Is my pot looking ok?

Alexland

Anonymous101 said:

My strategy started fairly simply by making sure my taxable income never exceeded the higher rate threshold. This has recently evolved into front loading the contributions to make use of the fact that unlike tax, N.I. contributions are calculated monthly and can't be applied retrospectively. So any monthly income which is below the higher rate threshold benefits from 12% NI relief vs the 2% relief against the higher rate contributions if I spread evenly over the year. So say I was contributing 20% of salary over the year, I now contribute 30% for the first 6 months and 10% for the latter 6 months.

Wow that just blew my mind. Like you I contribute enough to ensure my earnings are under £50k to avoid higher rate tax (and child benefit claw back). So rather than going at a steady rate across the year (plus any bonus), if over the next 10 months I salary sac an extra £1k pm of higher rate earnings into my pension for 5 months and then £1k pm less for 5 months then it would save an extra £500 (10% of £5k) of NI for the same amount of pension contribution?

Anonymous101

Alexland said:

Anonymous101 said:

My strategy started fairly simply by making sure my taxable income never exceeded the higher rate threshold. This has recently evolved into front loading the contributions to make use of the fact that unlike tax, N.I. contributions are calculated monthly and can't be applied retrospectively. So any monthly income which is below the higher rate threshold benefits from 12% NI relief vs the 2% relief against the higher rate contributions if I spread evenly over the year. So say I was contributing 20% of salary over the year, I now contribute 30% for the first 6 months and 10% for the latter 6 months.

Wow that just blew my mind. Like you I contribute enough to ensure my earnings are under £50k to avoid higher rate tax (and child benefit claw back). So rather than going at a steady rate across the year (plus any bonus), if over the next 10 months I salary sac an extra £1k pm of higher rate earnings into my pension for 5 months and then £1k pm less for 5 months then it would save an extra £500 (10% of £5k) of NI for the same amount of pension contribution?

Correct.
It's something that I've only just started doing myself but I'm aware others have been doing this for some time. Obviously you need to have the funds or headroom to cashflow the higher contribution months.
At the extreme there are some which contribute their full pension in as few a months as possible. Taking their salary right down to the minimum thresholds (minimum wage for most rather than the lower NI threshold) and therefore they are getting all of their pension contribution at the 12% NI level. I'm intending on modelling this for myself shortly so will work out exactly what I'd save as I move towards something like that over the next couple of years.

Alexland

Anonymous101 said:

It's something that I've only just started doing myself but I'm aware others have been doing this for some time. Obviously you need to have the funds or headroom to cashflow the higher contribution months.
At the extreme there are some which contribute their full pension in as few a months as possible. Taking their salary right down to the minimum thresholds (minimum wage for most rather than the lower NI threshold) and therefore they are getting all of their pension contribution at the 12% NI level. I'm intending on modelling this for myself shortly so will work out exactly what I'd save as I move towards something like that over the next couple of years.

Thanks I just did a spreadsheet and it will save me around £500 pa. The cashflow impact isn't too bad as you get the benefit of less Tax/NI in months where you contribute extra and more tax (and a tiny bit more NI) in months where you don't which smooths it a bit. A lot of our take home pay goes into ISAs so it just means their contribution rate will be in reverse correlation.

The other nice thing about this trick is the NI saving is cash in your pocket (to be invested in an ISA...) rather than tied up into the pension with resulting access, LTA, etc implications.

Anonymous101

Alexland said:

Anonymous101 said:

It's something that I've only just started doing myself but I'm aware others have been doing this for some time. Obviously you need to have the funds or headroom to cashflow the higher contribution months.
At the extreme there are some which contribute their full pension in as few a months as possible. Taking their salary right down to the minimum thresholds (minimum wage for most rather than the lower NI threshold) and therefore they are getting all of their pension contribution at the 12% NI level. I'm intending on modelling this for myself shortly so will work out exactly what I'd save as I move towards something like that over the next couple of years.

Thanks I just did a spreadsheet and it will save me around £500 pa. The cashflow impact isn't too bad as you get the benefit of less Tax/NI in months where you contribute extra and more tax (and a tiny bit more NI) in months where you don't which smooths it a bit. A lot of our take home pay goes into ISAs so it just means their contribution rate will be in reverse correlation.

Same for me. This year I think it will be straightforward as I'm doing something similar to what you have described. Next year however I'm intending on stepping this up a level or 2 which might involve a little more thoughts on the cashflowing from me.
Good little hack though on the NI though isn't it!  

MaxiRobriguez

Anonymous101 said:

Alexland said:

Anonymous101 said:

My strategy started fairly simply by making sure my taxable income never exceeded the higher rate threshold. This has recently evolved into front loading the contributions to make use of the fact that unlike tax, N.I. contributions are calculated monthly and can't be applied retrospectively. So any monthly income which is below the higher rate threshold benefits from 12% NI relief vs the 2% relief against the higher rate contributions if I spread evenly over the year. So say I was contributing 20% of salary over the year, I now contribute 30% for the first 6 months and 10% for the latter 6 months.

Wow that just blew my mind. Like you I contribute enough to ensure my earnings are under £50k to avoid higher rate tax (and child benefit claw back). So rather than going at a steady rate across the year (plus any bonus), if over the next 10 months I salary sac an extra £1k pm of higher rate earnings into my pension for 5 months and then £1k pm less for 5 months then it would save an extra £500 (10% of £5k) of NI for the same amount of pension contribution?

At the extreme there are some which contribute their full pension in as few a months as possible. Taking their salary right down to the minimum thresholds (minimum wage for most rather than the lower NI threshold) and therefore they are getting all of their pension contribution at the 12% NI level. 

Hiya!

This is what I'm doing, and using my offset mortgage facility as cashflow if my "minimum wage" doesn't cover monthly outgoing requirements.

Nice little hack though, and I plan to scale back contributions in the near future somewhat so this frontloading is a grand idea for then for me!

Anonymous101

MaxiRobriguez said:

Hiya!

This is what I'm doing, and using my offset mortgage facility as cashflow if my "minimum wage" doesn't cover monthly outgoing requirements.

Nice little hack though, and I plan to scale back contributions in the near future somewhat so this frontloading is a grand idea for then for me!

I'm in broadly the same space. Looking to fill the pension as soon as possible and any angle like this could be useful. 
Out of interest how did you work out how far down you could push the income? Spread your required contributions over a reasonable timeframe or work out what minimum wage was and then the amount of contributions followed that?

MaxiRobriguez

Anonymous101 said:

MaxiRobriguez said:

Hiya!

This is what I'm doing, and using my offset mortgage facility as cashflow if my "minimum wage" doesn't cover monthly outgoing requirements.

Nice little hack though, and I plan to scale back contributions in the near future somewhat so this frontloading is a grand idea for then for me!

I'm in broadly the same space. Looking to fill the pension as soon as possible and any angle like this could be useful. 
Out of interest how did you work out how far down you could push the income? Spread your required contributions over a reasonable timeframe or work out what minimum wage was and then the amount of contributions followed that?

Our pension sacrifice is done via a portal on our intranet. It calculates salary vs any other sacrifice schemes etc, and it physically won't let you go under a certain % if you go under minimum wage.

That's the technicalities anyway. In terms of the affordability, I've got 2x salary in the offset mortgage, and the way I view it is that I'd rather avoid 32% tax and pay a couple more % in interest than pay that tax and no interest. I'm trying to work down the offset mortgage anyway as we're coming up to the end of the fix term, with a plan to move to a non-offset facility and just carry the mortgage over many years. Using the offset as cash flow whilst sacrificing more into the pension helps that as well. 

Alexland

MaxiRobriguez said:

Our pension sacrifice is done via a portal on our intranet. It calculates salary vs any other sacrifice schemes etc, and it physically won't let you go under a certain % if you go under minimum wage.

My wife is part time so is setup to sal sac all the way down to her personal allowance which doesn't take her below minimum wage. It really depends on your outlook for future earnings on if doing sal sac at 32% saving is worthwhile. For me it would be a waste of my LTA but my wife is unlikely to ever work full time again so would never get the chance to avoid higher rate tax and the LTA is less likely to be an issue.

MaxiRobriguez

Alexland said:

MaxiRobriguez said:

Our pension sacrifice is done via a portal on our intranet. It calculates salary vs any other sacrifice schemes etc, and it physically won't let you go under a certain % if you go under minimum wage.

My wife is part time so is setup to sal sac all the way down to her personal allowance which doesn't take her below minimum wage. It really depends on your outlook for future earnings on if doing sal sac at 32% saving is worthwhile. For me it would be a waste of my LTA but my wife is unlikely to ever work full time again so would never get the chance to avoid higher rate tax and the LTA is less likely to be an issue.

Trying to get out of the rate race 15 years before what is considered normal means chances of exceeding LTA are low. I'm forecasting a pot between £500k and £1m based on 20 years of annual growth between 2% and 6% on average.

If at all goes to pot and I need to work longer and it would have been more efficient only to salary sacrifice down to basic rate and no further, then it's only a 10% difference in efficiency. I'll get over it. 

Cypruseast

MaxiRobriguez said:

Cammywatson033 said:

So what I’ve said might have been a bit misleading, sorry.

I'm surprised you got two pages worth of people rushing to congratulate, because the figures looked wild to me without doing any calculations!

FWIW, to generate a £250k pot on those contributions by 35 then you'll have had to had entered the workforce at 18, on the same salary you are now (ie, touching higher rate taxpayer), with the 10%/16% contributions applying throughout, and on top of that consistent returns on the portfolio of 5% a year, over a timeframe which includes both great recession and Coronavirus knocks.

For comparison sake, what I suspect is going to ring true for far more people (on this forum at least) is my scenario. I started work after uni at 21, joined a grad scheme paying a very average wage. I didn't contribute for the first two years of work because I couldn't afford to. Now 32, so ten years on - I've upped contributions from a £400 a month to £1,000 a month halfway through that timeframe and more recently over the last few months been able to up to £2,300 a month (taking advantage of HRT breaks, and because I dont need the cashflow). My current portfolio is £65k, after being knocked down a bit in recent months.

I think I've done OK. If anyone has over £100k in their pension by 35, I'd say you're doing well. It takes a lot of effort nowadays to get to that. £250k figure at 35 was ludicrous for a DC pension!

The figure of £250k is somewhat doable for someone who’s potentially worked and contributed for 12/13 years considering the way the markets have played out for the past decade. 

I am 43 and have both a DB pension and a DC pension. My DB pension was accrued over a 9 year period at the start of my working career until I was approx 31. It is currently worth 10.5k per annum and has a TV of about £330k. 

12 years ago I started DC pension. The monthly payments has changed as my salary has increased to a point where over the past 3 months the total paid in (mine and my employer contribution) is £1130. Previously for many years it was about £760 a month and probably less before that. The pension fund value is currently £230k (so over 90% of the figure the OP originally mentioned in a similar time frame).

This has been achieved by close monitoring and a weekly review of the performance of my funds. I’ve taken action when it seemed necessary and have learnt a fair bit about the markets and how they’re likely to react to global events. Now I’m no expert, but it can be achieved and if I had been investing as much per month as the OP I’m pretty sure my DC pension pot would be in excess of £250k.