Salary Sacrifice Defined Contribution Question

roysterer

I am a standard rate taxpayer salary £38,000
If I sacrificed 65% of my wages to my pension fund through salary sacrifice via company pay roll I would pay very low tax and very low National Insurance contributions.
By paying very low National Insurance payments would this have any impact when I eventually receive my state pension in 7 years time ???
My plan is to supplement my reduced salary by using savings for the next 4 years and using the proceeds of the "NEW" Defined Contribution Pension Built up over the next 4 years to retire early via Cash Drawdown????
I currently have 38 years of Final Salary / Career average Deferred Pension that I plan to draw without penalty when aged 65.
Reason for this question is :-
My Company is about to close down the Final Salary / Career average and replace with a money purchase scheme making a 10% contrbution.
To date I have 40 years of Contracted Out National Insurance Contributions.

Does this sound like a reasonable plan or am I missing something???
Plan to raise £100,000 over the next 4 years to use for draw down at age 61.5
currently aged 57.

Thanks Roysterer.

roysterer

Typo error:- 7 years time should have stated 9 years time when state pension kicks in.

Thanks

xylophone

Have you obtained a new state pension statement which gives your starting amount?

As you have been contracted out for many years, your starting amount will be less than the full new state pension.



See https://www.gov.uk/new-state-pension/how-its-calculated

You will not be permitted to salary sacrifice below the level of National Minimum Wage.

You will be paying NI on a contracted in basis as contracting out has now ended for all.

Your NI contributions will increase your state pension as above.

roysterer

Thanks Xylophone.
Yes I am aware of the end of contracting out and.that I will get a reduced state pension due to previously contracting out.
The current minimum wage is £7.20 for over 25 yr olds this year 2016
Does this mean I can sacrifice my pay down to £13852.80 per year (based on 37 hr week) and be awarded full state pension entitlement for this and future years???

greenglide

Yes, you can pretty much.

NI contributions either make a year qualify for pension purposes or they don't. As long as you earn over the lower earnings limit it will count as a qualifying year. If you work full time then the minimum wage will take you easily over the lower earnings limit.

With the ending of the S2P state second pension now that nSP is upon us there is no earnings based part any more.

If you do sacrifice a huge amount it [STRIKE]make[/STRIKE] may impact loan / mortgage applications depending how the employer shows it on payslips, earnings declarations etc.

**Typo - meant "may" not "make". "make" doesnt make any sense!

ischofie1

Just to sum up what's already been said.
You can salary sac down to min wage & it will make no difference to your state pension as you still earn qualifying years. Assuming you are currently at the lower rate pension (£119 ish) but intend working 9 more years then you will catch up to the higher rate (£155 ish) by virtue of the 9 years.
I'd counter the statement that salary sac will effect any mortgage application. Companies would generally report your notional salary if asked for although you may wish to confirm this.
I think your plan is an excellent idea & I plan to do likewise in the near future.

xylophone

If you do sacrifice a huge amount it make impact loan / mortgage applications depending how the employer shows it on payslips, earnings declarations etc

You would look for the salary sacrifice scheme to use a "notional/reference salary"- see https://www.pensionplaypen.com/top-thinking/show/540/pension-salary-sacrifice-how-to-make-friends-and-keep-the-bosses-happy.html#.VwWMqxMrJ8c

mgdavid

ischofie1 wrote: »

Just to sum up what's already been said.
You can salary sac down to min wage & it will make no difference to your state pension as you still earn qualifying years. Assuming you are currently at the lower rate pension (£119 ish) but intend working 9 more years then you will catch up to the higher rate (£155 ish) by virtue of the 9 years.
I'd counter the statement that salary sac will effect any mortgage application. Companies would generally report your notional salary if asked for although you may wish to confirm this.
I think your plan is an excellent idea & I plan to do likewise in the near future.

No; the OP says he wants to retire at 61.5 and is 57 now so only 4 1/2 years to go.
Would voluntary Class 3 NI be an option after this?

ischofie1

Sorry I missed the 4.5 years retire bit. In which case he'd be somewhere in the middle of the lower to upper pension amounts. Nearer to or at the upper end if the starting amount was higher than £119.
Not sure about class 3 NI, perhaps others can comment. Either way I think he's going to be "there or there a abouts" towards the top end SP when he retires.

Paul_Herring

roysterer wrote: »

Does this mean I can sacrifice my pay down to £13852.80 per year (based on 37 hr week) and be awarded full state pension entitlement for this and future years???

Theoretically, you could put the rest of that ~£14k into a pension (not via sacrifice) and get the 20% income tax back on the lot. Including the bit covered by the personal allowance. (Akin to the £2880 someone with no income can get grossed to £3600.)

roysterer

Thank you all for your replies.
It has certainly got me thinking about how best to move forward with my Pension
Contributions for the future.
I just hope the government continues to allow salary sacrifice for future years to come.