Company pension contributions and ISA money

fifeken

Hi.
I posted this on the Pensions sub forum, but it's not getting any response so I wondered if it would get any further over here. It has both pension and savings content.

I contribute to my employers defined contribution pension scheme through salary sacrifice. Once a year I have the opportunity to change the level of my contributions.

I have a couple of pots of money available to me. 1) Stocks and shares ISA and 2) Collective Retirement Account, both of which I was content to leave where they were to contribute to my pension income when I retire.

Another idea has been put in my head that I take the money from either of these two pots and use it for regular expenses, in particular my mortgage as that's my largest outgoing.

As I would then have £800 per month less outgoings from my salary, I could increase my company pension contributions by £800 without any downside in my available cash for day to day living and, at the end of the (2 year) period doing this, the same amount of money in my retirement pots, only distributed differently.

Finally, as the pension is salary sacrifice, I'd actually be £160 better off in my take home pay each month (which far outweighs the interest in the CRA or ISA)

I'm not familiar with all the rules surrounding this, so my questions here are how does all the above sound? Is it a practical suggestion or a non-starter? What should I be looking out for, and are there any other comments you would like to make?

Mistermeaner

Bit confused but that's easily done; not sure what the question is?

First off pension is normally good; it's tax efficient both in and generally out plus you get employer contributions so I would encourage you max that. You don't however say how old you are, when you plan to retire, how much is in your dc pot , how much you want retire on, whether your married etc etc all of which have a bearing. However in general pension is good,keep paying max you can into that.

I think your question is around whether you should use money from an s+s isa to pay off your mortgage ?

It depends is the answer, gross rule of thumb is compare the % interest on your savings vs your debts and to balance them accordingly; ie no point in 100k mortgage at 5% with a 100k isa paying 1%…… however keeping a sum of cash readily available is a good idea fr rainy days.

Lots of different opinions but General rule of thumb is do the following in order of priority;

Clear expensive debts, eg store cards
Have emergency pot of cash eg 3 months salary
Max pension contributions to be tax efficient and get employer contributions
Pay / over pay mortgage
Invest in s+s isa and or oth higher return things depending on risk attitude and timescales
Buy nice things and enjoy life

Fyi the above is not set in stone and of course personal opinions and circumstances vary: eg I don't have a large emergency fund on basis I'm on 12 month notice at work, i am disproprtionately over paying my mortgage because psychologically I want to be mortgage free.

As long as you have your eye on each of the things above your probably doing ok

fifeken

Thanks for the reply and sorry for the confusion.

I think the main thing I'm trying to ask is can I take advantage of the salary sacrifice system to effectively not pay tax on outgoings, in this case increased pension contributions.

If it's allowed, I would have to sacrifice S&S ISA or CRA to do so, but it appears a good option. I'm afraid I'm missing something.

To give some more details, I already max out employer contributions to my pension, don't have any debts apart from mortgage and have my emergency pot in cash isa and high interest current accounts.

Mistermeaner

Ok;I think I understand.

Essentially you are looking to live of savings (including paying off your mortgage) and put more of your salary into your pension pot, thus being tax efficient.

This certainly sounds sensible and yes absolutely doable I think there is however a constraint of 40k per annum into your pension, but this can be extended back 3 years. Ie if you have paid 20k per annum into your pension for the last 3 years including this one you could put up to 60k in this year and still get tax relief. Please don't take my word for this though and do some googling.

In terms of is that sensible? Draw back of pension is the money is locked away until you are 55 soon going up to 57 so as long as you are ok wi t h that then no issue

Essentially you are swapping the ready availability of cash today for more tax efficient cash tomorrow

fifeken

ggb1979 wrote: »

Essentially you are looking to live of savings (including paying off your mortgage) and put more of your salary into your pension pot, thus being tax efficient.

Yes, I think that's the best way to describe it.

As the savings were for my retirement, I want to replace them, hence the increased pension payments. It just seems like easy money to me because of the salary sacrifice element, and this makes me surprised I've not read of others doing it.

In fact, once my savings are gone, it might even make sense to borrow money to do it, as long as loan interest is less than tax saved (assuming I want to keep putting extra into the pension).

jimjames

Effectively what you seem to be saying is to transfer ISA savings into pension. If you're prepared to not have access then I can't see a problem with that.

fifeken

jimjames wrote: »

Effectively what you seem to be saying is to transfer ISA savings into pension. If you're prepared to not have access then I can't see a problem with that.

Yes, but if I do £800 a month through salary sacrifice, I'll have £160 extra in my pocket each month which seems to good to be true.

I feel I must be missing something, or why isn't everyone doing it?

jimjames

fifeken wrote: »

Yes, but if I do £800 a month through salary sacrifice, I'll have £160 extra in my pocket each month which seems to good to be true.

I feel I must be missing something, or why isn't everyone doing it?

Not everyone has salary sacrifice scheme. I don't for my pension so I'd expect once it gets to a critical mass it will be stopped. Depending on election results that might be sooner than later.

fifeken

jimjames wrote: »

Depending on election results that might be sooner than later.

That would be a shame as the window for making changes in the scheme isn't for a few months yet.

I just noticed the signature at the bottom of your posts - most apt in this case, but hopefully not true.

Mistermeaner

fifeken wrote: »

That would be a shame as the window for making changes in the scheme isn't for a few months yet.

I just noticed the signature at the bottom of your posts - most apt in this case, but hopefully not true.

It's worth remembering that money into your pension goes in tax free that's why 800 in feels like 160 in your pocket because you've not paid tax on it. The 800 you will be replacing it with from your isa has already been taxed, so was once 1000.

Also money is taxed on the way out of your pension but at generally a lower rate: eg 25% taken as tax free lump sum then depending on your annual earnings taxed as any other income. Grossly simplistic but of that 800 that goes in tax free you take 200 out tax free but then pay income tax on the 600 at 20% thus you get 200+480=680 of your 800 back.

As to why isn't everyone doing it? Everyone with a dc pension is, to a lesser or greater extent it's just most people limit what they put in because they need x per cent o f their income to live on either because they don't have large savings like you or dont earn enough to be able to sacrifice lots.

I presume you are approaching retirement age at which time it is common for people to have clear e d all debts Inc mortgage and be loading up their pensions

ColdIron

ggb1979 wrote: »

As to why isn't everyone doing it? Everyone with a dc pension is, to a lesser or greater extent

It's an even better deal if you are paying higher rate tax as it can take you out of it entirely and now you are not obliged to take an annuity it's a no brainer