Annuity or lump sums?

arbster

jamesd wrote: »

It is possible that using her employer's auto-enrolment scheme is a bad idea. The problem would be if it uses "salary sacrifice" to save NI as well as income tax. Because of her low income she's paying neither income tax nor NI so she'd get no tax relief at all if a salary sacrifice scheme was used. If it's not salary sacrifice it'd be fine. If it is salary sacrifice the solution is easy, she can just start her own pension outside work and pay into that instead. Then she'll get the 25% added to give her 20% basic rate tax relief even though she isnt' paying any income tax - she's still entitled to it.

Of course, need to consider employer contributions here, which may require her to remain within the company scheme?

jamesd

Yes, any employer contributions can make the salary sacrifice better. The catch is that the employer is only required to pay them on the qualifying earnings between the lower and upper earnings limit. For 2015/16 the lower level of qualifying earnings is £5,824 a year if evenly spread out. Since the wife earns only £5,000 a year, if that is evenly spread the employer is not required to contribute anything.

The Pensions Regulator has a calculator that can be used to work out what the employer's minimum required contribution is. When a £5,000 income is entered and the Get contributions button is pressed it says "Employer contributions are payable on gross earning above £5824. Please check you have entered the correct figures" as if it's an error rather than just meaning that the required contributions is zero.

Of course an employer can just choose to pay when they don't have to, so that does need to be checked to see if she might be better off even without the income tax and NI gain.