Salary sacrifice v personal pension (for higher earners)

perky29

Hello all, are there any particular benefits of using a personal pension in addition to a workplace pension?

I am fortunate to be employed, and as a higher rate taxpayer - and I contribute to a workplace pension, which is salary sacrifice, with my employer matching 5% contributions (if I do that or above).  They also top it up with the NI savings. 

I have had a cold-call from a financial advisor, who instantly explained that it is better to keep my salary sacrifice work pension (to keep the employer contributions), which I understand totally, but recommended that for any further contributions, I would be better off setting up a personal pension, as that way I would have the benefit of the "extra money in my pocket" as he explained, rather than it all being deducted from source. 

This will be due to my lack of understanding of how salary sacrifice systems versus personal pensions work, but I would have thought that the tax saving is exactly the same, whether you contribute by salary sacrifice or a personal pension.  I don't quite understand how I would have more money "in my pocket" if I went down the personal pension route?   Eg if I want to put in £1000 by salary sacrifice (ignoring employer contributions) the way I understand it is that my salary gets reduced, and because I would save 40% tax on that salary, it only costs me £600 for the pension contribution to be £1000.   Whereas if I went down the personal pension route, I would be taxed at 40%, but I would then put £600 into personal pension, which automatically becomes £800 with 20% tax relief, and I then apply to HMRC to get the further 20% relief for higher rate - ultimately costing the same £600??

I'm sure i'm missing something but would be grateful for any explanations out there on salary sacrifice v personal pensions for higher earners!  Thank you

Paul_Herring

cold-call

Don't talk to them again.

 I would be better off setting up a personal pension, as that way I would have the benefit of the "extra money in my pocket" as he explained, rather than it all being deducted from source. 

You wouldn't be able to access it any sooner than your work pension, and you'd be losing this:

They also top it up with the NI savings. 

Which is (if all of it) 13.8% of your sacrifice. Note - I'm assuming this is the Employer NI savings, not just yours. Which you'd lose if you didn't salary sacrifice.

Eg if I want to put in £1000 by salary sacrifice (ignoring employer contributions) the way I understand it is that my salary gets reduced, and because I would save 40% tax on that salary, it only costs me £600 for the pension contribution to be £1000.   

You'd also be saving 2% employee NI on that £1000. And your employer would be saving £138 on that £1000, which they are (maybe?) also adding?

 Whereas if I went down the personal pension route, I would be taxed at 40%, but I would then put £600 into personal pension, which automatically becomes £800 with 20% tax relief, and I then apply to HMRC to get the further 20% relief for higher rate - ultimately costing the same £600??

Doing that, you've lost the 2% NI (£20), and also your employer's extra contribution (£138, if any.)

I'm sure i'm missing something

You were cold-called by someone selling you their pension scheme, and either being evasive or outright lying. It's unlikely to benefit you.

Put any extra you would have put into a personal pension into your salary sacrifice.

zagfles

The tax saving is the same. You aren't missing anything, other than the fact that whoever called you was lying, clueless, or a scammer. In common with virtually all cold calls.

It is also more complicated in a personal pension as you have to claim the higher rate relief off HMRC. Also you get NI savings in sal sac which you don't in a private pension.

house_help

I am in same boat. I do put some additional into personal pension as my workplace pension the fund choices are limited  and also have high charges so I have DIY PP to invest in things not covered by work scheme. My workplace do not however pass over the NI saving they make so the delta for me is not so much.

The other consideration for me is that I claim the additional 20% from HMRC in my self assesment so only get the additional 20% relief at end the year whilst doing it via work get the full amount in your pension each month as you make the payment. I guess what they could mean by 'money in your pocket' is you get the higher rate relief back in your bank from HMRC so it is money in your pocket rather than in the pension? 

kuratowski

The cynical part of me thinks the advisor meant to say 'money in my pocket'

kinger101

Anyone who cold calls you is likely to be a scammer.  

For higher rate taxpayers, salary sacrifice still beats a personal pension.  Assuming each pound in your pension is really worth 85 p on withdrawal due to income tax, the net cost of this 85 p is 60 p with PP and 58 p with SS.  Which means a tax uplift of 41.67% PP or 46.55 % with SS.  SS schemes are also a lot easier to administer from your perspective.

There are two scenarios where SS is even better.
(a) employer passes on their NI saving to you.  I think you were alluding to your employer doing that.  In this case, the 58 p of surrendered net income buys (113.8 * 0.85) = 96.73 p of net pension.  A 66.77 % uplift.
(b) the second scenario is an employee wouldn't usually be a HR taxpayer if it wasn't for annual bonus.  In these circumstances, it's possible (on some or most) of your contributions to save both 40% income tax and 12 % NI due to the former being calculated on an annual basis, and the latter based on pay period.  In this case, the 85 p net pension income costs 48 p of net salary, meaning a 77.08 % uplift.  In fact, it's possible for (a) and (b) to happen,  which would give you 101.5%.  

The only occasion I'd use a SIPP if I had salary sacrifice available is for a lump sum payment just before the end of the tax year to drop myself back into basic rate.

dunstonh

I have had a cold-call from a financial advisor, 

Financial advisers do not cold call.    It is more likely that it was not a financial adviser.   Indeed, a ban on pension cold calling took place in 2019.   That was an attempt to stop scammers and dodgy dealing but the problem is that scammers and dodger dealers don't really care about the rules.

Anonymous101

Firstly as others have said I don’t trust anyone that cold calls me about anything.

Sal Sac is likely better value despite high charges due to the NI relief.
Theres also the possibility of transferring out periodically to a personal pension?

perky29

Thanks very much for all the replies.   Glad to know i wasn't missing something glaringly obvious, and i agree completely re cold callers!  

Young_worker

house_help said:

I am in same boat. I do put some additional into personal pension as my workplace pension the fund choices are limited  and also have high charges so I have DIY PP to invest in things not covered by work scheme. My workplace do not however pass over the NI saving they make so the delta for me is not so much.

Not sure if its an option for you but one thing to consider is salary sacrificing into your workplace pension to get the NI saving and every so often doing a partial transfer of funds to your DIY PP to get the wider investment choice. Bit of a faff and you are out of the market for a few days but does give potential to get best of both worlds if its allowed by both your schemes. 

Albermarle

and as a higher rate taxpayer - and I contribute to a workplace pension, which is salary sacrifice, with my employer matching 5% contributions (if I do that or above). 

Just to change the subject slightly. If you are only adding 5% , or thereabouts, you should consider increasing this significantly if you can. Especially if you can gain higher rate tax relief.