Will I be eligible for pension tax-relief if I'm not earning?
16 July 2021
Question by Annabel
I am a teacher (aged 31) who is about to have a baby and I am thinking of not returning to work for a few years after the baby arrives.
I have paid into the Teachers Pension Scheme for 5 years, however my school have recently come out of the TPS and so I've contributed to an Aviva Teachers Pension Scheme for 1 year or so.
My husband and I were looking at our finances (he's also a teacher, currently still contributing to the TPS) and were wondering if it would be worth opening a SIPP in my name whilst I am not contributing to a workplace pension (using either current savings or some of his income).
Our thinking was, it would be worth me having my own pension savings, partly if anything were to happen to my husband, and partly because it would be more tax efficient to save more in my name as I won't have built up so much of a pension if I've taken years out of work to look after children?
We own our own home and can pay the mortgage on one salary and have about £15,000 invested in Stocks and Shares ISAs between the two of us, as well as £20,000 in easily accessible savings accounts. I was wondering about Vanguard (we currently hold their Lifestrategy 100 fund in an HL S&S ISA) or you recommend a few other options too.
However, if I am not earning and therefore not paying tax, will a SIPP be topped up by the government? If that is the case, would it be more make more sense for my husband to open a SIPP instead? We would probably be looking at saving around £200-300 a month.
Thanks for your help.
Answered by Adam Johnson
It is great you are really thinking about your financial future. You have identified that the time out of the workplace will create a savings gap later and are actively looking at ways to address this. In terms of the SIPP contributions you have suggested, there are two observations I would make.
The first is that a lot of clients are looking for SIPPs when perhaps a SIPP is not the right vehicle. A SIPP is a Self-Invested Personal Pension, which allows you to hold a wide variety of investments, including commercial property. For many clients they do not need this level of flexibility as they are typically holding investment funds in their pension. This means that they are paying a SIPP platform charge as well as the fund manager charges. They may also then be paying a financial adviser to advise them about the strategy. Costs could be saved as it is often the case that you do not need the SIPP wrapper, but instead a straightforward personal pension would be a better solution.
The second observation, and more pertinent to your circumstances, is that your pension contributions are limited to either £3,600 gross or 100% of earnings. As you appear to not be earnings during your career break, you will be restricted to £3,600 contributions (gross). Despite not being a taxpayer, you will still get basic-rate tax relief on your pension contributions. This means you will be able to invest £2,880 into a pension and the tax relief, which is claimed on your behalf by the pension provider, will be grossed up to £3,600. However, whilst it is technically possible to make pension contributions larger than this, you will not get the tax relief for doing so and most providers would not permit this. You will therefore need to get advice about the best way forward for you. You could, for example, make use of your £20,000 per year ISA allowance to supplement any savings for retirement that you wish to make and cannot get into your pension. In terms of the Vanguard investment options, I would suggest that you discuss this further with your financial planner and agree a risk strategy and asset allocation together. To answer beyond this on the specific investment feels like I would be giving you advice without having a clear grasp of your overall situation and your future plans.
Helping deliver client outcomes is at the heart of everything Adam does. Helping clients achieve their dreams is what motivates Adam as a financial adviser, and he takes great pride in the way he has helped so many families over two decades of providing financial advice, and fifteen years running his own practice.