Embarrassed 40 year old - no pension.

MallyGirl

Anything you sal sac above the £50k threshold benefits from saving 40% tax and 2% NI - so 42%
Anything you sal sac above min wage but below the £50k threshold benefits from saving 20% tax and 12% NI - so 32%.
Plus if you have kids then the child benefit comes into the equation too.

putting more in for longer then benefits from compounding - even if you have to back off later.

I like this picture - interest rate is obviously higher than we can get right now:


 

ex-pat_scot

Under sal sac, you get 42% relief on any contribution in your higher rate tax band, and 32% relief on contributions made in basic rate band.

If you earned £60,000 gross, then (ignoring employer matching) if you diverted £20,000 as sal sac into your pension then the £10,000 earnings upon which you pay HR tax (ie the earnings between £50,000 to £60,000) would attract 42% tax relief, and the £10,000 earnings upon which you pay BR tax (ie the earnings between £40,000 and £50,000) would attract 32% relief.

That means the net cost to you is £5,800 for the HR portion, and £6,800 for the BR portion, ie a net cost to you of £13,600 to get a pension contribution of £20,000.

(bonus points if you have children - sal sac to take you out of the £50,000 to £60,000 earnings band will also mean you can still enjoy child benefit).

On your earlier point about being fortunate enough to be able to contribute £40,000 - indeed I am fortunate and I recognise this. I had more modest earnings and contributions for many years before I started to earn a premium London consulting salary, and I (we) still make sacrifices in order to keep my contributions at this level.

Albermarle

What advantage is there if I salary sacrificed to say £40K per year? 

On the extra £10K you would get basic rate (20%) tax relief, so still a benefit to you but obviously not as much as the 40% tax relief you are getting in contributions above £50K.

As pension money is inaccessible until your late fifties , some people prefer to forego the 20% tax relief in favour of investing in a S&S ISA , in case funds are needed before the pension is accessible . However 40% tax relief is very generous so normally it is a no brainer to maximise that as much as possible. 

Surely the way anyone can do this is being able to put away the max £40K per year right? On my wage, I could never do that. Forget living like a monk, I would need to live like a monkey swinging from tree-to-tree.

Of course putting away £40K ( or even £4K) would be impossible for many people. However it is not quite as difficult as it looks if you have at least a good job,

1)The £40K includes tax relief and employer contributions . So for a 40% taxpayer with a reasonably generous employer it will 'only' cost less than £20K in net take home pay 

2) Some people , including myself , only do this for the last few years before retirement , once the mortgage is paid, kids left home etc

3) Some people , including myself , only start to really concentrate ( or wake up ) on pensions etc once they are 50+ and often supplement regular contributions with lump sums from other savings in the last few years before retirement.

ex-pat_scot

Albermarle said:

What advantage is there if I salary sacrificed to say £40K per year? 

On the extra £10K you would get basic rate (20%) tax relief, so still a benefit to you but obviously not as much as the 40% tax relief you are getting in contributions above £50K.

It's even better - if under sal sac then you also get the 12% NI back, so the total relief is 32%

sho_me_da_money

I have cut back on all the crap to a limited amount - i.e. eating out etc. I received my first pay pack after the first £1040 salary sacrifice and after all the bills and outgoings, I have around £1000 left over. That said, I do not have any emergency funds so am kinda using this excess amount to build up a fund.

I think I could up the ante and say contribute another £500 per month and take my salary sacrifice up to £1500.00. This would leave me £500 squids left over.....I think. I should be able to survive on that. 

I have no kids nor any partner so if there was ever a time to act like a monk, its now.

Right now, I have no idea if my funds are in the right pension plan. I have put 100% into https://markets.ft.com/data/funds/tearsheet/performance?s=GB00B4QBYH95:GBP

I have no fricken idea if I have done the right thing here. I simply moved UP a risk level and figured it can offer good/better rewards. Based on that product, how can I tell how much it makes per year?

Would love to make 10% per year. Not sure if I have the right product to do that though. Thoughts from you fine experts?

sho_me_da_money

Ok lets get a bit more factual about this. I just checked my last amount that was paid IN and then looked out all the things I pay OUT:

MONTHLY INCOMING:

£3071

MONTHLY OUTGOING:

£77 - Gas and Electric
£55 - Council Tax
£44  - United Utilities
£360 - Mortgage
£120 - Contribution to Parents House Bills
£500 - Credit Card 0%
£150 - Buy Now, Pay Later Washing Machine 0%
£20 - Online Subscription to Shares
£17 - Three Mobile Phone Bill
£25 - Virgin Media
£70 - Fuel (per month)
£150 - Food Shopping (per month). I know it's less than this.

Total - £1588

MSE FREEBIES

1. Barclays Blue Rewards - I get £8 cash back per month after fees. I get this for the direct debits AND mortgage I have with them.

2. Santander 123 LITE - I get £1 a month after the fee and bills I pay

3. Natwest Rewards - I get £5 per month for holding two direct debits with them.

I have already done the first direct switch and got the £125. I recently just flicked from First Direct to Virgin Money for the £150 virgin experiences voucher.

Total Freebies per Annum - £168.00 (excluding the bank switches)

PENSION UPLIFT

That means I should have £1483 left over. What the hell. I should Salary Sacrifice another £483.00 and really push myself here When the Credit Card gets paid off, I should throw that extra 500 to the Pension too. 

Living off £1000 a month is EASILY doable. In fact, I personally think I can live off less. That is like a pimped out Monk.

Im about to change and UP my contributions for the third time this past 2 months!

 

sho_me_da_money

MSE Guys, 

I have just pumped up my SS to £1580 per month. May as well. Let's go!!! Below is a brief report of what this looks like at 55. FYI, the below image does not include the £33K that is held in other pensions that needs to be transferred over to this one.

Forgot to add that in my previous outgoings, I already have opted in for the companies private medical insurance, dental insurance, life assurance cover, critical illness cover, personal accident cover and income protection cover. All of these things get taken out before the £3071 lands in the bank.

I think I am set up to start my new journey as a monk.

QrizB

sho_me_da_money said:

MSE Guys, 

I have just pumped up my SS to £1580 per month. May as well. Let's go!!! Below is a brief report of what this looks like at 55. FYI, the below image does not include the £33K that is held in other pensions that needs to be transferred over to this one.

Forgot to add that in my previous outgoings, I already have opted in for the companies private medical insurance, dental insurance, life assurance cover, critical illness cover, personal accident cover and income protection cover. All of these things get taken out before the £3071 lands in the bank.

I think I am set up to start my new journey as a monk.

Your current fixed monthly outgoings are £1588 pm, falling to £1088pm once you pay down your CC balance? That's comfortably within your £1400pm predicted pension at 55, so once you get used to living like a monk you'll be able to do it in retirement too

ex-pat_scot

Good stuff.
A couple of things to consider in your rush of enthusiasm:

1. if you are not quite 40 yet, then you can open a LISA, even if it's just for £1. That will get you a good emergency cash fund with a generous state topup (an actual topup, not merely a tax rebate).

2. you're going fairly aggressively with your £1,545. I trust it is flexible, so that you can dial it down if it proves optimistic, or big bills come in?

3. there's some short term and long term challenges you are slightly skipping over:

- mortgage payments. are you on a long term good rate, or will your payments jump at the end of a fixed / intro period?
- there's nothing in here for some of the less frequent capital and maintenance costs - car service and repairs, replacement, boiler, holidays, presents.  Whilst this is not a budgeting board, you need to look at your longer term base level expenditure if you can.  
- there are a couple of items you ought to consider: washing machine I presume will be paid off fairly soon on a £150/m rate.  Credit card £500 is this paying off historic balance/loan, or are you spending on it? If the latter, then  you need to include your ongoing spends here.
- you ought to build up a bit of a savings buffer, ideally housed somewhere like a LISA if possible or other account.
- focus on the inputs. Dont get too distracted by the forecast figures on the picture you have shared.
- you are sal sac an effective £962 to net pay. That should mean your total net will be just over £2,000 pm (if your previous net was £3,000 pm). That still gives you about £450/m above your basic budget.
- you mention "full monk mode". At the risk of sounding churlish, you are still quite some way from "full monk". "Novice monk", perhaps. (I live next to a monastery).  You could cut much deeper if you so wished, albeit this is a pensions not budgeting board, so I will refrain in commenting further!
- you talk about transferring older pension across. It might be sensible. It might not. It is helpful to have things in one place, but check the costs and investment opportunities you have in your existing arrangement, and consider if they are worse or better than your new pension, before transferring. You don't have to do anything with the old.

michaels

sho_me_da_money said:

michaels said:

ON 1st Jan 2016 my pension pot was 250k, now it is about 780k despite having underperformed the market - if you are willing to 'live like a monk' and maximise contributions( I was lucky, I was able to maximise use of carry forward allowance, the pip/tax year change etc to maximise contributions in a tax efficient way) for a few years you can really turn around your retirement prospects.

This is amazing Michaels. How the heck where you able to 3X in 5 years? What does living like a monk mean and curious to learn what the rest of the Jargon means above carry forward etc. Of course, please feel free to explain it to me like a 5 years old.

So carry forward at the start benefited from some previous years having a 50k annual allowance rather than the current 40k

Pension input periods (PIP) were an old system where a pension year might not align to a tax year.  This system was changed in about 2017? and in the change over year it was possible to first make a contribution in at the start of the tax year before the end of the PIP period up to the AA and then do this again in the latter part of the tax year after the PIP period had ended so basically a double AA for that year.

During the whole period our family of 5 lived (like monks) on less than 30k net pa compared to a gross income in the 70s, in the double AA year we lived of savings and put the whole income into pensions so I guess some of the pension gain came from a run down (transfer) of non-pension savings.  This obviously meant we kept all of the child benefit for 3 kids throughout the period.  I also benefitted from Sal Sac down to minimum wage and a 10% uplift from employer NI savings.

This is not hard to live on but means UK holidays, no apple 'tax', few meals out, no pop concerts/festivals, no uber eats, second hand cars etc but using MSE tactics on expenditure it does not rule out music lessons, karate etc for the kids, cinema trips, theme park trips etc. Oh yes, mortgage was switched to IO, we can always use some of the TFLS to pay it off if needed.