Increase pension contributions and live off savings

Belludog

I'd really appreciate your thoughts...
I'm 45 years old, earn 45k with savings of 120k (relatively easy to access). Wife very low earner.
My DC pension pot is currently at 205k - currently I contribute 9% through salary sacrifice and my employer contributes 11.5% (max).

I'm considering bumping my contributions up to the max allowed to still receive minimum wage - about 60% - in order to boost my pension pot.
This would mean using savings to top up my salary. Difficult to calculate with tax implications but i would expect to have to transfer around £1500 per month.
Maybe do this for a couple of years before my savings take too much of a hit.

Any thoughts on this - are there any advantages / risks beyond the tax saving through salary sacrifice?

Many thanks

michaels

Belludog said:

I'd really appreciate your thoughts...
I'm 45 years old, earn 45k with savings of 120k (relatively easy to access). Wife very low earner.
My DC pension pot is currently at 205k - currently I contribute 9% through salary sacrifice and my employer contributes 11.5% (max).

I'm considering bumping my contributions up to the max allowed to still receive minimum wage - about 60% - in order to boost my pension pot.
This would mean using savings to top up my salary. Difficult to calculate with tax implications but i would expect to have to transfer around £1500 per month.
Maybe do this for a couple of years before my savings take too much of a hit.

Any thoughts on this - are there any advantages / risks beyond the tax saving through salary sacrifice?

Many thanks

This certainly works for me through sal sac but I get an additional 10% bump from the employers NI saved.  Obviously it won't work if lifetime allowance or higher rate tax during draw down might ever come into play.

Don't forget your wife can contribute (gross) the higher of her entire gross earnings or 3600 to a pension and get tax relief even if she has not paid any tax, plus as she is unlikely to be pay any tax on draw down this is definitely a good use of the combined savings pot.

Albermarle

Probably a good plan as with the salary sacrifice you get NI savings as well.

The only possible downside is that market movements in the investments in your pension, may or may not work for you in cramming all the extra into a couple of years. An alternative would be to spread it out over five years say.

Also make sure the investments in the pension are suitable for your age/risk tolerance .

MallyGirl

advantages are the 12% NI boost as well as the tax relief, and maybe the employer NI as well if you are lucky.
As mentioned above - you should also consider putting some in a pension for your wife as she can get tax relief even if she earns under the threshold to pay tax - free money! 

jamesd

It looks like a good plan and if you do follow it you should consider whether you want to retire at 57 or 55 or maybe earlier because that appears entirely possible, depending on investment performance and how much subsidy you end up taking from the savings each year. A high equity percentage would be sensible for that sort of objective in at least the first five years.

If you have a mortgage it'd be useful to minimise payments on that, perhaps by lengthening the term.

tigerspill

I did this for a few years before retiring (Sal Sac).  Made a huge difference as I in effect nearly doubled my contributions for that time (I was a HRT payer).  Just need to manage your allowances.

PParka

I'm doing something similar.  Sacrificing about 60% of my salary and living off savings and investments for the next 5 years.
It does feel strange depleting savings that have been built up over many years, but the tax and NI savings are too good to miss.
Wife is a low earner, so is contributing as much as possible into her pension up to the 'relevant earnings' limit.  She pays no tax, so the tax relief on the contributions is 'free money'
We are keeping 6 months of essential expenses as an emergency fund, and have a credit card with a healthly limit just in case.
Another bonus is if anyone asks how much I earn, I can honestly say 'about £18,000' 

El_Torro

Good points made so far. One thing that I don't think has been addressed: It'll be good if your wife has a decent pension since when you come to take your pension it will be taxable. A decent pension split across 2 people is more tax efficient to withdraw than 1 big pension for one person and a small / non existent pension for the other.

Snapdragon

I've been doing this for the past 4 years and when I did eventually suss I could have been doing this, was quite disappointed with myself for not thinking to do it earlier .  Used up my carry forward allowances over past 3 and this year have had to reduce how much I'm sacrificing so as not to sacrifice more than the 40,000 annual allowance.

Has worked well for me, just needed to keep track of carry forward potential and annual limits. I'm a spreadsheet fan when it comes to my budgets and financial plans, so hasn't been difficult to manage. 

Obviously needs the occasional manual transfer of savings, although I'd been using 'regular savers' maturing at different points in the year and therefore as they mature these automatically top-up the account now receiving less salary each month, so hasn't needed much additional effort.

Good luck.

michaels

Snapdragon said:

I've been doing this for the past 4 years and when I did eventually suss I could have been doing this, was quite disappointed with myself for not thinking to do it earlier .  Used up my carry forward allowances over past 3 and this year have had to reduce how much I'm sacrificing so as not to sacrifice more than the 40,000 annual allowance.

Has worked well for me, just needed to keep track of carry forward potential and annual limits. I'm a spreadsheet fan when it comes to my budgets and financial plans, so hasn't been difficult to manage. 

Obviously needs the occasional manual transfer of savings, although I'd been using 'regular savers' maturing at different points in the year and therefore as they mature these automatically top-up the account now receiving less salary each month, so hasn't needed much additional effort.

Good luck.

The maths becomes less clear if you go over the annual allowance if you benefit from NI and employers NI via sal sac - 20% payable on anything over the 40k but hopefully 'scheme pays' so the money comes from the untaxed money in the pension and then probably 15% tax on the way out.

E.g. 51.38k annual contribution, the last 11.38k could be 1380 employers NI plus 10k income subject to tax and NI at 32% so £6800 net or 11.38k into the pension less 20% income tax paid form the pension = 9104 less 15% income tax on drawdown = £7738 net

DATMAN_2

Hi 

So is the £40000 annual allowance before or after the 25% tax relief

So you can contribute £3333.33 per month and you get £833.33 tax relief ?

Also does the employer contribution count towards the £40,000?

Would be a good way to quickly build up a pension pot !

thanks