Salary Sacrifice vs S&S ISA

PParka

Hi all,

I was about to open a S&S ISA as a long-ish term investment (10+ years). The idea behind this was to have some tax free savings when I retire at 55.

However, my company pension allows me to make contributions via Salary Sacrifice. According to my calculations, I would be better off increasing my Pension contributions rather than investing in an ISA.

Here's my logic:
If I pay money into an ISA, I've already paid tax and NI on the money from my salary that I'm investing. I can draw this money out and not pay tax on it.
If I use Salary Sacrifice, I save 20% tax and 12% NI on the contributions when it is paid into my pension. At 55 I can take 25% out tax free. Even if I have to pay tax and NI when receive the rest, I would still be better off.

Have I got this right?

The only downside I can see, is that I can't access the pension before 55, where I could with the S&S ISA.

MoneySavingUser

1) Does your employer pay in the 13.8% employer NIC saving - if so., then you are better off
2) No NICs on pension income so no NICs to pay on the way out
3) Only downside I can think of is if your pension pot was close to the lifetime limit (£1m) but it probably isn't or likely to be?

PParka

1) Does your employer pay in the 13.8% employer NIC saving - if so., then you are better off
They pay in 8% of my salary regardless of how much I sacrifice. Although they save employer NIC, they don't pass it on.

2) No NICs on pension income so no NICs to pay on the way out.
Oooo, I didn't realise that. I thought I would only stop paying NI when I reached state pension age (67)

3) Only downside I can think of is if your pension pot was close to the lifetime limit (£1m) but it probably isn't or likely to be?
Very unlikely to reach £1m by the time I'm 55.

ermine

If you want to retire before 55 you need enough savings to carry you through to 55, so in that case you'd need a bit of both. But otherwise, salary sacrifice is a clear win on NI. plus most people have a lower pension income than when working, so you pay less of it in BRT tax because more is below the personal allowance.

jamesd

PParka wrote: »

2) No NICs on pension income so no NICs to pay on the way out.
Oooo, I didn't realise that. I thought I would only stop paying NI when I reached state pension age (67)

Pension income (the taxable 75%) is still paid via PAYE, though. Your plan is a good one.

I now expect to pay almost all of my pay into pensions. First by salary sacrifice down to minimum wage, then personal pension for the rest. I have enough investment income and short enough time to 55 that I can afford this. Also some VCT buying to keep that other income minimally taxed.

Thrugelmir

PParka wrote: »

The only downside I can see, is that I can't access the pension before 55, where I could with the S&S ISA.

The amount of savings in an ISA could impact your ability to obtain benefits. Whereas a pension doesn't.

The upside of the pension pot is that you would leave more to your dependants in the event of an early demise.

Number75

As you say it's a 10+ year investment to fund early retirement, does that mean you're under 45?

I am, and I'm being careful about where I put some of my money in case the 55 start date is increased to 57 (10 years lower than SPA) which was apparently part of the government proposal but not yet passed into legislation.

I'm planning for 55, so I'm saving to cover 2 years outside of pension wrapper, for accessibility.