Pension questions from a newbie

bavli

I would appreciate some pension advice please.

I am 41 year old, I am married with 2 kids. I earn £80k per year, PAYE. I pay over £26k in tax and NI on my salary. I have been putting money into an ISA/life insurance and I have quite a lot of savings but want to start investing in a pension.

I don't know much about pensions and tax relief so please bear with me and correct any mistakes or assumptions I have made.

I have just taken a look at the "listen to the taxman" website which shows that if I paid £30k into a pension each year, the government would top this up to £42k and I would only be taxed on an income of £40k which would mean I keep my child benefit and would obviously be able to put a lot into a pension.

However, the company I work for have said that their pension scheme (a group personal pension plan) is payable from a post tax income. They would match any pension contribution from my base (if I contribute 5% of my base salary they will contribute 4%).

Can someone explain how this would work in practice if after tax I receive a salary of £53,500 and then I put £30k into a pension, I would only be left with £23,500 which I could not live on. What can I actually claim back on my tax return and is this actually returned to me (like a tax rebate) or is it just added to my pension pot?

However, as far as I can see I would still be much better off if I were able to pay into a pension from my pre-tax income and I am wondering what the benefits of having to pay from a post tax income could be or whether it is just tough luck and the company can't be bothered with the payroll complications of doing it from a pre-tax salary (maybe someone on her can explain the pros and cons of pre/post tax pension contributions?)

The company have told me that I can pay into my own private pension but the company would not contribute to.

So I am basically wondering;

a) If it is possible to insist that the company I work for pay into a private pension (not their scheme) before tax, so I reduce my taxable income and can pay much more into a pension and

b) Why the company pension would be set up this way (to pay into from my already taxed income) and whether there is some kind of tax advantage that I can use to make it as cost effective as if it was being paid from a pre-tax salary.

I have asked the provider but their answers have not been very clear.

jem16

bavli wrote: »

However, the company I work for have said that their pension scheme (a group personal pension plan) is payable from a post tax income. They would match any pension contribution from my base (if I contribute 5% of my base salary they will contribute 4%).

Good - free money. What's the maximum they will match?

Can someone explain how this would work in practice if after tax I receive a salary of £53,500 and then I put £30k into a pension, I would only be left with £23,500 which I could not live on. What can I actually claim back on my tax return and is this actually returned to me (like a tax rebate) or is it just added to my pension pot?

It's not added to your pension pot. You would claim it either via your tax return at the end of the tax year or by phoning HMRC who can adjust your tax code. The 2nd option sounds better for you as you'll get the tax relief right away.

However, as far as I can see I would still be much better off if I were able to pay into a pension from my pre-tax income and I am wondering what the benefits of having to pay from a post tax income could be or whether it is just tough luck and the company can't be bothered with the payroll complications of doing it from a pre-tax salary (maybe someone on her can explain the pros and cons of pre/post tax pension contributions?)

It won't make any difference in the end.

The only time it makes a difference if it's a salary sacrifice scheme where you also save on the NI contributions.

a) If it is possible to insist that the company I work for pay into a private pension (not their scheme) before tax, so I reduce my taxable income and can pay much more into a pension and

No it's not possible to insist on this.

b) Why the company pension would be set up this way (to pay into from my already taxed income) and whether there is some kind of tax advantage that I can use to make it as cost effective as if it was being paid from a pre-tax salary.

I have asked the provider but their answers have not been very clear.

It's just the type of pension that your company offer. In the end it makes no difference.

atush

a, you cannot insist it. This is salary sacrifice, and it can save both you and your employer in NICS paid. It would be in their interest to pay employee contribs by SS and save NICs so ask them why not? It does not affect the amt you can pay in.

b, it could be laziness, or lack of knowledge, or inertia. The provider doen't really have anything to do with it.

So, before I go on, how long have you worked there, and not paid into their pension scheme? Is 4% the max they will match? What is the absolute most they will pay in? Do you realise, you have been throwing away Free money of at least 3200 per annum (ie 4% of 80K)????

So, the way it works from post tax income is that your contributions are bumped up by basic rate tax. So every 800 into your pension becomes 1000 immediately as they pension provider gets the Basic rate tax in for you. To get the other tax back for HRT, you tell HMRC about these new contributions, and they will reduce the amt of tax they take off you each month by 200 for every 800 put in (20 for every 80 etc). So your income should not drop too drastically.

Unfortunately, as you have left planning so very late (ie age 41) and have missed many years of both yours and employers contribs, you will probably need to put in quite a bit to 'make up' for lost time. As you have lost say 20 years or so of compound growth on what could have been lower contributions.

So, as a minimum I would put in enough to match what your employer max contrib would be. Then on top of that, more either into your employers plan or a personal pension you can set up yourself. 30K in total after tax relief would be a good idea as you would gain back the CB. More if you wanted to (enough to take you out of higher rate tax altogether if you could) but there is a limit of 40K per year incl employers contributions. you could possibly use the last 3 years limits to put more in though.

Anyway, joint hte company scheme today, and put in enough to get their max money. You don't really want to waste another month of throwing away 266 quid or more?

Then either open a DIY personal pension thru someone like Cavendish online or HL or contact an independent financial advisor to help thru a recommendation or unbiased.co.uk. This would be for contributions above what your employer will match.

bavli

Thanks for your reply. So the only disadvantage with the post-tax pension is that I lose my child benefit whereas if it is pre-tax, child benefit is based on my income after pension is paid?

xylophone

However, the company I work for have said that their pension scheme (a group personal pension plan) is payable from a post tax income. They would match any pension contribution from my base (if I contribute 5% of my base salary they will contribute 4%).

See below
http://www.hmrc.gov.uk/incometax/relief-pension.htm

"However, some employers use the same method of paying pension contributions that personal pension scheme payers use - read more in the section on 'Personal pensions'."

You can contribute enough to get the maximum contribution from your scheme and to a personal pension as well.

See section in the link on maximum that can be paid in and be eligible for tax relief.

See an IFA? http://www.unbiased.co.uk/

bavli

atush wrote: »

a, you cannot insist it. This is salary sacrifice, and it can save both you and your employer in NICS paid. It would be in their interest to pay employee contribs by SS and save NICs so ask them why not? It does not affect the amt you can pay in.

b, it could be laziness, or lack of knowledge, or inertia. The provider doen't really have anything to do with it.

So, before I go on, how long have you worked there, and not paid into their pension scheme? Is 4% the max they will match? What is the absolute most they will pay in? Do you realise, you have been throwing away Free money of at least 3200 per annum (ie 4% of 80K)????

So, the way it works from post tax income is that your contributions are bumped up by basic rate tax. So every 800 into your pension becomes 1000 immediately as they pension provider gets the Basic rate tax in for you. To get the other tax back for HRT, you tell HMRC about these new contributions, and they will reduce the amt of tax they take off you each month by 200 for every 800 put in (20 for every 80 etc). So your income should not drop too drastically.

Unfortunately, as you have left planning so very late (ie age 41) and have missed many years of both yours and employers contribs, you will probably need to put in quite a bit to 'make up' for lost time. As you have lost say 20 years or so of compound growth on what could have been lower contributions.

So, as a minimum I would put in enough to match what your employer max contrib would be. Then on top of that, more either into your employers plan or a personal pension you can set up yourself. 30K in total after tax relief would be a good idea as you would gain back the CB. More if you wanted to (enough to take you out of higher rate tax altogether if you could) but there is a limit of 40K per year incl employers contributions. you could possibly use the last 3 years limits to put more in though.

Anyway, joint hte company scheme today, and put in enough to get their max money. You don't really want to waste another month of throwing away 266 quid or more?

Then either open a DIY personal pension thru someone like Cavendish online or HL or contact an independent financial advisor to help thru a recommendation or unbiased.co.uk. This would be for contributions above what your employer will match.

I have only been working for this company a year and was previously earning much much less, investing in an ISA as per the advice of my financial adviser and had my own business so was paying low salary/dividends and took company profits out when I closed the business as a capital gain. I have been putting money aside, as best I can. I was also ill for a period of time so not working.

jem16

bavli wrote: »

Thanks for your reply. So the only disadvantage with the post-tax pension is that I lose my child benefit whereas if it is pre-tax, child benefit is based on my income after pension is paid?

Again it doesn't matter. You will receive Child Benefit no matter which way it's done. As long as your net adjusted income is less than £50k you will get it.

Basically if you're making the contribution from net pay, think of the gross amount you want to pay into the pension and then pay this minus 20% basic rate tax relief.

So for example on an £80k salary which you want to take down to £50, then it's a £30k pension contribution gross but you will actually pay in £24,000. Your pension provider will make this up to £30k and you then claim another £6k tax relief from HMRC so in the end that £30k gross contribution has only cost you £18k.

atush

No, if you pay enough into ANY pension to get you below 60 (or better yet 50K) you will get your CB back (in part or in full depending on your income). Dont forget to include income that is taxed ie not in Isas/NSI.

the biggest difference is the amount of Nics paid would drop if in salary sacrifice .

jem16

atush wrote: »

a, you cannot insist it. This is salary sacrifice, and it can save both you and your employer in NICS paid. It would be in their interest to pay employee contribs by SS and save NICs so ask them why not? It does not affect the amt you can pay in.

Not all gross pay company pensions are salary sacrifice. Many are paid from gross pay but no saving on NI.

xylophone

Thanks for your reply. So the only disadvantage with the post-tax pension is that I lose my child benefit whereas if it is pre-tax, child benefit is based on my income after pension is paid?

See
http://www.theguardian.com/money/2013/sep/28/child-benefit-pension-contributions-higher-earners

atush

bavli wrote: »

I have only been working for this company a year and was previously earning much much less, investing in an ISA as per the advice of my financial adviser and had my own business so was paying low salary/dividends and took company profits out when I closed the business as a capital gain. I have been putting money aside, as best I can. I was also ill for a period of time so not working.

So you've only lost 3200 or more employers conrtribs plus any tax relief and growth on yours.

Who is your FA? Are they independent or Tied? Did they advise cash isas or S&S isas for your savings?

If they didn't mention a pension to you (for tax relief) and advised on cash isas instead fo some S&S isas then they may not be the right advisor and you could be better with another. If they advised S&S isas, and you are happy with what you paid them and how they are doing (and they are an IFA) get home to ehlp you with your pension.