Salary Sacrifice - Too good to be true?

6022tivo

Hello

I have recently had a financial shake up and have increased my work pension payments through salary sacrifice to 25%.

My company allow me to make as many changes a year, so I can adjust this if I need to.

I am surprised to see the difference in deduction, and the payment into my pot.
Also, my TAX/NI through PAYE has dropped which is an additional bonus.

So, I pay 25%, company pay 10%, they also pay the NI savings on my sacrifice (Apparently they don't have to?) which equates to an additional 13% (I think after doing some math).

All looks very good.

It is a Friends Life thing with a good negotiated fee for the standard fund (Apparently) I can log in and do all sorts to change risk and even change funds and split my pot around. (Sounds scary).


My justification for doing this is that I am financially and asset comfortable , have surplus cash around which is earning nothing in cash isa's. I have about 6 current accounts with standing orders to collect the interest. With this I have their regular monthly savings accounts for more interest. Also have a chunk in tax free Index linked which I plan to keep hold of. I was looking at investments, possibly a buy to let, but can't deal with the stress of it all, especially with a bad tenant.
I don't plan to claim maternity pay, or apply for a mortgage (Two things I have been warned could be affected by the change).
If anything comes up (Big holidays, new cars) I have the cash isa's I can dip into.
I just see this as a nice regular tax/ni efficient monthly payment I can afford to invest for my long term future.

Again, looking at the plan, I can take 25% tax free at the age of 55. I can also draw upon it as income from this age, liable to Tax, just like an income.

All seems to good to be true? I'm actually thinking of increasing it some more?
Pitfalls?

HappyHarry

It's quite common, and it works very well for most people. Not all employers offer salary sacrifice, but it is well worth taking up.

The main downsides are
(i) if your income after salary sacrifice is below the Personal Allowance (£11,000) then you would not be receiving full tax benefit.
(ii) If you are receiving any salary based benefits then these could change.

ColdIron

For once this is something that is not too good to be true, and anyone who doesn't take advantage of it needs their bumps feeling

You obviously cannot protect against future legislation regarding pensions in general but the salary sacrifice method of making contributions is the best way to go about it. Make hay while the sun shines

It's also useful for higher rate taxpayers above and beyond the NI reduction. While you pay no less income tax, your entire contribution is paid directly into your pension. Outside salary sacrifice your pension manager will reclaim the basic rate portion of your contribution leaving you to claim the higher rate portion via self assessment etc. What's not to like?

aajax42

Was advised to salary sacrifice some time ago, but the rules of our pensions were not explained. Had built up £96,000. Now discover that what you can take out in cash is equivalent to 25% of your total pension pot. For us that means we can take just over 50k in cash but have to use the remaining 46k to buy additional annuity. If we had known about the rule we would have stopped the salary sacrifice when it reached 50k . Fells like we have lost 46k through poor advice.:(

HappyHarry

aajax42 wrote: »

Was advised to salary sacrifice some time ago, but the rules of our pensions were not explained. Had built up £96,000. Now discover that what you can take out in cash is equivalent to 25% of your total pension pot. For us that means we can take just over 50k in cash but have to use the remaining 46k to buy additional annuity. If we had known about the rule we would have stopped the salary sacrifice when it reached 50k . Fells like we have lost 46k through poor advice.:(

I think you have misunderstood.

When you retire, you can transfer to a scheme that allows you to move to drawdown, and take the remaining funds out, subject to income tax. There is no need to buy an annuity.

The salary sacrifice you entered into did not change this at all.

aajax42

HappyHarry wrote: »

I think you have misunderstood.

When you retire, you can transfer to a scheme that allows you to move to drawdown, and take the remaining funds out, subject to income tax. There is no need to buy an annuity.

The salary sacrifice you entered into did not change this at all.

We have been told that as this was a defined pension scheme, subject to the rules of :
a) The local Authority, and-
b) The Greater Manchester Pension fund,
then the normal rules that apply to private and works pensions do not apply in this situation.

6022tivo

HappyHarry wrote: »

I think you have misunderstood.

When you retire, you can transfer to a scheme that allows you to move to drawdown, and take the remaining funds out, subject to income tax. There is no need to buy an annuity.

The salary sacrifice you entered into did not change this at all.

That is how I understand my policy, and have questioned it.
I can take 25% at the age of 55 tax free and then the pot continues in its investments and I can draw down whatever I like (Subject to the current tax/income laws)

WobblyDog

I've been salary-sacrificing into my pension around the 50% level for 2 years. The only minor problem I've found is that I missed out having my current account automatically upgraded to some kind of free "premium" account because my take-home pay suddenly plummeted. I don't think I missed out on much there.


It's such a good deal, I'm a bit worried that the government will retrospectively try to claw back some of the tax and NI at a later date, but that seems unlikely.

jimjames

HappyHarry wrote: »

The main downsides are
(i) if your income after salary sacrifice is below the Personal Allowance (£11,000) then you would not be receiving full tax benefit.
(ii) If you are receiving any salary based benefits then these could change.

The main upsides are that you can move benefit more than just the drop in NI and tax if it means your salary now takes you out of the net of various restrictions. So if you have kids and earn £55k, pension of £5k will mean you can receive full child benefit.

At the other end of the scale, reducing salary to below £21k(?) could mean that you no longer qualify to pay back student loan repayments.

6022tivo wrote: »

So, I pay 25%, company pay 10%, they also pay the NI savings on my sacrifice (Apparently they don't have to?) which equates to an additional 13% (I think after doing some math).

It is a Friends Life thing with a good negotiated fee for the standard fund (Apparently) I can log in and do all sorts to change risk and even change funds and split my pot around. (Sounds scary).

You might want to check the NI numbers, it won't be 13% of your salary, it might be a similar percentage of the pension contributions.


I'm with Friends Life too. Seems a very good provider, low charges (total 0.54%) for mine with them and easy to login to change funds.

ColdIron

Salary sacrifice is a way of making pension contributions, it has nothing whatsoever to do with what pension you chose to contribute to

webnibbler

Salary sacrifice is a very good deal, especially if the employer passes on their NI savings. I recently bumped mine up to 40% and would really like to fit 50% in the next few years.

jimjames wrote: »

You might want to check the NI numbers, it won't be 13% of your salary, it might be a similar percentage of the pension contributions.

If the employer passes on 100% of their NI saving then it will be 13.8% of the contribution for a basic rate tax payer. So £100 contribution attracts an addition of £13.80.