£5,000 start pension for DH or pay into mortgage

[Ladycoo1]

My DH is self employed and does not have a pension. We are in our mid 40's. I have a pension with the job I have with the local authority. We have a low mortgage probably have 8 years left to pay. We have got £5,000 given to us. Should we start a pension up for DH if so how do we do this? Or should we pay the money into my pension and hope my DH benefits if I decease before him? Or pay it into the mortgage? Advice would be greatly appreciated. Many thanks.

Pensions make more sense as they come out of gross pay.

If you’ve got a local government pension, then I’d focus on your husband building up a pension pot. A SIPP could be a good option.

What difference would it make to your mortgage if you put it in there? What length of time would you have left if you overpaid now. Martin Lewis has a good calculator if you don’t know.

Regardless, I would set up something for your husband and increase payments when the mortgage is paid off. I wouldn’t add to your pension, he should have something of his own.

For tax purposes you should only pay into dh's pension from his earnings.
Fwiw my dh is also self employed and hadn't set up pension, it kept me up at night. I've recently set one up for him - now just need to make him pay into it

I'd bung it into the mortgage, it will be so liberating when that is paid.

But could your DH not set up a pension and a standing order to pay into it as well? Then once mortgage is paid off he can increase the amount he puts in?

For tax purposes you should only pay into dh's pension from his earnings.

Not sure that's right, TankGirl, as it's perfectly possible and legal to set up a pension for people who don't have any earnings at all.

He can't pay in more than 100% of his earnings, or more than £40k in a year.

Fair comment. I should have said to be more tax efficient he should pay £5k from his earnings (assuming he earns enough to pay tax) rather than use the £5k gift.

Thank you everyone. Your advice is much appreciated.

@TankGirl97 I have a SIPP and it makes no difference where the money that I pay into it comes from - earnings or gift. The 25% gets added automatically a few weeks after I pay into it.

The only link to earnings is that you can’t pay in more than 100% of earnings or £40k, which ever is greater (including the 25% contribution from the gov). So hypothetically you could earn £20k and pay £16k into a pension, because after the extra 25% is added your pension contribution will be at your limit of £20k.

@scarlet but wouldn't there be a penalty if my DH pays for a pension with the gift money tax wise with him being self employed? Wouldn't he end up paying tax on it?

There is no trace on each specific pound. He has income of x and a gift of y. It is all his money. His ability to make a pension contribution depends on his earned income, but doesn't have to be paid specifically from that earned income - how would that even be possible? The majority of this money is probably all just figures on a computer.

Pension. And your DH should pay into it regularly too.

www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed

Pension for the tax benefits. Your mortgage will probably have a low rate of interest so makes more sense to go for a pension and get the tax uplift. I understand people want to get rid of the mortgage but by delaying pension investing, you are missing out on the benefits of compounding your returns over time.
You could try looking at a website like Monevator as I think they have guide for beginners. The usual advice is to try to find a SIPP with low fees and invest in a cheap global tracker. I’m not a financial expert by the way it’s just what I have read on the internet when researching my own pension.

Who gifted you the money?
I’d say if you’re a higher rate tax payer and he isn’t, then it’s better going into your pension - but if it was his family gifting it, you may feel differently.

You have said what your mortgage interest rate is, or how much either of you earn, so it’s not possible to say which is the best option financially.