Company pension vs SIPP

oli356

Hi all,

Pension noob here. Been paying into my company pension at 3% since I started working as an apprentice back in 2012. As of this month I've upped this to 10% as after bonuses I might be creeping into the 40% tax bracket now. The company contributes 8.7%. I'm contributing via salary sacrifice.

The pension provider is Aviva what they seem to called "balanced risk" , there seems to be a 0.26% annual charge. Currently the pension has a value of just over £29k.

The asset allocation if it matters looks like this (%):

<div>Fixed interest 35.87 Developed market equivity (excl UK) 30.54 UK equities 15.11 Emerging market equity 9.80 Global equities 4.13 Cash/Money market 2.65 Other 1.01 Property 0.89</div>

What I'm wondering, is if there is any benefit at all in paying into a different pension elsewhere (SIPP)? I'm only 25 so a long way off retirement, sadly Aviva has my retirement age set at 74! Though I'd rather find out sooner than later if I should be doing something different..

Any advice appreicated

SonOf

What I'm wondering, is if there is any benefit at all in paying into a different pension elsewhere (SIPP)?
You would lose salary sacrifice.
You would lose the employer contribution (if you mean moving it altogether)
Why do you think you may need a SIPP?

 sadly Aviva has my retirement age set at 74! 
That is for admin purposes only.  Most pensions nowadays are set up to 74 or 75.  Using 74 gives them an extra year to get the lifetime allowance admin sorted.  Although dont worry about that as god knows what the rules will be in 50 years time.    You can take it earlier.

kinger101

There's absolutely no benefit to the SIPP in your case.  If your annual bonus is pushing into HR, you hit a real sweet spot tax-wise.  Here's why.

SIPP
For BR taxpayers, 80 p of net income becomes £1 gross in a pension.  Mostly taxed at 15% on the way out.  85 p / 80 p = 6.25 % gain on day 1.
For HR taxpayers, 60 p of net income becomes 85 p net pension, therefore 41.67 % gain.
Sal sac pensions scheme.
As well as saving tax,you save NI. 
For BR taxpayers @ 12% NI, 68 p becomes 85 p = 25 % gain.
For HR taxpayers  @ 2 % NI, 58 p become 85 p = 46.55 % gain.
But, as it's you bonus pushing you into NI, you have to take into account that income tax is calculated annually, and NI by pay period (in your case one month).  During non-bonus months, you pay 12 % NI.  IT will be calculated at your marginal rate.  Some of your pension contributions save both 40% tax and 12 % NI.  Now, 48 p becomes 85 p.  A whopping 77.08 % gain on day one.

Sac sac also clearly wins in those years you're unfortunate enough to not get annual bonus.

But you do need to see if you can get out of that default fund. 60% equities is too low for someone of 25.  The annual charge of 0.26% is very reasonable.
  

oli356

Thanks for the answers gents. I couldn't really see a reason why I would need a SIPP, but I wanted to make sure I wasn't missing something!
@kinger101j thought the 65% was too low also, something more like 80% would be better? With what, 40 years maybe till retirement, I'm quite open for risk in the pension pot.
Need to ring Aviva and see what options there are. 

Knock_Rock

Hi oli.

My workplace pension is with aviva via salary sacrifice too.

I was invested automatically into the default fund according to my age 3 years ago (54), a very cautious allocation being an old codger, although i had many years worth of pension from another job in another pension, so could afford to take a lot more risk than the default. 

I registered online with aviva and hence have switched out of the default fund & reset my retirement date to 60 instead of 65. (& they give forecasts to that timeline & options for what its worth!)

The app and online interface is very good, just needed my plan number & details to register online.

0.26% is the annual platform fee to aviva that has to be payed regardless . Any fund you switch to will have an additional annual management charge. ranging from zero to a lot more.

To see the AMC charges for the funds look at the aviva fund centre online.

At your age annual management charges for any funds you choose will have a big impact in the long term, the default fund will be lowest cost for sure (0%) , but there are others at 0% and some good options at discounts to buying elsewhere. 

Time is on your side so research & learn as much as you can...keep piling the money in!

knock.

CSL0183

kinger101 said:

There's absolutely no benefit to the SIPP in your case.  If your annual bonus is pushing into HR, you hit a real sweet spot tax-wise.  Here's why.
SIPP
For BR taxpayers, 80 p of net income becomes £1 gross in a pension.  Mostly taxed at 15% on the way out.  85 p / 80 p = 6.25 % gain on day 1.
For HR taxpayers, 60 p of net income becomes 85 p net pension, therefore 41.67 % gain.
Sal sac pensions scheme.
As well as saving tax,you save NI. 
For BR taxpayers @ 12% NI, 68 p becomes 85 p = 25 % gain.
For HR taxpayers  @ 2 % NI, 58 p become 85 p = 46.55 % gain.
But, as it's you bonus pushing you into NI, you have to take into account that income tax is calculated annually, and NI by pay period (in your case one month).  During non-bonus months, you pay 12 % NI.  IT will be calculated at your marginal rate.  Some of your pension contributions save both 40% tax and 12 % NI.  Now, 48 p becomes 85 p.  A whopping 77.08 % gain on day one.
Sac sac also clearly wins in those years you're unfortunate enough to not get annual bonus.
But you do need to see if you can get out of that default fund. 60% equities is too low for someone of 25.  The annual charge of 0.26% is very reasonable.

That's a hell of a complicated way to explain SS.

Basic rate taxpayers will get 32% relief. (£100 into pot will cost them £68 net pay) 
Higher rate taxpayers will get 42% relief (£100 into pot will cost them £58 net pay)
SIPP, £100 into the pot will cost them £80. 

In the OP case, if his earnings are to breach £50k then yes he's in the sweetspot. £55,555 would be even better as he would put £5,555 into his fund with 42% relief and not pay any HRT at all. This £5,555 personal contribution plus the £4,833 (8.7%) employer contribution would cost him £3,222 NET pay. £10,388 into the pot having only paid £3,222 for it. No brainer.

bowlhead99

CSL0183 said:

kinger101 said:

There's absolutely no benefit to the SIPP in your case.  If your annual bonus is pushing into HR, you hit a real sweet spot tax-wise.  Here's why.
SIPP
For BR taxpayers, 80 p of net income becomes £1 gross in a pension.  Mostly taxed at 15% on the way out.  85 p / 80 p = 6.25 % gain on day 1.
For HR taxpayers, 60 p of net income becomes 85 p net pension, therefore 41.67 % gain.
Sal sac pensions scheme.
As well as saving tax,you save NI. 
For BR taxpayers @ 12% NI, 68 p becomes 85 p = 25 % gain.
For HR taxpayers  @ 2 % NI, 58 p become 85 p = 46.55 % gain.
But, as it's you bonus pushing you into NI, you have to take into account that income tax is calculated annually, and NI by pay period (in your case one month).  During non-bonus months, you pay 12 % NI.  IT will be calculated at your marginal rate.  Some of your pension contributions save both 40% tax and 12 % NI.  Now, 48 p becomes 85 p.  A whopping 77.08 % gain on day one.
Sac sac also clearly wins in those years you're unfortunate enough to not get annual bonus.
But you do need to see if you can get out of that default fund. 60% equities is too low for someone of 25.  The annual charge of 0.26% is very reasonable.

That's a hell of a complicated way to explain SS.

Basic rate taxpayers will get 32% relief. (£100 into pot will cost them £68 net pay) 
Higher rate taxpayers will get 42% relief (£100 into pot will cost them £58 net pay)
SIPP, £100 into the pot will cost them £80. 

And SIPP £100 into the pot for a high rate taxpayer will cost them £60.  So we can see that it is generally better to use SS for a cost of £68 or £58 instead of £80 or £60 via the SIPP route. Even if the workplace pension wasn't a good offering in terms of investment choices available and charges, it's still pretty much always going to be better to use the route that gives you the most money in the pension per pound invested, and if you don't really like Aviva you can always transfer all or part of your pension elsewhere, sometime down the line. In the meantime you just need to select a suitable fund rather than an unsuitable one (e.g. 80% or more equities instead of 60% equities if you are going to shut it away and not look at it for 4 or 5 decades).

Still, if part of the benefit of using SS over a private pension is the NI saving it is worth being aware of the quirks of how NI is calculated per pay period rather than for the year as a whole, to understand quite how much you might save. So I can see why kinger mentioned it.

The reason to properly understand the schemes is that with just the basic information, some people earning 49999 for the year and then getting a £12000 bonus one month might think they'll save 12% of it by doing a one-off sacrifice that month when really they would have only paid 2% NI on it after all. While people with that pattern of income committing to a regular sacrifice of £1000 a month would truly save 12% NI on the £1000 every month, and then in the last month would have only saved 2% because they were still over the monthly threshold for high NI.  

None of that really changes the analysis that SS is better than a private contribution arrangement unless you are sacrificing down to really really low levels of net income where the income wouldn't have been taxable if taken as salary.

kinger101

CSL0183 said:

kinger101 said:

There's absolutely no benefit to the SIPP in your case.  If your annual bonus is pushing into HR, you hit a real sweet spot tax-wise.  Here's why.
SIPP
For BR taxpayers, 80 p of net income becomes £1 gross in a pension.  Mostly taxed at 15% on the way out.  85 p / 80 p = 6.25 % gain on day 1.
For HR taxpayers, 60 p of net income becomes 85 p net pension, therefore 41.67 % gain.
Sal sac pensions scheme.
As well as saving tax,you save NI. 
For BR taxpayers @ 12% NI, 68 p becomes 85 p = 25 % gain.
For HR taxpayers  @ 2 % NI, 58 p become 85 p = 46.55 % gain.
But, as it's you bonus pushing you into NI, you have to take into account that income tax is calculated annually, and NI by pay period (in your case one month).  During non-bonus months, you pay 12 % NI.  IT will be calculated at your marginal rate.  Some of your pension contributions save both 40% tax and 12 % NI.  Now, 48 p becomes 85 p.  A whopping 77.08 % gain on day one.
Sac sac also clearly wins in those years you're unfortunate enough to not get annual bonus.
But you do need to see if you can get out of that default fund. 60% equities is too low for someone of 25.  The annual charge of 0.26% is very reasonable.

That's a hell of a complicated way to explain SS.

Basic rate taxpayers will get 32% relief. (£100 into pot will cost them £68 net pay) 
Higher rate taxpayers will get 42% relief (£100 into pot will cost them £58 net pay)
SIPP, £100 into the pot will cost them £80. 

In the OP case, if his earnings are to breach £50k then yes he's in the sweetspot. £55,555 would be even better as he would put £5,555 into his fund with 42% relief and not pay any HRT at all. This £5,555 personal contribution plus the £4,833 (8.7%) employer contribution would cost him £3,222 NET pay. £10,388 into the pot having only paid £3,222 for it. No brainer.

If prefer the term accurate.  You've missed the fact pensions are taxable, and the timing anomalies of NI.  It's already a given that OP is getting the employer match, it's a question of what gives the best ROI on additional contributions.

For the 2019/2020 financial year, OP's goal should be to drop themselves back into basic rate tax, so they just need to make a one-off contribution for that purpose, be it SIPP or to the Aviva scheme.

For 2020/2021 (assuming pension rules don't change, and OP can expect a similar bonus next year), they'll get a better ROI if they spread pension contributions evenly via salary sacrifice rather than a one-off contribution.  I know it's not always easy to predict bonuses, but understanding the difference between a potential gain of 41.67 or 46.55 versus 77.08 % gain is important.  A little bit of forward planning goes a long way.

kinger101

oli356 said:

Thanks for the answers gents. I couldn't really see a reason why I would need a SIPP, but I wanted to make sure I wasn't missing something!
@kinger101j thought the 65% was too low also, something more like 80% would be better? With what, 40 years maybe till retirement, I'm quite open for risk in the pension pot.
Need to ring Aviva and see what options there are. 

Yes, 80 % is much more in line with what a lifestyled fund for someone of your age would typically include. 

Albermarle

Need to ring Aviva and see what options there are.

You need to get on line access. Either your employer or Aviva will supply the appropriate username, passwords etc .

oli356

Albermarle said:

Need to ring Aviva and see what options there are.

You need to get on line access. Either your employer or Aviva will supply the appropriate username, passwords etc .

@Albermarle I have access to it via avivamymoney website though never taken a deep look at it. What I don't understand is if I can just tell Aviva that I want to increase my risk rating and they will go off and pick a fund for me.

As far as I can tell with the current programme I'm on "<employer name> target cash lifestyle fund lifetime investment programme" the highest risk rating is 4 (medium volatility).

I can see other funds as well that are apparently available to me (just over 1000 of them). I searched for Vanguard just because I have £1k in a LifeStrategy 100% with them so I know the name.

The annual charge from Aviva for the 'vanguard target retirement 2055' is 0.41%. According to the Vanguard key investor information "This fund will seek to achieve its investment objective by investing more than 90% of its assets in passive funds that track an index".

2055 would put me at 60 years old so close enough for a plan I suppose.

Not sure if this would be a good plan / if the annual charge is too much etc etc. If I do have to pick my own fund, going to have to research more to find out a "good one" with a decent annual charge.