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Losing access to salary sacrifice
FatherAbraham
Posts: 1,036 Forumite
I've just discovered that from next month, salary sacrifice for DC pension contributions will cease at work, because of a take-over.
Net contributions will have relief-at-source applied by the new DC pension provider.
I'd only just realised what a good deal salsac is, and raised my contributions extremely high a month or two ago, but now I'll have to start paying National Insurance Contributions on those pension contributions.
Without having salary sacrifice, is there any advantage to making high monthly pension contributions, as opposed to just making the minimum necessary to get the maximum employer match each month, and then writing a huge cheque at the end of the tax year directly to the pension provider?
The advantage of the latter is that one retains the option not to make the pension contribution for as long as possible. Without salary sacrifice, I can't think of much benefit of high monthly contributions (where "high" means "above the level necessary to obtain the maximum employer contribution").
Net contributions will have relief-at-source applied by the new DC pension provider.
I'd only just realised what a good deal salsac is, and raised my contributions extremely high a month or two ago, but now I'll have to start paying National Insurance Contributions on those pension contributions.
Without having salary sacrifice, is there any advantage to making high monthly pension contributions, as opposed to just making the minimum necessary to get the maximum employer match each month, and then writing a huge cheque at the end of the tax year directly to the pension provider?
The advantage of the latter is that one retains the option not to make the pension contribution for as long as possible. Without salary sacrifice, I can't think of much benefit of high monthly contributions (where "high" means "above the level necessary to obtain the maximum employer contribution").
Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...
THE WAY TO WEALTH, Benjamin Franklin, 1758 AD
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Comments
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The obvious thing is that your contributions and tax relief won't be invested as long potentially losing growth.0
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It's effectively a pay cut for you losing sal sac.0
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Agreed, its a pay cut. Whether you can do anything on those grounds, I dont know.
And no it would be foolish to save up your contributions to the end of the year you would always have a % of your contributions not invested and since you invest because you think there will be growth, you would be giving up on growth.
Plus, inevitably, there would be mishaps along the way. You'll pay in late and miss a years contributions, you'll forget, the pension company will mess up and credit it wrongly, you'll leave and forget and miss the employers contributions, whatever.0 -
On the other hand you could say it was a unexpected pay rise when it was introduced .It's effectively a pay cut for you losing sal sac.
Personally I do not understand why HMRC lets salsac exist for pensions, as it is just a loophole to avoid NI, and must cost them a few hundred millions of Pounds I guess.
Regarding paying lump sums , it does not have to be once a year, could be every 3 months . Plus gives you the possibility of investing it in an alternative pension scheme ( if you wanted to)0 -
Albermarle wrote: »On the other hand you could say it was a unexpected pay rise when it was introduced .
Personally I do not understand why HMRC lets salsac exist for pensions, as it is just a loophole to avoid NI, and must cost them a few hundred millions of Pounds I guess.
Because it mimics the astonishingly-good National-Insurance avoidance which members of defined-benefit scheme enjoy. They don't pay NI on their employers' enormous, putative contributions.Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...THE WAY TO WEALTH, Benjamin Franklin, 1758 AD0 -
Without having salary sacrifice, is there any advantage to making high monthly pension contributions, as opposed to just making the minimum necessary to get the maximum employer match each month, and then writing a huge cheque at the end of the tax year directly to the pension provider?
Opportunity cost for the period those contributions aren't being invested.
Possibility of missing the end of the tax year and making the contributions in the next (wrong) tax year.
Spending the money before it gets to the point of writing that cheque.Conjugating the verb 'to be":
-o I am humble -o You are attention seeking -o She is Nadine Dorries0 -
FatherAbraham wrote: »Because it mimics the astonishingly-good National-Insurance avoidance which members of defined-benefit scheme enjoy. They don't pay NI on their employers' enormous, putative contributions.
Members of DC schemes don't pay NI on employer contributions either, which rather undermines your reasoning.0 -
Albermarle wrote: »Personally I do not understand why HMRC lets salsac exist for pensions, as it is just a loophole to avoid NI, and must cost them a few hundred millions of Pounds I guess.
Probably not as much as that in lost NIC. Pension contributions only amount to around £2bn a month in total.0 -
Members of DC schemes don't pay NI on employer contributions either, which rather undermines your reasoning.
Not really.
Albermarle was considering a situation where DC scheme members who use salary sacrifice to increase their employers' contributions might be prohibited from doing so by the tax authorities.
However, members of defined-benefit schemes implicitly have given up higher salaries in exchange for giant employer contributions. It's not clear why DC members shouldn't be able to do the same, by agreeing a contractual modification.Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...THE WAY TO WEALTH, Benjamin Franklin, 1758 AD0 -
The obvious thing is that your contributions and tax relief won't be invested as long potentially losing growth.
This is a good point.
The contributions-in-waiting ought to be invested in a similar asset to that held within the pension wrapper, preferably tax-protected, until it's time to make the irrevocable contribution, when the asset should be liquidated.
As long as one doesn't breach the tax-relief limits (annual allowance plus carry forward; total gross salary), the larger contribution after noon-pension investment growth receives a larger tax relief, so all is well. Except for some trickiness around the 20%/40% boundary.
Paying appropriate attention to transaction costs, of course.Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...THE WAY TO WEALTH, Benjamin Franklin, 1758 AD0
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