Personal pensions

[josadler7]

Just wondered what people think about personal pensions (Stakeholder etc.) I work as a sole trader and was thinking about setting up a pension this year since I am 41 years old and I only have an old (£40k’s worth) pension from my previous employer. Recommendations, experience and advice welcome. Thank you in advance.

[factor-fiction]

Hi. A £40K fund sounds quite a lot but at current annuity rates will give you only a fairly small pension at age 60- maybe £2000 a year. So yes, you need more.
It depends on the age youw ant to retire at and homuh you need to live on. There are sites that will calculate for you how much you'd need to put in to get a certain income. You probably need to be putting at least £500 a month away from now on.
I'm not sure though what tax relief you get on contributions as a sole trader

[Hymie]

My advice would be to find some other investment vehicle to fund your retirement.

I am in a money purchase pension scheme through my employer – the only reason I am in it, is that for every £ I put in, my employer matches this. So when I come to retire, my pension fund will be twice what it would otherwise have been.

On the plus side, these pension contributions are tax efficient – in that no tax is paid on the earnings paid into the pension.

Now the bad news – when you come to retire you can take 25% of your total fund as a tax free lump sum. With the rest, you have to buy an annuity. An annuity will pay out a very poor investment return – given that the annuity-company gets to keep your pension pot once you die.

As an example, with a £100k pension pot, at age 65 you might get a pension of £6k per year (fixed, never increasing) – you will have to live until 82 just to get your money back, without adding the interest that would be added over those 17 years.

[factor-fiction]

I agree with Hymie about low annuity rates. However although Hymie gives an example of age 82 life expectancy has increased significantly and someone who retires at 65 may live to 90.
One advantage of a pension is you can't be tempted to dip into it before you retire. If you can keep a fair amount in another savings vehicle you will have more control over it. Maybe you need a mix. I was simpy saying you need to put a lot of money aside

[josadler7]

Thank you both, I guess I'm wondering if I should put a lump sum into a pension this year when I'm in a good position to do so. Pensions are an option since they are tax efficient unlike some other investments - does anyone have any experience of this as a sole trader?