Salary sacrifice calculation

MallyGirl

your company, even if they allow lumpy sal sac (nice description), may have other constraints. I used to sal sac 80% of my pay some months to maximise the 12% NI saving and then one month my company unilaterally decided that you were not allowed to sal sac more than 70% so the extra 10% went through as net pay contribution. No warning. 
Now I just stick to the smooth ride.

Alexland

I am in my second tax year of lumpy sal sac for NI efficiency and have settled into a pattern of 3 months low pension contribution (just enough to get employer matching) which includes the annual bonus followed by 9 months of high contribution. Once I know the bonus value on my month 3 payslip that gives me a few days to set the percentage I need to contribute for the remainder of the tax year to keep my adjusted net income just below £50k for child benefit etc. I guess it could always be changed again if I get the maths wrong or an unexpected payrise or other source of income during the tax year.

It's all fairly efficient but having started pension contributions early and having been fairly tax efficient for several years before going lumpy it has caused rather a lot to build up in my pensions when I would really rather have more in ISAs to enable an earlier retirement especially with ongoing uncertainty on minimum access age. But as someone pointed out earlier if the money doesn't go into the pension there would be very little of it after deductions.

noclaf

Thanks for all the input guys, I think that with an additional 2% monthly pension contribution my taxable income will be around the threshold level.
I will likely increase this figure once we get to a point where child benefit is coming in i.e: pushing taxable income below £50k.
My bonus schedule is different to the usual Feb/March cycle so would need to tweak the 'lumpy' approach based on that.
I also need to check with my pension provider that there are no penalties for low pension contribution months; new joiners can no longer benefit from the highest level of employer matching that I am entitled to so just want to ensure I don't lose it!

Alexland - you mentioned ISA's and that you had put more in them...I'm in a similar predicament in that my S&SISA is much smaller than my pensions...and I need to find a balance between taking advantage of sal sac but also topping up my S&SISA such that it will act as a 'bridge' to retirement...lot of work for me to do here.I am 40 for context so a bit of time but not much!

Alexland

noclaf said:

My bonus schedule is different to the usual Feb/March cycle so would need to tweak the 'lumpy' approach based on that.

When I say month 3 in my above scenario that's of the tax year which starts in April so bonus payable in June but yes you would need to tweak your approach for when your employer pays bonuses. Planning the lumps might get tricky for someone who doesn't get certainty on their bonus until towards the end of the tax year in Feb/March as ideally you want the bonus to happen in a month where you are making a low contribution so it can go through at 2% NI.

noclaf said:

I also need to check with my pension provider that there are no penalties for low pension contribution months; new joiners can no longer benefit from the highest level of employer matching that I am entitled to so just want to ensure I don't lose it!

Suggest you keep your low month pension contributions high enough to ensure you are always getting maximum employer matching. As such you should never have to ask them to take their contribution back up again. It's never worth declining free money.

noclaf said:

Alexland - you mentioned ISA's and that you had put more in them...I'm in a similar predicament in that my S&SISA is much smaller than my pensions...and I need to find a balance between taking advantage of sal sac but also topping up my S&SISA such that it will act as a 'bridge' to retirement...lot of work for me to do here.I am 40 for context so a bit of time but not much!

We are a similar age and not only is it annoying that we have so much tied up in pensions (mine is getting on for £500k now) but we have also been filling LISAs since launch which we can't access before 60 without penalty. However it's likely that our well paid work will dry up (so lower pension contributions in future) and we will get some inheritance during our 40s which would go into our S&S ISAs and maybe premium bonds to act as a cash buffer for drawdown which might over enough years help balance things out. Am increasingly hoping that I won't need to work in my 50s!

noclaf

Alexland said:

noclaf said:

My bonus schedule is different to the usual Feb/March cycle so would need to tweak the 'lumpy' approach based on that.

When I say month 3 in my above scenario that's of the tax year which starts in April so bonus payable in June but yes you would need to tweak your approach for when your employer pays bonuses. Planning the lumps might get tricky for someone who doesn't get certainty on their bonus until towards the end of the tax year in Feb/March as ideally you want the bonus to happen in a month where you are making a low contribution so it can go through at 2% NI.

noclaf said:

I also need to check with my pension provider that there are no penalties for low pension contribution months; new joiners can no longer benefit from the highest level of employer matching that I am entitled to so just want to ensure I don't lose it!

Suggest you keep your low month pension contributions high enough to ensure you are always getting maximum employer matching. As such you should never have to ask them to take their contribution back up again. It's never worth declining free money.
This makes sense, I have to contribute 8% to receive firms 12% matching contribution so that's my baseline as it were

noclaf said:

Alexland - you mentioned ISA's and that you had put more in them...I'm in a similar predicament in that my S&SISA is much smaller than my pensions...and I need to find a balance between taking advantage of sal sac but also topping up my S&SISA such that it will act as a 'bridge' to retirement...lot of work for me to do here.I am 40 for context so a bit of time but not much!

We are a similar age and not only is it annoying that we have so much tied up in pensions (mine is getting on for £500k now) but we have also been filling LISAs since launch which we can't access before 60 without penalty. However it's likely that our well paid work will dry up (so lower pension contributions in future) and we will get some inheritance during our 40s which would go into our S&S ISAs and maybe premium bonds to act as a cash buffer for drawdown which might over enough years help balance things out. Am increasingly hoping that I won't need to work in my 50s!
i need to correct you on the part where it says 'we have so much tied up in pensions'...sadly I wasn't as diligent as you with both contribution amounts and investment options....I have £100k net across two DC pensions but have at least switched to 100% Global Equities for both  and the reason for my increased salary sacrifice for current employer pension. I also have a LISA that will be used to complement the pensions (currently £15k but will top up £4k+HMRC £1K so £20k soon hopefully, this is invested in LCWL per your suggestion on a earlier thread from last yr; it's cheap and non-distribution so hopefully a cost effective ETF option for the long term.

Based on my pension shortfall, would you do anything differently if in my position?
As an aside I am due to get an inheritance soonish as lost a parent last yr, subject to a long probate so far. The plan is to make full use of my s&sisa this year (Vanguard FTSE Global All Cap which I invest in monthly) and some will be needed for home improvements.

Thanks Alexland, responses above

Alexland

noclaf said:

I also have a LISA that will be used to complement the pensions (currently £15k but will top up £4k+HMRC £1K so £20k soon hopefully, this is invested in LCWL per your suggestion on a earlier thread from last yr; it's cheap and non-distribution so hopefully a cost effective ETF option for the long term.

Glad you were pleased with my suggestion of LCWL for your LISA although now the ETF has been running a few years I have been comparing it's performance with the bigger more liquid SWDA which also accumulates the dividends and I've got to admit that SWDA seems to have a slight performance edge over most measurement periods despite the slightly higher charges.

noclaf said:

Based on my pension shortfall, would you do anything differently if in my position?

£100k at 40 isn't too bad. I got lucky earning good money through my 20s and 30s but am increasingly pessimistic how long that will continue. You might be on a different career trajectory who knows? I recently read a blog article about how £100k was the magic number after which your net worth begins to snowball.

https://bankeronfire.com/save-100k

noclaf said:

As an aside I am due to get an inheritance soonish as lost a parent last yr, subject to a long probate so far. The plan is to make full use of my s&sisa this year (Vanguard FTSE Global All Cap which I invest in monthly) and some will be needed for home improvements.

Our kids have the Global All Cap fund in their Junior SIPPs but our ISAs are now in Murray Income Trust as it provides a UK bias to our overall portfolio and I sleep well at night knowing the dividend yield is enough to cover our mortgage and some of our basic outgoings. Sure it might not give the best overall return but I quite enjoy building a growing income stream. Sometimes at work I wonder how long I can keep going as it's so tedious and feels like such a waste of time so ISA income could soon be useful.

noclaf

Alexland said:

noclaf said:

I also have a LISA that will be used to complement the pensions (currently £15k but will top up £4k+HMRC £1K so £20k soon hopefully, this is invested in LCWL per your suggestion on a earlier thread from last yr; it's cheap and non-distribution so hopefully a cost effective ETF option for the long term.

Glad you were pleased with my suggestion of LCWL for your LISA although now the ETF has been running a few years I have been comparing it's performance with the bigger more liquid SWDA which also accumulates the dividends and I've got to admit that SWDA seems to have a slight performance edge over most measurement periods despite the slightly higher charges.
happy so far but will look at SWDA, we can never know for sure on future performance but sometimes even with the higher charges it pays off to periodically review options

noclaf said:

Based on my pension shortfall, would you do anything differently if in my position?

£100k at 40 isn't too bad. I got lucky earning good money through my 20s and 30s but am increasingly pessimistic how long that will continue. You might be on a different career trajectory who knows? I recently read a blog article about how £100k was the magic number after which your net worth begins to snowball.

https://bankeronfire.com/save-100k
thanks I will have a read, I was too busy enjoying the high life in my 20's but we live and learn. Working in financial services am all too aware that's it's becoming harder to 'future-proof' jobs, I think by age 50 il need to consider a different career given increased automation, out sourcing etc not sure yet what might be an alternative career path that is viable financially too. 

noclaf said:

As an aside I am due to get an inheritance soonish as lost a parent last yr, subject to a long probate so far. The plan is to make full use of my s&sisa this year (Vanguard FTSE Global All Cap which I invest in monthly) and some will be needed for home improvements.

Our kids have the Global All Cap fund in their Junior SIPPs but our ISAs are now in Murray Income Trust as it provides a UK bias to our overall portfolio and I sleep well at night knowing the dividend yield is enough to cover our mortgage and some of our basic outgoings. Sure it might not give the best overall return but I quite enjoy building a growing income stream. Sometimes at work I wonder how long I can keep going as it's so tedious and feels like such a waste of time so ISA income could soon be useful.

I work in a fairly stressfull role so know the feeling and funny enough there isn't a week where I don't think about 'what will I use for income generation' when my time in financial services comes to an end. I missed the boat on BTL, prices, taxes and being a landlord all put me off so only option for now is to keep building the pension and S&SISA.
I'm still on a learning curve but was thinking when my FTSE Global All CAP value reaches circa £30k, wonder, if it's worthwhile looking at cheaper ETF'S to create a 'portfolio,..downside is more work involved to pick the funds and ongoing rebalancing but more fun too...maybe

                               

Alexland

noclaf said:

I work in a fairly stressfull role so know the feeling and funny enough there isn't a week where I don't think about 'what will I use for income generation' when my time in financial services comes to an end. I missed the boat on BTL, prices, taxes and being a landlord all put me off so only option for now is to keep building the pension and S&SISA.

Yes I was a landlord for a bit when living at my wife's house before we consolidated down to a single bigger property. I was only renting my place to people I already knew so it wasn't too bad but with the hassle, tax situation and elevated property prices BTL doesn't seem like much of an opportunity at the moment. At least the S&S look after themselves, the tax situation is good and we only really have to worry about elevated prices in the US and bond markets.