Can I start a pension plan if I’m unemployed?

Q

“I am disabled, unemployed and have no pensions. I am 57 and looking to start a 10-year pension plan until my official retirement date in June 2030.

I am interested in the pension plan for people on low incomes, where I believe you can put in a maximum of £240 a month and the Government will add £60 a month to it.

I contacted a financial adviser who wants to charge me £900 to set this up for me.

Where can I apply to do the pension and an Isa?

”

From: RM/via email

A

Without earnings, you can save up to £3,600 each tax year into a personal pension or perhaps a stakeholder pension plan. The former generally offers a wider investment choice, if that is important. The latter is a type of personal pension, but with more restricted investment choices and capped charges: they are often better suited to people on low incomes.

You are correct that whatever you pay in is ‘grossed up’ by 20% tax relief – so if you pay in £240 a month, £60 tax relief is added to make a gross contribution of £300.  

However, before going down this route you need to consider what it is you are trying to achieve. For instance, do you aim to provide a regular income from the age of 65? Or perhaps just accumulate a lump sum from which to draw as and when you want? With a pension you can withdraw 25% tax-free, while any withdrawals from the remainder are potentially taxable depending on your other income.

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You would also have to decide how to draw your income. You could leave the fund invested and draw as needed – though this option may be less viable, given the size of fund you are likely to accumulate – or buy an annuity to provide income for life.

Then there is the question of risk. You will not get any interest on cash in a pension, so you would have to invest your contributions in some kind of investment fund, which could fluctuate in value. 

As an alternative, therefore, you could consider an Individual Savings Account [Isa].

Just as with pensions, all returns on Isas are tax-free. Although you will not benefit from the tax relief on contributions, all future withdrawals are free of tax. You could save in either cash or stocks and shares, or a mixture of both, and you could save up to £20,000 each tax year.

If you are entitled to working tax credit or receiving universal credit, there is a third option: the Help to Save scheme. This is a government-backed savings account, which provides a bonus of 50p for every £1 saved over four years. You can save between £1 and £50 each calendar month, with your bonus added at the end of year two and year four. Your account closes after four years, but you could then put the maturity value into a pension or Isa.

You have to apply directly for Help to Save at Gov.uk/get-help-savings-low-income/how-to-apply, but for a pension or Isa you definitely do not need to go through an adviser.

Several do-it-yourself investment platforms such as Fidelity, interactive investor (Moneywise’s parent company) and Nutmeg, deal directly with investors. Most of these platforms offer both a Stocks and Shares Isa and a personal pension at very low cost, so you could have both within one account. For a Cash Isa, however, you would use a bank or building society online or in branch.

Francis Klonowski is director of Klonowski & Co.