Medium vs long-term savings and investments

BananaRepublic

Alexland said:

BananaRepublic said:

I don’t understand the point you are making. 

Yes if the platform or fund manager go bust the account cash and assets should still be safe in the client nominee accounts for someone else to take over management.
However in the unlikely event the money was stolen, the assets were never purchased, etc and it affected enough customers that the platform or fund manager was unable to compensate then you would need FSCS to payout but it could be more limited if you transfered into a product with less FSCS protection (eg moving from a product with unlimited protection to one with only £85k protection) or even no FSCS protection (eg ETFs).
It's just a risk for the OP to consider as part of their decision making. It doesn't stop us having SIPP accounts that exceed £85k and investing in ETFs and ITs with no protection.

Okay thanks for the clarification. I am sure there are many people with large sums in one SIPP.

I wonder if anything like this has ever happened, or if it is likely? I do recall some cases of bank employees siphoning off money from the bank. Only last year the US discovered that large numbers of sensitive networks had been penetrated by a foreign group. 

george4064

mullygrubber said:

Alexland said:

You would only consider using a S&S Lifetime ISA if you had already put enough into your pension to avoid paying higher rate tax and get max employer matching. We already have lots in pensions (and I contribute enough to avoid higher rate tax and child benefit clawback) so are using our S&S Lifetime ISAs (and 25% government bonuses) to invest for house deposits for our kids when we are 60+ and they are 20+.

What do you mean by putting enough into your pension to avoid paying higher rate tax? I have already maxed out the employer contribution and I am a higher rate tax payer. Do you mean contributing even more into your person to take advantage of the relief (i.e. the higher rate tax relief means it's effectively free money from the government if you are willing to forego having money in your pocket today). 

On the Lifetime ISA front, that is a smart idea!

I think what Alexland means for example;

- Imagine you earn £45k a year and you receive a £10k year end bonus, irrespective of employer matching etc. To avoid higher rate tax you should contribute at least £5k per annum into your pension, ie you are sacrificing £3,000 of post-tax earnings for a £5k contribution to your pension over the course of the tax year (hence saving £2,000 worth of income tax @ 40%)

- Or if you earn £70k a year and receive a £5k year end bonus, you should look to contribute at least £25k a year to your pension to avoid higher rate tax. Ie you are sacrificing £15,000 of post-tax earnings to make a £25k contribution to your pension over the course of the tax year (hence saving £10k in tax).


Any further pension contributions will only save you tax at the basic rate and hence LISA contributions become a more attractive alternative once you have sacrificed all your higher rate earnings to your pension (as per examples above).

Others may correct me, but that is my understanding.

DiamondLil

Of course pension planning is sensible and necessary. But the ISA route can be a valid and important partner to the pension fund.

There's a lot to be said for a stream of tax free income.

Albermarle

Okay thanks for the clarification. I am sure there are many people with large sums in one SIPP.
I wonder if anything like this has ever happened, or if it is likely?

This subject has been discussed many times on this forum . The consensus is that if you use a mainstream pension provider then the chance if this happening is very very low. Some people have 7 figure sums with one provider, although most people with large pots seem to split it between at least two. Not just to be on the safe side in case of fraud etc but also in case of prolonged IT meltdowns ( like with TSB). Also you can optimise platform charging structures by investing in more than one platform, as certain types of investments are cheaper to hold on some platforms than others.

MDMD

george4064 said:

mullygrubber said:

Alexland said:

You would only consider using a S&S Lifetime ISA if you had already put enough into your pension to avoid paying higher rate tax and get max employer matching. We already have lots in pensions (and I contribute enough to avoid higher rate tax and child benefit clawback) so are using our S&S Lifetime ISAs (and 25% government bonuses) to invest for house deposits for our kids when we are 60+ and they are 20+.

What do you mean by putting enough into your pension to avoid paying higher rate tax? I have already maxed out the employer contribution and I am a higher rate tax payer. Do you mean contributing even more into your person to take advantage of the relief (i.e. the higher rate tax relief means it's effectively free money from the government if you are willing to forego having money in your pocket today). 

On the Lifetime ISA front, that is a smart idea!

I think what Alexland means for example;

- Imagine you earn £45k a year and you receive a £10k year end bonus, irrespective of employer matching etc. To avoid higher rate tax you should contribute at least £5k per annum into your pension, ie you are sacrificing £3,000 of post-tax earnings for a £5k contribution to your pension over the course of the tax year (hence saving £2,000 worth of income tax @ 40%)

- Or if you earn £70k a year and receive a £5k year end bonus, you should look to contribute at least £25k a year to your pension to avoid higher rate tax. Ie you are sacrificing £15,000 of post-tax earnings to make a £25k contribution to your pension over the course of the tax year (hence saving £10k in tax).


Any further pension contributions will only save you tax at the basic rate and hence LISA contributions become a more attractive alternative once you have sacrificed all your higher rate earnings to your pension (as per examples above).

Others may correct me, but that is my understanding.

Don’t forget that where salary sacrifice is in operation the NI is also saved, and if you concentrate the lump sum payments over a short period (such as right at the start or end of the year) you can take advantage of the fact that Income tax is calculated on an annual basis but NI is weekly/monthly (except for some ltd co directors). 

You can therefore save the 40% tax, plus 12% NI, rather than 2% if it were spread out over the year. I’m currently being paid the minimum wage until the tax year end. Unfortunately due to a miscommunication with my payroll they still paid me a bonus in cash rather than sacrificing that too, so I will need to do a top up payment before 5 April into my SIPP as I’m still £2k above the HR threshold.

I haven’t done any calculations to prove this out but it might be even more beneficial to not do the large pension payments (i.e. reducing pay right down) in the month the bonus is paid if the majority of that bonus attracts 2% NI, as you would only be saving 2% on most of it, but if you pay in over a longer period at another point in the year, more might be saved on which you save 40% tax but 12% NI.

TheAble

Any chance someone could give a worked example on how you can get the 12% NI saving? This is something I had no idea about. Many thanks in advance!

TheAble

It was more the concept of maximal NI saving efficiency. 
Suppose you earn 4.5k gross a month and want to put 9k into your pension over the course of the tax year. Are we saying it's more efficient to pay in your full salary for 2 months, and then nothing for the other 10, than pay in £750/month for 12 months?

NottinghamKnight

TheAble said:

It was more the concept of maximal NI saving efficiency. 
Suppose you earn 4.5k gross a month and want to put 9k into your pension over the course of the tax year. Are we saying it's more efficient to pay in your full salary for 2 months, and then nothing for the other 10, than pay in £750/month for 12 months?

Yes assuming your employer offers SS or Smart pension and they allow you to vary contributions in that manner - the former is common the latter far less so, eventhough it is now allowed which wasn't the case several years ago.

Alexland

The trick is to sal-sac enough in some months that your weekly pay falls below £962 pw (to save 12% NI on some of the contribution) and take enough in other months that your weekly pay goes above £962 pw (to pay 2% NI on the extra) but still contribute enough to keep your total across the tax year just below £50k to save 40% income tax (unless you are in Scotland where rates are different) and avoid child benefit clawback (if applicable). Under PAYE the income tax will gradually recalculate itself across the tax year but the extra NI savings are money in your pocket to keep.

I didn't push this trick to the extreme this tax year and still saved around £500 of NI compared to a regular contribution rate of the same amount. I am going to try and do even better next tax year.

You would still want to sal sac enough each month to ensure you are always getting maximum employer matching and you cannot contribute so much that your employer is paying you below minimum wage for the hours worked. Also you may want to ensure you pay enough NI each week to get a complete NI year towards state pension.

TheAble

Ok very interesting thanks both!