New job with non contributory pension

13Kent

My hubby is just changing his job. This involves a massive pay rise of about £20k as his salary will be £70k. The contract says there will be a non-contributory pension of 8%, but there is an option to make top up payments. Please could someone explain how this works, because as it's such a huge pay rise if he was to pay top ups into the pension it his take home pay would still be much more than his current take home pay. 

Retireinten

Someone will be along to explain the non contributory pension bit in more detail I am sure.  But if you don't need the extra income then I would suggest paying any salary above £50k into the pension as a means of avoiding 40% tax and protecting any child benefit (if you claim it).

If the company offers a salary sacrifice scheme for pension payments then even better as you save NI as well as tax. 

Albermarle

Is the 8% paid on behalf of your husband and the employer contributes in addition to that ? Or is it 8% in total ?
Is it a standard DC ( Defined contribution ) pension where a pot of money is built up ? Or is a DB (Defined Benefit ) scheme where rights to a guaranteed retirement income are built up?

Marcon

13Kent said:

My hubby is just changing his job. This involves a massive pay rise of about £20k as his salary will be £70k. The contract says there will be a non-contributory pension of 8%, but there is an option to make top up payments. Please could someone explain how this works, because as it's such a huge pay rise if he was to pay top ups into the pension it his take home pay would still be much more than his current take home pay. 

Your husband is being offered membership of a defined contribution pension scheme to which his employer will pay 8% (the 8% is likely to be based on his basic salary, but check to be sure - the paperwork should tell him) and he is not required to contribute as a condition of membership - that's what 'non-contributory' means.

He has the option to pay contributions into the pension scheme on top of the employer's 8%. If he has the chance to do so using something called 'salary sacrifice', using that route will give him both a tax saving and an NI saving. Otherwise his top up contributions will be deducted from his post-tax salary and the pension provider will claim basic rate tax relief for him and add this direct to the pot; he can claim higher rate tax relief on these contributions via his self assessment tax return, or simply by contacting HMRC.

Great start to the new year, by the way - well done him!

CSL0183

The pay rise will work out to be slightly less than £1k pm after tax as above £50k the tax increases significantly. (40% income tax + 2% NI)

£20k x 0.58 = £11,600 / 12 = £966pm

£70k salary = £4,100pm (approx)

£50k salary = £3,140pm (approx)

Do you claim child benefit at all? If so, you should phone up and stop this otherwise your husband will have to file a self assessment form and pay it back. If you continue claiming it and he does not fill out a self assessment form then you will have to pay it all back but with fines and interest added. So the easiest way is to phone up and cancel it completely so he doesn’t need to go down the self assessment path. 

Child benefit is withdrawn starting at £50k earnings to fully at £0 at £60k earnings. (Tapers by x amount between)

For the pension question, I suspect the company will be putting in an 8% contribution into his scheme and he has the choice of putting zero in. Did he have a pension at his old job, if so what was he putting in and what was the employer putting in? 

Regardless, if he wants a decent retirement he should at least be matching his employers 8% contribution. On that level of salary, ideally he should be wanting around 20% total going into his pot (8% by employer and 12% of his own) but a good starting point would be to match the 8% so it’s 16% going into the pot. (Do try aim for 20% though)

If you do have child benefit; you obviously need to take this into account as although you will gain £966pm, you may lose £200pm (depending on how many kids you have). Then factor in how much it would cost him to match his employers 8% contribution each month. 

£70,000 / 100 x 8 = £5,600pa = £466.66pm pension contribution. However this would be gross so if it’s on a salary sacrifice arrangement with 42% tax relief it would cost just £270.66pm from his net wage. (£466.66pm x 0.58 = £270.66pm) or £280pm if not on salary sacrifice at 40% relief. (£466.66 x 0.6)

So adding all that up you could potentially gain £966pm (If you have no child benefit and do not contribute towards pension and leave it at 8% employer contribution) 

If you do have say 3 kids you would lose £212pm by forfeiting that so that £966 gain is now £754. If you do then also decide to match the employers 8% contribution that would cost £270pm which would leave you around £484pm better off each month. Still a good amount extra for sure but when you consider the “huge” £20k pay rise it will be a lot less than that when you consider the tax, the child benefit and the employees pension contribution. 

Figures are slightly different if you live in Scotland due to different tax rates. 

Hope that helps. 

Marcon

CSL0183 said:

Regardless, if he wants a decent retirement he should at least be matching his employers 8% contribution. On that level of salary, ideally he should be wanting around 20% total going into his pot (8% by employer and 12% of his own) but a good starting point would be to match the 8% so it’s 16% going into the pot. (Do try aim for 20% though)

Great answer, but could I pick up on this point? The level of salary isn't the main consideration in terms of what is being paid into a pension scheme - age and other savings come into it, especially age. If he's 63 with little in the way of retirement provision, a 20% contribution looks on the low side. If he's in his late 20s with a brood of small children, tying up so much cash for the long term may not be the best idea if in the years to come he has to borrow to provide for his family. 

Dazed_and_C0nfused

It is less likely nowadays, particularly for new starters, but I think some non contributory DB schemes still exist.

In which case paying more into the main scheme probably isn't possible.

CSL0183

Marcon said:

CSL0183 said:

Regardless, if he wants a decent retirement he should at least be matching his employers 8% contribution. On that level of salary, ideally he should be wanting around 20% total going into his pot (8% by employer and 12% of his own) but a good starting point would be to match the 8% so it’s 16% going into the pot. (Do try aim for 20% though)

Great answer, but could I pick up on this point? The level of salary isn't the main consideration in terms of what is being paid into a pension scheme - age and other savings come into it, especially age. If he's 63 with little in the way of retirement provision, a 20% contribution looks on the low side. If he's in his late 20s with a brood of small children, tying up so much cash for the long term may not be the best idea if in the years to come he has to borrow to provide for his family. 

Indeed, valid points. If in the latter stages of life (50+) and they can afford it (Kids grown up, mortgage low) then pump as much as you can into your pension pot. In this case, put the £20k difference straight into the pot with the employers 8% contribution on top. Saves that £20k money being taxed at 42%. 

If in the earlier years <30, putting in 12% to up the total contribution to 20% may be too much depending on kids/house etc. That’s why i went with the 8% option and if comfortable should increase that to 12% so his contributions into the pot are 20% (A great place to be, a sensible place to be) If they can afford more than a total 20% even better. 

No hard fast rules, but sound advice would be that whatever you can afford to save, do so now and let growth works it’s magic which will then lead to a comfortable retirement. 

JoeCrystal

Dazed_and_C0nfused said:

It is less likely nowadays, particularly for new starters, but I think some non contributory DB schemes still exist

Bank of England is one of them and I think John Lewis as well.

13Kent

Thank you. He's 54 this year and has a significant military pension which he already draws. 
In his old job he was paying 12% (not sure if that was the total contribution).
We do claim child benefit so that I can get my NI stamp, but we do a self assessment tax return anyway and declare it as he's already near the threshold with the pension he gets. 
We have 2 teenagers that will hopefully be heading for uni in a few years time.  

Marcon

JoeCrystal said:

Dazed_and_C0nfused said:

It is less likely nowadays, particularly for new starters, but I think some non contributory DB schemes still exist

Bank of England is one of them and I think John Lewis as well.

The John Lewis DB scheme closed to future accrual in April 2020.