Salary sacrifice to SW Pension or SIPP?

thepixies

Hi all,

My employer pays 1% into a Scottish Widows pension, and I can take advantage of salary sacrifice scheme to also pay in (can't choose another provider).
As a higher rate tax payer, I understand this is efficient from tax and NICs point of view and am thinking of substantially increasing my pension contributions.

However
- the charge for the Pens Portfolio Two is 0.75% which seems expensive compared to DIY funds I can get like Vanguard LS ones charging .22% !? Choice of available funds all seem to be .75% or higher
- I find the Scottish Widows pension site is like logging into 1980s computer system. Seems very basic and hard to navigate and find relevant info

Leaving aside fund performance, do you have a view as to whether its best to
a) increase contributions to company scheme
or
b) invest minimum in company scheme and then also invest majority into my own SIPP (lower cost fund & platform) ?

I understand with (b) I would have to reclaim higher rate tax via my return which is a hassle and pay more NICs than (a).

Thanks all

MoneySavingUser

The Income tax and NICs bands are slightly different, however in general

a) A basic rate taxpayer pays 20% tax and 12% NIC so the saving from salary sacrifice is 32%, the saving using a SIPP is just 20%

b) A higher rate taxpayer pays 40% tax and 2% NIC so the saving from salary sacrifice is 42%, the saving using a SIPP is 40%

So the difference for a higher rate taxpayer isn't that much. But if you are sacrificing enough so that you get into the BR band (where you start saving at 32%) then you would be losing out more by going for a SIPP.

So to a certain extent it depends on how much you want to sacrifice.

Also tax is cumulative and NICs are earnings period based. So if your employer lets you change your % contribution at any time (not all do), you might want to sacrifice say nearly all your salary (can't go below minimum wage) to get a lot of saving at 32% in one month, and do less in other months.

I have the same SW options at work too, what I am doing at the moment is putting money into the SW pension via salary sacrifice and at some point in the future to transfer out (maybe do a partial transfer once it hits a certain level and both schemes allow this).

(Actually, thinking about it if you use Salary sacrifice then all the 40% saving is going into the scheme but if you use a SIPP 20% goes into the scheme and you get the other 20% in a reduced tax bill so less might go in the scheme, unless you adjust contribution level to equalise it).