Salary Sacrifice??

marklv

I'm a bit puzzled as to why you are paying £100 a month from your net salary as an AVC. You would be better off increasing your salary sacrifice to say 10% of your baseline salary to make an extra contribution into your pension plan, as that would save you on NIC. May I ask how much your employer is contributing?

Matt002

The employer contributes nothing! If your in the scheme you have to nominate a % of your gross salary to be paid in salary sacrifice, if your not in the scheme you get the gross salary.

My payment part was set up when I first started the company. I have no idea why it was advised that I do this other than my salary was somewhat smaller back then?

marklv

zzr-matt wrote: »

The employer contributes nothing! If your in the scheme you have to nominate a % of your gross salary to be paid in salary sacrifice, if your not in the scheme you get the gross salary.

My payment part was set up when I first started the company. I have no idea why it was advised that I do this other than my salary was somewhat smaller back then?

When you first started the company? Does this mean you are self-employed?

If the 'employer' does not contribute and the contributions are from yourself, I would advise raising your contributions to 15% of salary, and yes, do it through salary sacrifice.

Matt002

Sorry I meant started being employed by the company.

Is the 15% a minimal amount I should be putting in to give me something reasonable in the future or is it based on something else?

marklv

zzr-matt wrote: »

Sorry I meant started being employed by the company.

Is the 15% a minimal amount I should be putting in to give me something reasonable in the future or is it based on something else?

15% is just a suggestion. Personally, I would contribute 20-25% of salary if my employer is not paying in anything at all, but then I am in my early 40s and don't have a big fund already. It all depends on your circumstances - if you expect to work another 35 or 40 years, then 15% should be adequate to give you a decent pension at 65. Obviously, the more you put in the more you will get out.

jamesd

You'd be better off switching it to salary sacrifice.

You're correct in the tax handling, it's not counted as income, won't appear on your P60 and doesn't need to be reported to HMRC when it's done by salary sacrifice. Salary sacrifice schemes normally track a "scheme salary" that you report for mortgage and other credit applications, it's just the salary you'd have without he sacrifice.

You might also consider sacrificing more because we're apparently in the early part of a global financial recovery. That should make now and the next year or two good times to be investing. A good time to cut back would be the next time we're in a boom market and things are looking generally over-valued. That would also be a good time to gradually switch some of the investments you've made in to lower risk investments to protect them during market drops. Varying like this can do nice things for the average growth level of your investments.

It's also good, in general, to try to get the contributions in early. That way you benefit from compound growth for longer and that reduces the amount you eventually need to have paid in to achieve any particular level of pension income.

During 2008-9 I sacrificed around 80% of salary to exploit the drops in the markets that year by buying at the relatively low prices then. I've also been very aggressive saving and investing in the last year to exploit the low prices at the start and growth during the year. Nice when a plan comes together.

marklv

I would strongly recommend keeping a balanced outlook to your spending, despite what JamesD said - sacrificing 80% of your salary is not a realistic option for most people! :eek: Of course if you are earning £150k+ then it certainly makes sense and can give you a platinum plated retirement. For ordinary mortals on 'normal' incomes this is a pipe dream unfortunately. There is more to life than saving up for your pension - never lose sight of this fact. You should always ensure you have a reasonable amount saved up for emergencies like the boiler going up the spout, urgent operations etc otherwise you can end up being a credit card slave - a dangerous approach to personal financial management.

jamesd

marklv, sacrificing 80% of salary is not a good idea for most people alright! That took my income down to minimum wage that year and most people wouldn't be willing to do that. It was a one-off, though I'm still sacrificing between 25 and 30% since then.

I didn't sacrifice any of the things you mentioned: years of emergency fund, private health cover, PHI, life assurance all in place. I wouldn't have done it if I didn't have enough to live on for several years.

The point of that part of the description is that if you decide you're committed to doing something it's possible to do more than just average things. Up to each individual to strike their personal balance. Mine is getting to the point where I can live on savings and investments until I can retire and then being able to continue living that way for the rest of my life. Along the way that'll put me in a position to retire early if I have a need to.

Empty_pockets

To save starting a new thread can someone please briefly explain how the tax rebate works on SMART pensions.

I understand the reduced earnings giving a lower NI figure but I thought you got tax relief on your pension payments.
e.g £100 paid into pension pot, HMRC put another £20/£40

Is that right??? If so, if the company are paying the pension payments how does the employee get the tax relief??

Thanks

jamesd

save every penny, there's a nice convention: individuals and businesses are entitled to arrange their affairs so that they minimise the tax due. Here's HMRC official guidance on salary sacrifice.

You're suggesting a risk that simply doesn't exist for standard employee-employer salary sacrifice agreements but might conceivably exist in some small businesses if they paid pension contributions at what would be a ridiculously high rate for the hours worked by the employee. £125k of pension and a couple of hours of minimum wage work for the spouse of the owner, say.