit is if you don't pay tax, not if you have no earned income. Can you please clarify.

What happens if you don't pay tax?
If you don't pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20%) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.

Even if you pay no tax at all on your earned income then you can still make a gross contribution (after the pension has been topped up) upto 100% of the earned income and the pension provider will be able to claim tax relief.

So for example, if you have a salary of £10k then you can make an £8k payment into the pension and it will get topped up by £2k, making the gross contribution £10k. If you tried to pay more into the pension then you would not get any tax relief on the excess.

[psychocandy]

If you pay into a pension personally then your higher rate threshold will increase by the gross pension amount (upto a maximum of your salary). Say you have a salary of £10,000 this year and pay in £8,000 (net) to a pension (which will be a gross payment of £10,000) then your higher rate threshold will be increased to £51,865 and you will save some tax on your dividends.

NLUK, it is more tax efficient to pay into a pension personally than to do it through the company

Hope this helps!
Craig

Assume here your limited to a max of what your salary is? i.e. You cant pay in more in than your salary is?

[Craig at Nixon Williams]

Assume here your limited to a max of what your salary is? i.e. You cant pay in more in than your salary is?

Also, I thought difference between personal and company contribs was small?

Yes, so if you have a gross salary of £10,000 then you can contribute £10,000 gross which would be a payment of £8,000 (net).

The difference between personal and company contributions is 2.5% if your income is at or in excess of the Higher Rate threshold.

[psychocandy]

Thank you. In 2 posts you have made the position clearer than my accountant could (or would) in 3 weeks of phone calls and emails. I lost out by not paying in before April 6th. C'est la vie.

Switch to NW? LOL.

[lukemg]

Re 1, any decent sources on this? IIRC, you previously mentioned Vanguard's funds.

Apologies for long post, sent this to S-i-l who wanted some 'how to get started' advice.

No-one is sorting out my retirement so I take this all very seriously !

First - If you want better returns, you have to accept more risk, there is no way to get one without the other.

For me – this means investing in shares but how to do this ?
There are 3 main ways:
1. Invest directly in individual shares BT, SSE, Unilever ? – Why do you think you can do better at this than fund managers with hundreds of analysts ? You can’t so don’t even think about it.
2. Buy funds being run by these managers to use their expertise ? Sounds tempting but it turns out no-one can beat the market forever and last years best are very unlikely to be next years. Plus, because of the higher charges eating your returns, they have to do really well to beat the index over time. Over 10 years ~80% don’t beat the index and you have no way to work out in advance which 20% will do !
3. Buy the cheapest index tracking funds you can find – Smart individual investor money does this, you buy the whole market, a computer buys and sells and you get the market return. It’s dull but it works. See this for some proper zealots who like to sleep at night.
Video:Bogleheads® investment philosophy - Bogleheads

Ok – I’ve decided to do this, what next ?
You have to choose between ISA’s and SIPP’s for starters.
SIPPs vs ISAs: pensions win if you’re saving for retirement | Monevator

This explains it far better than I can and this site is brilliant for straightforward advice about how this all works, read as much as you can stand !
DONT under any circumstances pay someone to rob you blind and put the money into ANY of the pension providers, if fund managers are bad, this is legalised theft with the advisor, the pension provider and the fund manager all taking a cut.

In v.short – SIPP’s work really well if you are high-rate taxpayer but will be low-rate when retired (v.likely). Plus, new flexibility on getting the cash out makes a SIPP even better.
Plus – you can’t get the cash till 55 and for a lot of people this is REALLY important to stop them doing something stupid, which is anything usually.

Ok I want a SIPP, what now ?
HL.co.uk – Hargreaves Lansdowne are the biggest fund supermarket (FTSE100 company) the website tells you how, its very easy to get started and you don’t need much money.
Vanguard LifeStrategy funds turn passive investing catatonic
This is talking about a low-cost fund from Vanguard (Largest fund mgmt co in the world and they specialise in index funds.)
IF I was starting from scratch I would setup a monthly payment into a lifestrategy 80 fund and forget about it for 10 years.
This puts 80% of the money into stock markets all over the world (you never know what area might do well -Asia, US, Europe), don’t try to guess, just have some in all.
The other 20% is in fixed income, bonds from companies, government IOU’s. This reduces the risk as they are not exposed to market falls.
OTHER STUFF TO THINK ABOUT:
- Market falls are as inevitable as cold weather in winter, they are not a maybe they are only a when. So, why do we bother ? Because the markets tend to go up 2 years out of 3 and if you give it enough time (10 years at least !), you will do better than any savings fund, this has been true for hundreds of years.
- DO NOT PANIC WHEN THE MARKET FALLS AND SELL, they always recover and you will be glad your monthly payment was buying up all that cheap stock because you would not have the courage to buy – This is because of PCA – Pound Cost Averaging. Risk tolerance
- YOU HAVE TO FIGHT YOUR INSTINCTS – People are their own worst enemy, they buy and sell at the worst times, follow the crowds, over trade (extra charges) and are biased to their view etc etc There is loads written about behaviour theory, no-one is immune and so you need to take the decision away from yourself.

So, I would:
- Setup a SIPP with HL.
- Setup a monthly payment into the Vanguard Lifestrategy 80 fund (Gvmnt will top this up as a tax incentive, great for high-rate payers, you might have to claim the additional 20% through your self-assessment but this is easy)
- Hold your nerve and when the market falls you need to think ok, that means I will be getting more for my money this month.
- Try not to do anything else...

Finally, this is not the gospel, this is only my opinion, so be sure this is right for you and please don’t be swayed by what I am doing because there are NO guarantees.
I can find you plenty of people who won’t touch shares, think you should buy-to-let, buy wine, rugs, carbon credits etc etc AND I have made most of the mistakes highlighted, wondered why and started reading everything I can to find out.

Also:
5% From The FTSE vs 0.62% On Cash Is A No-Brainer

Why Do Investors Make Bad Choices? - Bloomberg View