Pension limit - really 100% salary?

ThinkingOutLoud_2

dunroving wrote: »

My take-home pay changed by about £10 per month after SS was implemented, which seems a pretty clear indication to me that financially it didn't make much difference..

That small difference would relate to your then pension contribution maybe. Did that change between prior and salary sacrifice scheme? What £ / % of salary were you sacrificing into your pension on that same wage slip?
More importantly - how much NI do you pay today per month or per year?

You only pay NI on the salary you have - so if you sacrifice all you can (down to the min wage limit) - then that should be a considerable reduction in NI you pay!

HappyHarry

dunroving wrote: »

Thanks, all. Yes, I was auto-enrolled into salary sacrifice (Pensions Plus) along with with everyone else where I work, about 18 months ago. It was done as an opt-out situation, and the message was there were no disadvantages.

I recently asked to be opted out

By opting out, have you lost out on your employer's contributions to your pension scheme? If so, then opting back in might be a good idea.

My take-home pay changed by about £10 per month after SS was implemented, which seems a pretty clear indication to me that financially it didn't make much difference.

Your take-home pay should not have changed at all. The amount added to your pension should have increased.

The basics behind salary sacrifice is that:
1. Instead of making personal contributions to your pension, your employer makes your contributions to your pension for you.
2. Your employer then reduces your salary by an equivalent amount. So, your take home pay should remain roughly the same.
3. Your employer has paid out the same amount overall.
4. However, your employer has not had to pay 13.8% NIC on the amount it used to pay you, and now contributes to your pension. Most employers add some, if not all of this NIC saving to the employee's pension scheme, boosting the employee's pension.

As mentioned above, your employer is not allowed to reduce your salary below minimum wage limits.

However, you are allowed to contribute to a personal pension, up to 100% of your earned income (less other contributions).

If you want to maximise your pension contributions, then consider salary sacrificing as much as possible to your employer's scheme, and then contributing as much as possible to a personal pension.

If you are working full time, then 35 hrs per week x £7.20 per hour x 52 weeks per year = £13,104.

So, by contributing to a personal pension, you would still gain the 20% uplift on most, if not all of your earnings that fall within your personal allowance.

dunroving

I'd have to go back to my payslips to answer some of these questions, but from memory, I think the following is correct:

My % contribution to DB pension did not change; neither (I believe) did the absolute amount.
My employer did not contribute the saved employer NI to my pension
I think my payslip hardly changed. Where it used to have a section stating £300 (or whatever) paid into "pension", I think it then said £300 into "Pensions Plus"

All these changes occurred shorty after I was involved in a pretty serious car accident so my attentions were elsewhere. I am now looking to retire early and have been maximising pension contributions up to the annual allowance and using as much of carryover as possible.

I am making additional MPAVC into a DC section of my employer's pension, but I don't think this is SS. (could be wrong). I am trying to put as much into employer MPAVC as possible rather than SIPP. My employer MPAVC scheme is linked with the DB scheme, which has advantages when it comes to 25% TFLS.

ThinkingOutLoud_2

OK. So some broad brush things:-
- if you earn 40k - you are likely paying around £3.8k in NI
- if you can salary sacrifice to the point you don't pay NI...then that is a huge win for you and more that goes into your pension
- as identified within the rules you have awareness of - you can then take any salary you must be paid (min wage) and put that into your SIPP - thereby putting all you want in overall.
- Your employer is hardly going to stop you as this saves them employer NI (but sadly they don't pass any of that on from what you say)

So you should from what is known, as you had been implored to, take advantage of your Salary Sacrifice scheme.

martinsurrey

dunroving wrote: »

I'd have to go back to my payslips to answer some of these questions, but from memory, I think the following is correct:

My % contribution to DB pension did not change; neither (I believe) did the absolute amount.
My employer did not contribute the saved employer NI to my pension
I think my payslip hardly changed. Where it used to have a section stating £300 (or whatever) paid into "pension", I think it then said £300 into "Pensions Plus"

All these changes occurred shorty after I was involved in a pretty serious car accident so my attentions were elsewhere. I am now looking to retire early and have been maximising pension contributions up to the annual allowance and using as much of carryover as possible.

I am making additional MPAVC into a DC section of my employer's pension, but I don't think this is SS. (could be wrong). I am trying to put as much into employer MPAVC as possible rather than SIPP. My employer MPAVC scheme is linked with the DB scheme, which has advantages when it comes to 25% TFLS.

You are confused and your decision to opt out and then pay 100% salary into pension could cost you up to £300 a month.

Your calc that SS only saved you £10 a month was based on you being a higher rate tax payer and STILL being a higher rate tax payer after SS. £300 a month SS saves a higher rate tax payer £6 a month (at 2% NI rate).

Re run your calc with a £3500 monthly SS and you'll save £250 as a lot of that SS saves NI at 12%.

the BEST way to do this is to SS as much as possible (down to min wage) and then personal contribute the rest.

please please, get them to opt you back in!

cjking

Does this not make a nonsense of the "100% of salary" limit?

Didn't spot an answer to this, so decided to chip in. Not it doesn't make a nonsense of the limit, your minimum wage salary could be put into a pension as a personal contribution. Also, your personal contribution doesn't have to come out of salary, it could be made out of any other money that you have.

chucknorris

cjking wrote: »

Also, your personal contribution doesn't have to come out of salary, it could be made out of any other money that you have.

That is not true, it has to be 'relevant earnings':

http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

For example I have quite a bit of rental and dividend income, neither are allowed to be used for pension contributions and tax relief claimed.

ThinkingOutLoud_2

True Chuck, although if the OP has under-contributed in prior years, he can use money from any source to make up his cash input to the "relevant permitted maximum contributions". i.e. he can use other income to make back contributions not to calculate his total "salary".

System

chucknorris wrote: »

That is not true, it has to be 'relevant earnings':
.

You can fund it from any source you like. It's the calculation of the limit that is related to relevant earnings.

chucknorris

Clifford_Pope wrote: »

You can fund it from any source you like. It's the calculation of the limit that is related to relevant earnings.

Well obviously, but as this the thread is about the contribution limit, so I obviously meant that you can't use funds exceeding your relevant earnings! But I suspect that you knew that already. For example next tax year our relevant earnings will be less than £12k, but our total earnings will be approx £140k (before you start, I know about the annual allowance), but the £12k is a hard limit for me for pension contributions with tax relief.