How much of Bonus to pay into Employer pension scheme?

CDB199

Enrolled last yr, pay 5% of pay as employer matches 4% so getting max benefit here.

Earn bonus on top of salary. This would be tax free if goes straight into pension plan plus 10% from employer I have recently been told.
(Guess they do this as incentive as would have to pay NI more than this?)

Anyway, is this the most effective thing to do with the money? Not subject to higher rate tax so save there, and getting employer benefit.
Should I put in as much of it as poss?

PeacefulWaters

It certainly sounds like an option to consider.

How old are you?

What debts do you have?

How much is in your contingency fund?

What unfulfilled aspirations do you have in life?

How will you replace your car when it wears out?

jamesd

Employer NI is 13.8% so your employer would save 3.8% of the amount paid in and you'd get the remaining 10%. It's a good deal. If you were to take it as income you'd lose the 10%, have to pay income tax and also have to pay employee NI at either 2% (higher rate income range) or 12% (most of basic rate range). It appears that your combined NI and income tax relief on this money would be 42%. That's a good deal.

Whether it's the best thing to do with it depends on the rest of your circumstances and we don't know those.

Say you had plenty of savings and investments. You could instead take the money and use it to invest in one or more VCTs. Those give you 30% tax relief, capped at income tax actually paid in the year. You can sell one and buy another after five years and get another 30%. And again five years later. And so on until you die. Generalist VCTs typically pay around 5% income, though some pay 7%. After allowing for the 30% tax refund that's equivalent to up to 10% on the money actually still invested. And it's tax free.VCTs vary greatly in possible risk levels. For the purpose of this post I'm thinking only of generalist or early exit VCTs that have high to very high asset backed lending of decent quality. That is, the lower risk end of the market. So a canny person with lots of investments already might arrange to use VCTs to eliminate almost all of their tax bill and get an increasing tax free income. Say hello to a mostly income tax free life once you've done that for long enough.

Yet a person close to age 55 might instead benefit from first running the money through a pension, knowing that they can take it out again in a few years and use it for the VCT investing.

Or someone might reduce their mortgage loan to value to save a lot of money in mortgage interest by changing down one LTV band.

To give some idea of what you can achieve with VCTs, last year my income was in the top 10%. Combining VCTs and pension contributions reduced my total income tax bill to less than £500. And I get to help small businesses grow their turnover by on average £7 for each Pound I buy, according to the industry group for the providers. I could only afford to do that because I've been investing very high proportions of my income for years, so I now have quite a lot of money in investments.

CDB199

Thanks for taking the time to answer this jamesd.

Does look a fair deal to both myself and employer - and you are right, it does depend on circumstances.

Tell me more about these VCTs!??

jamesd

Please do an advanced forum search and put VCT in the Keywords box and jamesd in the User Name box. You should find a lot of reading material, mostly oriented towards the lower risk end of VCT investing. That'll get you far more to read than I'd type in one post.

atush

Think it could be a bit early for VCTs in your case.

With your bonus, if you have no immediate needs, no debts, have a mtg/home, and have an emergency cash fund of 3-6 months outgoings, then yes I would put the bonus in your pension. With both TR and the employers contrib it seems a good deal.

However, i would also consider funding out of income in future, a S&S isa.

CDB199

Thanks atush.

Have done a little reding about vcts but co eb round thinking max bonus sacrifice in pension is the way for me.

No immediate needs for cash, have mortgage max overpay and £140k debt on 350k property. Other than that zero debt. Have cash fund in reserve so makes sense as call

jamesd

atush wrote: »

Think it could be a bit early for VCTs in your case.

Why "early" when we appear not to even know how old the person is? It may well be inappropriate but what causes you to use the word early? From the mortgage overpaying being at maximum (so probably 10% of capital a year, something like £14,000 a year) there seems to be ample income around.

CDB199 wrote: »

No immediate needs for cash, have mortgage max overpay and £140k debt on 350k property. Other than that zero debt. Have cash fund in reserve so makes sense as call

You're overpaying on a mortgage, at maybe 3% interest when you can get considerably more than that from saving or investing? Why? If VCTs aren't for you there's P2P, bonds or even regular savings accounts that probably pay a good deal more than you can save in mortgage interest by overpaying.

I'm puzzled about your tax situation. In the first post in this topic you wrote about not being subject to higher rate tax, but I see from older posts that you see to have been potentially subject to higher rate tax in all tax years from 2007/8 through 2011/12. Have you had a large drop in income, perhaps? I'm wondering because if you're a higher rate tax payer, or would be if you took the money as income, the calculated benefit of your employer's offer is higher due to the combination of higher income tax rate but lower employee NI. It would go up from 42% (20 + 12 + 10) to 52% (40 + 2 + 10).

One thing I tend to suggest for those doing mortgage overpaying is considering the VCT route and using the VCT tax relief and ongoing income for mortgage overpayments. That way the overpayments start out effectively free (the tax relief) or from untaxable income (the VCT income). It's a neat way of overpaying more efficiently so you don't lose out on the tax relief entirely while overpaying.

atush

Why "early" when we appear not to even know how old the person is? It may well be inappropriate but what causes you to use the word early? From the mortgage overpaying being at maximum (so probably 10% of capital a year, something like £14,000 a year) there seems to be ample income around.

Because they aren't a higher rate taxpayer.

I agree that the overpaying should probably cease or be lowered. But i'd look to fill S&Sisas before going down t he VCT route.

jamesd

Thanks. Not sure about them being a higher rate tax payer or not at the moment. Personally my inclination is to use pension contributions for higher rate income for those reasonably close to age 55 and VCTs for basic rate income. That's because the tax relief for higher rate is greater than VCT relief and the person will have access to the pension money reasonably soon.

If the person isn't reasonably close to 55, so there's perhaps a chance of VCT buy and a recycling VCT buy five years later, that tends to tip that tax relief in favour of VCTs. But maybe not the investment choice, depends on the rest of their situation and the risk level of the VCT(s) chosen. Not all about tax relief, nice though it is.

In this case I'm wondering just what other assets there are. I have a suspicion that maybe the mortgage overpaying has been given priority over accumulating investments that would be more remunerative, like investing within an ISA. That would decrease the suitability of VCT investing due to lack of accessible capital that could force a sale within five years and requirement to repay the 30% tax relief. If the job is secure enough, not as big an issue but no job is completely secure. This is the factor that causes me to have most reservations about VCT suitability for CDB199, or at least about use exclusively of VCTs vs ISA.

ISAs are an interesting alternative. One thing I did was stick with S&S ISA for longer than I should because I delayed doing the VCT research and investing. But even if I'd gone earlier as I know think I should have done, I'd have had well over £50,000 in ISA investments before starting on the VCTs. Enough for me to live on for years.

So I don't necessarily agree or disagree with favouring ISAs right now. I just don't know enough about the facts to have a strong opinion either way.