Salary Sacrifice

Theta101

I have a new job and will be joining the company pension scheme in a couple of months time.
The pension scheme is a "SMART" scheme, ie salary sacrifice, run by Legal and General.
I'm 60 years old and have 3 other defined contribution pension pots.
I'm waiting to find out what percentage of employers NI is passed on to employees.
The company will contribute a maximum of 8% of my salary into the pension and I am now wondering what percentage I should put in from my salary, it will be at least 8%.
My salary is £45K gross.
My state pension starts when I'm 66.
I aim to retire at age 67.
My 12 monthly budget of outgoings is £26K.

From what I've read, a lot from this excellent site, I think it would be possible to...
1) Make a high percentage Salary Sacrifice, say 40%
2) Take 25% lump sum from my existing pension pots. (and not one penny more).
3) Still be able to make gross pension contributions of up to £40K per year.

Is that correct?
It just seems too good to be true!

Many thanks for any comments.

bigadaj

Yes but not sure how you think the interaction between options 1 & 3 work.

The salary sacrifice contributions will be part of your £40k annual allowance, you won't be allowed to double dip in that regard but you will have the option for carry forward to increase your contributions for up to say three years to maximise pension contributions.

You won't pay NI above state pension age so the comtribution will be relatively less valuable at that point.

Might also be worth looking at state pension deferral, the rate has dropped but still a relatively high guaranteed return compared to what is available elsewhere.

DonaldLMcVay

excellent idea, if everything goes the way you have planned

jamesd

You're correct that you can take 25% tax fee lump sum from existing pot(s) and also use salary sacrifice. Salary sacrifice can only be done down to minimum wage because it's illegal for your employer to pay you less than that. You can pay the after sacrifice gross into another pension scheme and get 25% added to it.

You're correct that taking just the 25% tax free lump sum doesn't cause a reduction in your money purchase annual allowance from £40k to £10k.

Ask your employer about periodic transfers out of the scheme, it might be possible. If it is, you can pay in, transfer then take 25% of what you've transferred.

What you're planning is an excellent move and a great use also for say subsidising living with savings while doing it.

zagfles

Just be aware of the recycling rules - ie if HMRC think you're using the tax free lump sum to increase your pension contributions.

Google "hmrc recycling rules" there's plenty of articles explaining the rules.

jamesd

Plenty of scaremongering about the recycling limits around, given that HMRC is not known to have ever applied them to an individual, since they are intended primarily to block organised schemes. The payments here are clearly coming from income and there's no restriction on that.

Still, if there is any concern tax free lump sums of £7,500 per running twelve month period, not tax or calendar year, is a value that is always acceptable.

With minimum wage of £7.20 an hour for say 40 hours a week and 52 weeks a year that's £7,500 from pension, £11,000 personal allowance and £3,976 taxed at 20% so net £3,180.80. That's a total of £21,680 vs the budgeted outgoings of £26,000. £5,400 more income taken in pay will get to that need level and that's a salary sacrifice level of 54.7%, above the 40% contemplated in the initial post.

zagfles

jamesd wrote: »

Plenty of scaremongering about the recycling limits around, given that HMRC is not known to have ever applied them to an individual, since they are intended primarily to block organised schemes.

But if HMRC did apply them to an individual, would we ever know? Tax affairs are usually private between HMRC and the individual. Or do they publish stats for this sort of thing?

jamesd

The odd case might not be noticed but as of October 2015 it was believed that the recycling limits were working to block organised schemes, HMRC hadn't invoked it on an individual and it was not a focus of their efforts.

It's still worth being aware of the rules and planning not to be affected by them, as I have myself, but there's a limit to how worried people need to be about something that's already doing its job.

Theta101, also pay attention to the five year cumulative rule where contributions must have increased by more than 30% on average and by more than 30% of the total value of the lump sums (paying attention to the tax years for these rules). While £7,500 is easy and appears to meet your objectives, the two 30% rules might also be viable if more is needed and the pots are of sufficient size. You might also consider funding with 0% for purchase credit card deals initially, also taking the lump sums, so you can demonstrate that you were funding with borrowing and that you didn't repay the borrowing with the lump sums within the relevant time window. But you probably have a more than ample reason to increase contributions: the increased benefits of salary sacrifice compared to normal pension contributions, if you weren't previously in a salary sacrifice scheme.

Theta101

Thanks everyone for the comments.

I didn't mention that my wife also has an income from part time teaching and will get a small pension when she fully retires in a couple of years time.
She started taking her state pension two years ago, but is now deferring that SP at the annual rate of 10.4%. (thanks again to this site for that information!).

We have savings that we could live off for about 2 years, without any other income.
No debt at all.
So we are in a happy place at the moment.

I'm aware of the recycling rules and thanks for the additional info on that!
Jamesd - you certainly know your stuff!!

I don't intend to take a 25% lump sum, not until I'm forced to. I'd rather use savings where I can.
I would like to know more about when the £40k limit drops to £10k, are there any good sites that goes into detail?
I'd also like to see the calculations made for Salary Sacrifice? At the moment I'm using Legal & Generals online calculator but want to see the formulas behind the calculator?

http://www.legalandgeneral.com/workplacebenefits/employees/plan-for-your-future/salary-sacrifice/

Thanks.

jamesd

The drop to 10k happens as soon as you take a penny from the taxable 75% of any pot.

There are exceptions, like buying an annuity with the money. But I'm assuming that the amounts will be low enough and health good enough that state pension deferral offers better value than buying an annuity.

You can also avoid the drop to £10k by using the small pots rule. This lets you take up to £10k from each of three pots without triggering it. The money taken must be all of the money in the pot, nothing can be left behind. You can transfer money around to get efficient values if needed - better to combine a 2k and 5k to one 7k and use one small pot than do them individually and use two.

Theta101

Suffering from information overload now!!
From what I've read today it sounds like the following are completely legal, pre-planned and doable.

A)
Take a tax free lump sum of £7,500 from existing pension pots, which is 7% of current pots value.
Place £7,500 into new SIPP and get £1,875 from Tax man.
Also via salary sacrifice (32%), make contributions of £22,544 into works pension.
Do this every 12 months.


Take a tax free lump sum of £15,000 from existing pension pots, which is 14% of current pots value.
Place £7,500 into new SIPP and get £1,875 from Tax man.
Also via salary sacrifice (32%), make contributions of £22,544 into works pension.
Place £7,500 into new SIPP for my wife and get £1,875 from Tax man (assuming she doesn't go over her 100% earnings limit).
Do this every 12 months.

C)
Take a tax free lump sum of £15,240 from existing pension pots, which is <15% of current pots value.
Place £15,240 into new S&S ISA and buy Vanguard LS.
Also via salary sacrifice (32%), make contributions of £22,544 into works pension.
Do this every 12 months.
(ISA limit increases to £20k next year)

I think that by doing C) I can get money out of the pension pots more tax efficiently, but I could be completely wrong!