FIREside Chats

hugheskevi

South_coast said:

Question for you lovely peeps. I've just had my first lot of pension contributions taken in this job, but they're not SMART (ie they're being taken after tax and NI). The right amount has been taken, but I'm about £50 worse off in my net pay than I thought I would be. Is there any clever way round this, or am I stuck with it? I don't foresee any flexibility in their policies

There are 3 main ways in which pension contributions can be processed by employers:

1. Salary sacrifice (also commonly referred to as SMART) - under this method all of the pension contribution is made by the employer, and none by the employee. It may seem like the employee makes contributions, but their salary is reduced in exchange for the employer making the contributions. There is likely to be a 'reference salary' as well as a 'gross salary' where the reference salary is the amount prior to the salary being reduced and the gross salary is the salary actually paid. This method is the most efficient, saving both employee and employer national insurance payments (employers may put some or all of their national insurance saving into the member pension but many don't put anything in). Employees automatically receive everything they are due and do not have to take any further action.
   
2. Net pay - Employee pension contributions are deducted before PAYE is applied. This means employees are taxed on the correct amount and do not have to claim anything back from HMRC. There is no national insurance saving for the employee under this method. Non-tax payers do not receive any tax relief.
3. Relief-at-source - Under this method pension contributions are made by the employer after PAYE has been applied, with the contribution being taken from net income. There is no National Insurance saving under this method. The pension provider automatically grosses up the contribution with basic rate tax relief, which means non-tax payers still benefit from basic rate relief. This method means higher and additional rate taxpayers have to claim further tax relief from HMRC.

For higher and additional rate taxpayers, it is important to understand whether their employer is using relief-at-source and if so claim the extra tax relief from HMRC - many don't. A limited number of previous years can also be claimed where relevant.

South_coast said:

Oh well, it's reinforced my decision to just stick with the minimum contributions and focus on the FIRE pot instead (they'll only pay the statutory amount anyway, so not point in me putting in any more)!

Pension contributions are particularly valuable when:

• Ensuring payment of an amount to maximise employer contribution offered (eg if employer matches x% of contributions up to a limit)
  
• Salary sacrifice is available from an employer (particularly for higher rate taxpayers with earned income below the Upper Earnings Limit of £50,270)
  
• Higher/additional income tax is payable (particularly for those affected by taper of Personal Allowance at £100,000 of earnings)
  
• Child Benefit is reduced but pension contributions can reduce income below £50,000 to restore Child Benefit (or even below £60,000 to partially restore the benefit)
  
• If pension contributions would increase means-tested benefits, eg, Universal Credit - although affordability may be an issue
  

edinburgher

Month end summary:

NW: £641,275.62 (+£25,066.02) / Target: £1,018,437 (+£16,140) / 62.97% there

A spendy month due to unexpected veterinary bills and booking three trips to replace the cancelled overseas trip we had planned for our 10th anniversary. This was offset somewhat by some investment gains and both our state pensions ticking up by another year. Yes, I know the cool kids don't include state pensions and home equity, but I'm not cool

The nerd in me is very pleased that I paid more into my SIPP this April than I did for the entire financial year that preceded it.

jennystarpepper

edinburgher said:

Month end summary:

NW: £641,275.62 (+£25,066.02) / Target: £1,018,437 (+£16,140) / 62.97% there

A spendy month due to unexpected veterinary bills and booking three trips to replace the cancelled overseas trip we had planned for our 10th anniversary. This was offset somewhat by some investment gains and both our state pensions ticking up by another year. Yes, I know the cool kids don't include state pensions and home equity, but I'm not cool

The nerd in me is very pleased that I paid more into my SIPP this April than I did for the entire financial year that preceded it.

I'm not one of the cool kids either! 

This is the last year I have until full state pension qualified, (no kids and full time from 16), I do think it is something people should check but don't and panic later on in life if they fall short.   About 63% of the mortgage paid and it is down 1k again this month.   

South_coast

hugheskevi said:

South_coast said:

Question for you lovely peeps. I've just had my first lot of pension contributions taken in this job, but they're not SMART (ie they're being taken after tax and NI). The right amount has been taken, but I'm about £50 worse off in my net pay than I thought I would be. Is there any clever way round this, or am I stuck with it? I don't foresee any flexibility in their policies

There are 3 main ways in which pension contributions can be processed by employers:

1. Salary sacrifice (also commonly referred to as SMART) - under this method all of the pension contribution is made by the employer, and none by the employee. It may seem like the employee makes contributions, but their salary is reduced in exchange for the employer making the contributions. There is likely to be a 'reference salary' as well as a 'gross salary' where the reference salary is the amount prior to the salary being reduced and the gross salary is the salary actually paid. This method is the most efficient, saving both employee and employer national insurance payments (employers may put some or all of their national insurance saving into the member pension but many don't put anything in). Employees automatically receive everything they are due and do not have to take any further action.
   
2. Net pay - Employee pension contributions are deducted before PAYE is applied. This means employees are taxed on the correct amount and do not have to claim anything back from HMRC. There is no national insurance saving for the employee under this method. Non-tax payers do not receive any tax relief.
3. Relief-at-source - Under this method pension contributions are made by the employer after PAYE has been applied, with the contribution being taken from net income. There is no National Insurance saving under this method. The pension provider automatically grosses up the contribution with basic rate tax relief, which means non-tax payers still benefit from basic rate relief. This method means higher and additional rate taxpayers have to claim further tax relief from HMRC.

For higher and additional rate taxpayers, it is important to understand whether their employer is using relief-at-source and if so claim the extra tax relief from HMRC - many don't. A limited number of previous years can also be claimed where relevant.

South_coast said:

Oh well, it's reinforced my decision to just stick with the minimum contributions and focus on the FIRE pot instead (they'll only pay the statutory amount anyway, so not point in me putting in any more)!

Pension contributions are particularly valuable when:

• Ensuring payment of an amount to maximise employer contribution offered (eg if employer matches x% of contributions up to a limit)
  
• Salary sacrifice is available from an employer (particularly for higher rate taxpayers with earned income below the Upper Earnings Limit of £50,270)
  
• Higher/additional income tax is payable (particularly for those affected by taper of Personal Allowance at £100,000 of earnings)
  
• Child Benefit is reduced but pension contributions can reduce income below £50,000 to restore Child Benefit (or even below £60,000 to partially restore the benefit)
  
• If pension contributions would increase means-tested benefits, eg, Universal Credit - although affordability may be an issue
  

Thank you hugheskevi for the summary, that's really useful (and must have taken you a while to type 😮!) I'm so used to SMART deductions I didn't realise anyone did it any other way these days.... I'm only a basic rate taxpayer and my employer are only doing 3% contributions regardless of what I put in, so think I'll just leave it as it is. It should grow to what I need it to be, plus I've got two frozen ones also doing their thing in the background

Retireinten

edinburgher said:

Month end summary:

NW: £641,275.62 (+£25,066.02) / Target: £1,018,437 (+£16,140) / 62.97% there

A spendy month due to unexpected veterinary bills and booking three trips to replace the cancelled overseas trip we had planned for our 10th anniversary. This was offset somewhat by some investment gains and both our state pensions ticking up by another year. Yes, I know the cool kids don't include state pensions and home equity, but I'm not cool

The nerd in me is very pleased that I paid more into my SIPP this April than I did for the entire financial year that preceded it.

May I ask what you include in your net worth calculation Ed? Do you include value of paid for assets such as cars, for instance, or are these ignored? And do you include an estimate for your Defined Benefit scheme? 

I don't really monitor our net worth, just value of retirement savings against our target income and reduction in our 'retirement savings gap'. 

Suffolk_lass

South_coast said:

Question for you lovely peeps. I've just had my first lot of pension contributions taken in this job, but they're not SMART (ie they're being taken after tax and NI). The right amount has been taken, but I'm about £50 worse off in my net pay than I thought I would be. Is there any clever way round this, or am I stuck with it? I don't foresee any flexibility in their policies

@South_coast My DH contacted HMRC when he withdrew some of his DC pot and they sent the employer (pension provider) a new tax code - HMRC were really helpful (especially when he explained what he was doing), not at all like the "Big Brother" he was expecting - you could try contacting them (on a here goes nothing - nothing ventured, nothing gained basis) - I am sure pension is supposed to be taken before other deductions

(note to self - read the next page before posting - @hugheskevi's response much more comprehensive. May still be worth a chat with HMRC if yours are being taken from net and not gross pay)

edinburgher

@Suffolk_lass - home equity, cash, DC pensions, estimates for state and 2x DB pensions. Not car

edinburgher

£70 paid into SIPP (£87.50 after tax relief). Regular £60 contribution from my pocket money and an extra £10 "sin tax" to match my lottery tickets for May. Then again, the whole FIRE thing should be pretty straightforward if I win the lottery! 

becky_rtw

edinburgher said:

£70 paid into SIPP (£87.50 after tax relief). Regular £60 contribution from my pocket money and an extra £10 "sin tax" to match my lottery tickets for May. Then again, the whole FIRE thing should be pretty straightforward if I win the lottery! 

I hardly ever buy tickets but got one yesterday for Euro millions as it was my birthday. Cost £2.50.

Got excited this morning by the 'youve won' email. £2.60 😂😂 10p up I suppose. 

hugheskevi

becky_rtw said:

I hardly ever buy tickets but got one yesterday for Euro millions as it was my birthday. Cost £2.50.

Got excited this morning by the 'youve won' email. £2.60 😂😂 10p up I suppose. 

I bought Premium Bonds for the first time ever this week Still never purchased a lottery ticket though - if the live draw comes on TV I quickly scribble down 6 numbers and consider myself £1 up when they don't come up.

The Premium Bonds are the first part of setting up the various places that funds from selling our house will eventually end up in for a few years whilst off traveling. It was amusing to see the horror and perplexion on my wife's face when I told her she now owns Premium Bonds, after years of getting used to rather more adventurous investments in ISAs and pensions!

I'll be watching the May draw with interest....although £25 would be an above average result for now