Pension/Salary Sacrifice

lizzie123

Hi Guys

I'm sure this question has been asked time and time again, so please gentle with me I have started a new job and the pension on offer is a salary sacrifce, the company will match my contribution upto 5%. I started the pension and I am in the middle of my cooling off period at the moment. What I was wondering is it worth me contributing at the moment, would I be better off putting my money in an ISA or some other form of saving account? Advice would be very welcome.

dunstonh

A pension is not a savings account. It has totally different aims. So, if you want to save, you dont use a pension. If you want to invest towards your retirement (and assuming long term) then you use a pension and/or stocks and share ISAs.

The employer is giving you 5% "free" money and you only need to pay 4% net (plus NI reduction as well). Ignoring the NI reduction, the if you pay £80 into the pension then it gets taken upto £100 by tax relief and a further £100 from the employer. If you pay £80 into a savings account then you get £80.

For the savings account to match the free money and tax relief at a rate of return of 5% p.a. would take 19 years. And that assumes the pension itself doesnt make a penny. In reality, the savings account would always be behind and in the long term would get further behind.

Free money from the employer is a no brainer.

fimonkey

Agree with Dunstoh in that free money from your employer is a no brainer,..

However what pension options are your employer offering you? Is it only the one option with salary sacrifice, or do they have an alternative they will contribute to without salary sacrifice?

Salary sacrifice is complicated (IMO) and employers will use it in different ways.

lizzie123

many thanks for the replies, my company only offer a salary sacrifice option with AXA. I just feel a little out of my depth when it comes to pensions and as I'm nearly at the end of my 30 day cooling off period, whether an alternative to a pension would be a better option for my old age.

fimonkey

Is it a final salary scheme? How old are you? Have you got any other pensions (from previous employers etc)?

dunstonh

A pension is just a tax wrapper. It will get the same returns if you invest in the same funds in a unit trust or ISA. The only difference is the maturity method, tax and charges (charges less of an issue nowadays as they are often the same or nothing in it).

Do you think that cash savings can turn an £80 contribution into £200 and make up the difference in returns (cash is typically less than 5% p.a. and pensions typically closer to 7% p.a. using a balanced managed fund)? If you do then tell us where because you will have a lot of interested readers here

lizzie123

fimonkey wrote: »

Is it a final salary scheme? How old are you? Have you got any other pensions (from previous employers etc)?

they offer two options either a gross pension or a tax free cash sum and reduced pension at the age of 65. I do have 2 other pensions an army pension from 4 years service which will give me approx £600 a year at 65 (I think) and a civil service pension for about 11 years service. I'm 34 and have been in my new post since June 08.