Pension advice please

[Pensionwishes]

Hi all,
I'm completely clueless about pensions. I am 38 and I currently earn 33k a year part time. My pension pot is small and my DH only has 8k in his.
He has recently started a business and is earning about 100k a year now, so is planning on putting a lump sum in (about 50k) as it makes sense tax wise rather than taking it out of his business and paying high tax on it.
We have a mortgage of 450k for 25 years.

We can currently live on his salary alone. Is there any advantage to me paying my entire salary into a pension or should I be trying to overpay the mortgage instead? How much should we prioritise pension over everything else?

TIA

Pensions are tax efficient but you don't pay tax on the first £12570 of your earnings so at the very least I wouldn't pay that in from your salary, it's like free money. You would then only be paying 20% tax on the rest of your earnings.

If looking purely as a couple it would make more sense for your husband to pay more into his pension as he will be paying (therefore saving) at 40% tax whereas you would only be saving 20% tax. But I do think it's also important you have your own pot as well for your own protection, so it's probably a better idea to each save a decent amount instead of relying on one salary.

Remember if you have kids you should keep his taxable income (after pension contributions) at less than £100k for childcare benefits reasons.

As for mortgage vs pension it's a balance. You will have the tax savings on pension and compound interest so on paper that's probably where you should focus. But I'm sure there is something to be said from not having your mortgage hanging over you!

Thanks for your advice, really helpful. And good point that I shouldn't put my entire salary into a pension as some of it tax free!
I think we will prioritise putting more of his into a pension if they makes most financial sense. I dont have concerns about us splitting up and we very much live out of one pot of money as opposed to separate accounts.

I agree it makes sense for your DH to make all the pension contributions as he will get twice the tax relief you would receive.

Depending how old your DH is you should also consider that under current rules he will be able to take out 25% of his pension pot tax free as soon as he hits 55. If he is a 40% or 45% taxpayer this is an extremely efficient way of paying off the mortgage.

You can pay up to 60k into your pension every year and can backfill up to 3 years if you haven't used the allowance. This means that were he for example looking to retire and was 55 or older, he could pay in at least 60k in the last few years of work and take most of it back out almost immediately without paying any tax.

As an example if he is 40 and wants to retire at 55 and is happy to pay £20k pension contributions every year he would have accrued £300k+ fund growth over the 15 years. In his last year couple of years of work he could pay in £60k contributions plus could use the previous 3 years shortfall meaning he could pay in all his salary aside from his £12k tax free allowance.

This would mean he could pay in £88k of his £100k salary in each of those 2 years a pay no tax. He then has a fund of £300k + growth + £176k. He can then take 25% of this total amount out tax free. With the growth added it will mean he could take the entire £176k straight back out at 55 and have effectively paid no tax on his last 2 years of work.

That is the most tax efficient way of clearing your mortgage. If it is already cleared by then it is still worth doing as it will allow you more money for earlier retirement.

The only curve ball is that Labour are notoriously bad news for pensions and they may well change the rules but even if they do it will be well in advance of you needing to employ the process I have outlined and you'll have sufficient time to amend your strategy if needed.

You can pay up to 60k into your pension every year

Have I got this wrong? Isn't the £60,000 limit on total increase in pension value, including employer's contribution and gains from interest and appreciating stock?

Pension contribution limits are based on all contributions - employee, employer and tax relief. Growth is not taken into account in a DC scheme.

You can put 100% of relevant earnings - you don’t need to deduct your nil rate band.

If you have a limited company, the company can make contributions more tax efficiently.

You are partially correct.

The 60k relates to total annual contributions so does include both employer and employee contributions.

However any gains from interest and appreciating stock from either the existing fund or the new money being added are not included in the annual limit.

You don't need to deduct the nil rate band however it is unlikely you wouldn't want to unless you believed that the pension investment with no tax relief was the best investment on the market which is unlikely to be the case.

@Charlie2121 That’s not quite right. The government uplifts your pension contributions by 25% irrespective of whether you have paid tax on it. But the total amount added must not exceed your pre tax earnings.

Eg if you earn 30k you are allowed to add up to 24k of your earnings after tax (including employer’s contribution). That £24k gets uplifted by 25% to make 30k. However it doesn’t cost you all your income because of the tax free allowance: your income after tax works out as £26,514. That means you get to keep £2,514, while also adding £30k to your pension.

So if you can afford to pay in up to your earnings limit, it is definitely worth it.

My numbers and reasoning are based on using salary sacrifice.

If you can pay in that way then what I stated is correct.

@Charlie2121 Ah yes, you are much more limited using salary sacrifice. Though you could set up a standalone SIPP alongside your workplace pension and add up to 80% of your personal tax allowance that way, which would get topped up to reach your earnings limit.

The tax relief at source method will still provide tax relief on the full amount (even if no income tax is due).

Salary sacrifice is very much limited in that your employer still needs to pay you at least minimum wage.