Embarrassed 40 year old - no pension.

SomeMadeUpName

As above, the minimum you should be doing for now is salary sacrificing everything above £50,000 of taxable income into pension.

The rest is all about your personal planning, prioritising and choosing.

sho_me_da_money

I have just jacked up my pension contributions to 20% (approx. £1030) via Salary Sacrifice. This does not include the 5% contribution from the company, meaning, 25% is going into the total pot.

The sacrifice would also bring my total gross down to under £50K per year, moving me into the basic tax rate again? I am not sure why this is important - can anyone explain?

Given the new figures, does that mean the £1030 im putting into my pension is costing me approximately £600 per month?

Does everyone get a 40% tax relief?

One other thing - my company awards stocks based on performance per year. Does the gross value of these stocks contribute to my gross annual salary of £62K i.e. do i need to add them both to establish a true gross figure?

The stocks are not always guaranteed. When i get them, the tax on them is like 51% at the time of vesting. By salary sacrificing to under £50K, would/could i be paying less taxes on any stocks I receive?

Ceme3000

Now that you are contributing more into your pension, have you reviewed which funds you are invested in within your L&G platform? You may be in a default fund which may or may not be the best option for you given that you have perhaps 20 years until retirement. 

Username03725

It's easy to fall into the belief that what you spend now is what you need to spend, and what's left is available for saving. In your case it might be useful to turn it round and set an ambitious but realistic saving target and then reassess your real-world spending needs, esp if a lot of it is takeaways etc. It doesn't have to be a complete turnaround to a sackcloth and ashes lifestyle but plenty of people see a sudden income reduction through redundancy or job change etc and find that the new income is manageable, it just takes a bit of adjustment to get used to the new level.

Can you try 6 months of putting a lot more away, if not into a pension then into a savings account. It's normal to have just one window per financial year where you can begin or change salary sacrifice amounts, IME that's usually early in the calendar year, so you could try the savings regime for the rest of this year and use that to gauge how much you can commit to when the sal sac window opens in January.

In real terms, the tax relief that means £1 costs you only 60p means that a salary sacrifice of £500 into your pension pot will see your net pay drop by about £300, a bit less with the NI adjustment. You should also see that £500 become a bit more if your employer adds their Employer NI deduction savings to your pot - not all do that. Add the 5% matching that you'll get from your employer and it's a no-brainer in almost all situations. Free money, lots of it. Why wouldn't you?

Albermarle

As a simple example if you earn £60K and there no other taxable benefits . Then knowing the higher rate tax threshold is £50,270 you can work out the following 
£12570 is tax free ; £37,700 is taxed at 20% and the rest ( £9,730 ) is taxed at 40% .
So that £9370 would be after tax £5622.
However if that £9370 is contributed to a pension ( before it is taxed effectively ) you pay no tax on it . So £9370 goes into your pension instead of only £5622 you would have got in your pay packet if you had not contributed it to a pension
If you contributed more than £9730 , then the extra would only attract tax relief at 20% , so  not quite as good but still a benefit.
Before we get carried away though with the big gains , a pension is taxable when you take it . However 25% is tax free and you still get a personal tax free allowance and it is unlikely you will be paying 40% tax in retirement.

So in summary getting 20% tax relief is still a benefit even after paying tax in retirement ( 6.25% minimum ) . Getting 40% tax relief increases this benefit a lot .

hugheskevi

sho_me_da_money said:

The sacrifice would also bring my total gross down to under £50K per year, moving me into the basic tax rate again? I am not sure why this is important - can anyone explain?

It is simply a matter of incentives. Contributions made from income subject to higher rate relief cost you 58p for every £1 into the pension (40% income tax relief, 2% National Insurance relief). Contributions from income subject to basic rate relief cost you 68p for every £1 into the pension (20% income tax relief, 12% National Insurance relief).

There are situations which can change this, for example if your taxable income is higher than your income subject to National Insurance (eg if you had a salary of £45,000 and taxable income from other sources of £20,000 then you could sacrifice £15,000 and get income tax relief at 40% and National Insurance relief at 12%). The other common situation is if you are subject to the Child Benefit taper, in which case pension contributions increase Child Benefit.

Given the new figures, does that mean the £1030 im putting into my pension is costing me approximately £600 per month?

With a monthly contribution of £1,030 that is an annual contribution of £12,360. Almost all of that appears to benefit from higher rate income tax relief, so is a net cost to you of £12,360 x 58% = £7,168.80 which is £7,168.80 / 12 = £597.40 per month.

Does everyone get a 40% tax relief?

If your marginal tax rate is 40%, you are not subject to the Personal Allowance taper that starts at £100,000 of taxable income, the contribution does not take you out of the 40% tax band and you are do not exceed your Annual Allowance, then yes, everyone meeting that criteria will get 40% income tax relief.

One other thing - my company awards stocks based on performance per year. Does the gross value of these stocks contribute to my gross annual salary of £62K i.e. do i need to add them both to establish a true gross figure? The stocks are not always guaranteed FYI.

It is likely that if you hold the shares for 5+ years they will not be subject to income tax. Remuneration (ie all forms of payment for work) is separate to taxable income, just be clear which you are calculating.

MallyGirl

sho_me_da_money said:

I have just jacked up my pension contributions to 20% (approx. £1030) via Salary Sacrifice. This does not include the 5% contribution from the company, meaning, 25% is going into the total pot.
The sacrifice would also bring my total gross down to under £50K per year, moving me into the basic tax rate again? I am not sure why this is important - can anyone explain?
Given the new figures, does that mean the £1030 im putting into my pension is costing me approximately £600 per month?
Does everyone get a 40% tax relief?
One other thing - my company awards stocks based on performance per year. Does the gross value of these stocks contribute to my gross annual salary of £62K i.e. do i need to add them both to establish a true gross figure?
The stocks are not always guaranteed. When i get them, the tax on them is like 51% at the time of vesting. By salary sacrificing to under £50K, would/could i be paying less taxes on any stocks I receive?

It depends on how serious you are about retiring early, and what you can afford to do. I am currently salary sacrificing 45% with the employer adding another 10% so £39k is going in to my pension. That is sustainable for me - husband is contributing similar but earns a bit more. This is a good way of testing how much we actually 'need' in retirement which I am hoping is 4 or 5 years away at 58/59. This is a significant ramp up from previously where I only contributed the minimum needed to get the max from the employer (most 5% from me to get 10% from them). The earlier you ramp up, the longer you have for that to grow and compound.
If you can change your contributions easily (I can do it online as often as I like) then maybe try some months of putting more in (without increasing credit card debt) and see how it goes. Try keeping a spending diary for a month - write down absolutely every penny you spend then look back and reflect on where it goes. Is it all on takeaways, coffees, pub, papers, or do you actually have anything to show for it.
Check out the terms of your stock awards - is there a minimum time period you can keep them to avoid the tax hit?
You are in a good position to really turn this around.

SomeMadeUpName

sho_me_da_money said:

I have just jacked up my pension contributions to 20% (approx. £1030) via Salary Sacrifice. This does not include the 5% contribution from the company, meaning, 25% is going into the total pot.

At that level of contribution via salary sacrifice, based on your earlier figures you should now have circa £2,750 take home I think.

So you have room for a lot more saving.  Maybe keep the card repayments at £500 but also put £500pcm into a savings account, that way when the 0% finishes in say a year you will have a lump saved to pay it off.

One year from now you would have that debt gone and so have over £1k of take home pay to play with.  You could then radically increase your salary sacrifice AND still be putting a bit way elsewhere out of then remaining take home as a rainy day fund.

QrizB

sho_me_da_money said:

Thank you for the comments all, here is more transparency;
<snip>

Looking at your current numbers with a view to guesstimating a target retirement income:

• I have a 0% credit card on which I owe £12,000 and currently pay off £500 per month (for the next 2 years).
• Mortgage payment is £350 per month (for the next 28 years).
• My bills (inc. council tax) are around £500 per month
• My food costs are around £300 per month
• Living-like-a-monk general spending target of £500 per month
  

That's a total monthly expenditure of £2150 which requires a pre-tax income of ~£32500.

All other things being equal, once you've paid off your credit card debt your monthly expenditure will be £1650 which requires a pre-tax income of ~£24000.

In 28 years, you'll have paid off your mortgage (and might also have your State Pension) and won't need to pay NI. Your monthly expenditure will be £1300 which requires a pre-tax income of ~£15000.

Marcon

sho_me_da_money said:

Thank you for the comments all, here is more transparency;

Salary
£3360 after tax, which includes deducting contributions towards benefits that my company offer - private medical, dental, life insurance, critical illness cover, another illness cover (forgot the name).
Current Outgoings

• I have a 0% credit card on which I owe £12,000 and currently pay off £500 per month.
• Mortgage payment is £350 per month.
• My bills (inc. council tax) are around £500 per month
• My food costs are around £300 per month

Savings

• I have £15,000 saved in company shares
• My mortgage has with 24 years on it that I owe a total of £85K. The current value of the property is around £200-230K
  

Reducing Crap for Pension

• I do spend money on a lot of crap that I need to stop with - takeaways etc. Perhaps I can force myself to spend no more than £500 per month? This would mean my total outgoings would equate to around £2000.00, which means I could put £1360 away per month towards a pension?

Comment Above
"but I would also pay into a pension to get you out of the 40% tax bracket and to get hold of that employer contribution. Salary sacrifice means you save NI as well as income tax so usually the best way to go."
Question:
Is it best to always salary sacrifice an amount that takes me under £50K and out of the 40% tax bracket?

Perhaps. But if you are 40, have never paid into a pension (thus missing out on 'free' money from your employer) or developed any other real savings habit, and are a self-confessed fritterer (join a large percentage of the rest of the population!), what makes you think you can change overnight?

Given your history, if you do save a chunk of cash in a pension scheme with a view to retiring in your 50s, what are the chances of your simply withdrawing a load of cash each time you fancy a purchase, whether it's a one-off expenditure such as a car, or lots of little items?

I think your ambitions are laudable but possibly not realistic - but only you know how determined and disciplined you can be.