Salary sacrifice - is this a good idea for me

kaycastle

Hiya,
Hopefully I've given all the required information. And someone who understands this more than me can help out - I've been reading and enjoying this forum for a while but I never really post. so here goes

The company I work at is introducing salary sacrifice pension scheme in April. And I'm trying to understand if this is a good idea. We were on a non-contributory scheme of 6% but now that is changing to employees doing 2% to get up to the required 8%. And this is going to be done using salary sacrifice. Which can be opted out of.

My salary is £38900, and I also have a student loan to pay back so my take home pay each month is £2334.17
The monthly pension contributions are currently £194.75.

My questions are:
How much will my take home pay be affected? (I have my mortgage up later this year and want to remortgage well)
How much will this improve pension contributions?
Is it easy to opt out of salary sacrifice at a later date?
I'm in my late 20s and have dreams of retiring early. So is this good for that personal goal?

Thanks in advance for any help

EDIT: I have with the help of lovely people learned that salary sacrifice is a good thing and that I am going to massively increase mine to retire early Thanks all.

Dox

kaycastle wrote: »

Hiya,
Hopefully I've given all the required information. And someone who understands this more than me can help out - I've been reading and enjoying this forum for a while but I never really post. so here goes

The company I work at is introducing salary sacrifice pension scheme in April. And I'm trying to understand if this is a good idea. We were on a non-contributory scheme of 6% but now that is changing to employees doing 2% to get up to the required 8%. And this is going to be done using salary sacrifice. Which can be opted out of.

My salary is £38900, and I also have a student loan to pay back so my take home pay each month is £2334.17
The monthly pension contributions are currently £194.75.

My questions are:
How much will my take home pay be affected? (I have my mortgage up later this year and want to remortgage well) If you sacrifice 2% of 38,900 it will reduce your salary by 2% - i.e. £778. Use one of the online calculators to see the impact on take home pay e.g. https://www.moneysavingexpert.com/tax-calculator/?_ga=2.164905403.52898918.1543010060-353475065.1523260899
How much will this improve pension contributions? 2% - £778 (no tax relief added as this will be deemed an employer contribution)
Is it easy to opt out of salary sacrifice at a later date?Yes, but you might find you have to opt out of pension scheme membership to do so - thus losing the employer's 6% contribution. Find out by asking your employer
I'm in my late 20s and have dreams of retiring early. So is this good for that personal goal?You're saving more towards your retirement. Why wouldn't that be good?

Thanks in advance for any help

Please see above.

kaycastle

Thank you Dox. It doesn't seem to be a huge difference then. It was useful to get someone else's opinion on it as I haven't paid much attention to my pension yet - more been focusing on overpaying mortgage. I feel like I've learned so much more on pensions from my readings this morning bleh haha. Thanks again!

Dazed_and_confused

Most people have the opposite view, salary sacrifice is generally seen as an opportunity not to be missed.

Yes you agree to give up £778 of your salary.

No you don't get tax relief on the contribution going into the pension because it is your employer contributing not you.

But you pay no tax on the £778.

And you pay no NI on the £778.

And your employer might chip in the NI they aren't having to pay.

So you end up with £778 in your pension fund.

Which has probably only actually lost you £529 (you haven't said where you are resident for tax purposes but it could have even cost you a touch less, closer to £521.

MallyGirl

You will save the 12% NI on the amount you sal sac, and some employers even contribute the employer NI to the pension too (mine doesn't but DH's does).
Either way it is forcing you to put more in and 8% is still too low for someone dreaming of early retirement.

Zorillo

You also don't pay tax or NI on the sacrificed salary so it is an even better deal than Dox has presented. Your pension contribution will be £778 but the reduction in your take home pay will be less because of the tax saving.

2% is a bit low if you're thinking of retiring early. For example I earn roughly the same although I'm a little older and I contribute 10% in excess of my companies contribution of 6%, and all I'm hoping to achieve is retiring on time!

kaycastle

Thank you all - this is really helpful. I was trying to understand the NI bit earlier this morning - I don't think my employer will contribute more based on their NI saving - but I might ask the question in the open presentation they are having on it to see what they say

The only reason I'm not contributing more at the moment as I'm trying to overpay my mortgage and pay that off as quickly as possible. I'm not an expert on it - but when I have looked at it it feels like my best route to retiring early is to get rid of my mortgage and then as soon as that is paid off max out my pension contributions and savings. Again I'm not sure if I've over simplified it! I put £650 away in savings every month to pay for a loft conversion in a few years and overpay my mortgage by £300.

Dazed_and_confused

Less time for your pension contribution to get capital growth though.

But I understand the psychology of wanting the mortgage out of the way.

kaycastle

It sounds like I might need to start looking at my pension more closely then as I understand what you're saying about it having less time to grow.

My mortgage is so big too as I live in the south east and it just feels like something I can control a bit better. Although I feel like my knowledge of pensions has increased dramatically in the last few hours! A good way to spend a rainy Saturday morning haha

So is 10% the maximum pension contribution that can be paid? If I'm reading the gov pension scheme rate correctly is £40,000 the maximum you can put into your pension, is that both employer and employee contributions combined?

Marcon

Zorillo wrote: »

You also don't pay tax or NI on the sacrificed salary so it is an even better deal than Dox has presented. Your pension contribution will be £778 but the reduction in your take home pay will be less because of the tax saving.

Both of which will show up if OP uses the link Dox helpfully provided - and by giving a link it means OP can tailor with the right tax code etc. Adds a bit of knowledge and self reliance for the future!

kaycastle

Ah yes Marcon - I didn't post the exact results of that but I did respond to Dox's post used it to work out the small difference It states that it will be a difference of £62 each month. As the NI and income tax went down.

So I have my answer - I will probably use the early retirement wannabe thread to start asking some more questions around pensions too.