Arguments for/against paying into a pension

Albermarle

I'm in USS - for most Uni's you can salary sacrifice, and you can change your additional contributions to it directly yourself on the USS website and choose whether you make them via salary sacrifice or not.  If you are a HR taxpayer, you will save HR tax and NI by doing so - so this is much better than doing it via your own SIPP.

Just to be clear, with salary sacrifice or with a separate SIPP, you gain exactly the same amount of HR tax relief.

What you gain is the NI saving .

In this specific case of a USS pension, there are some advantages of contributing more to this, than separately to a SIPP, but that is unconnected to a salary sacrifice arrangement.

dllive

Hmmm... I thought of a pertinent fact last night: My day job is taxed at BR, but because I earn income outside of my day job (I have a property rental) it pushes me into the HR. What impact does that have on my additional payments into the USS scheme? Will I still get the 40% tax relief?

ussdave

I don't think so (but will let someone else comment who knows better than I).

It may still be advantageous to have at least some of your payments go into USS IB though.

Assuming no HR tax relief on USS:

£100 into the pension costs you £66.5 in take home pay (BR + NI savings).  Of that, assuming you don't go above your max tax free lump sum amount, you get to keep £100 when you draw your pension, so a net gain of £33.5.

Compare that to the gain you'd make on the SIPP, given that it is likely you'll be taxed at BR or HR when you draw it.  

dllive

Hi guys. Ive had a quick chat with the accountant at work. Shes confirmed that I wont get HR tax relief because its based on my tax code that they have for me. So does that mean Id be better off putting it into the SIPP? (because Ill be presumably be getting the HR relief there) 

She also confirmed that I cant pay AVCs via Salary Sacrifice.

Thanks

Linton

dllive said:

Hi guys. Ive had a quick chat with the accountant at work. Shes confirmed that I wont get HR tax relief because its based on my tax code that they have for me. So does that mean Id be better off putting it into the SIPP? (because Ill be presumably be getting the HR relief there) 

She also confirmed that I cant pay AVCs via Salary Sacrifice.

Thanks

In the circumstances you describe with 2 incomes, you will get HR tax relief but not from your day job if it is set to BR.  At the end of the tax year HMRC will calculate all your income and all your pension contributions and any higher rate tax relief due will be sent to you.

Putting it into a SIPP wont make any difference.  It is only the basic rate relief which is paid into your pension.

  

FrankRizzo

michaels said:

Worth thinking about your spending as well as your income.  If you are only spending a small proportion then it may b that your income increases when you retire - perhaps this is fine and you know how you are going to spend the money but the idea of retirement saving is to give you the income you desire for the period you want to be retired, no point saving a pot that means you can spend 50k pa in retirement if you intend to carry on spending 30k pa.  As mentioned above, pensions can not be spent until 55/57 at earliest unlike taxed income savings.

Thats the way i think of it as well....whats the point of having all this money at such a late age. Why not use some of the cash to retire even earlier?

Albermarle

FrankRizzo said:

michaels said:

Worth thinking about your spending as well as your income.  If you are only spending a small proportion then it may b that your income increases when you retire - perhaps this is fine and you know how you are going to spend the money but the idea of retirement saving is to give you the income you desire for the period you want to be retired, no point saving a pot that means you can spend 50k pa in retirement if you intend to carry on spending 30k pa.  As mentioned above, pensions can not be spent until 55/57 at earliest unlike taxed income savings.

Thats the way i think of it as well....whats the point of having all this money at such a late age. Why not use some of the cash to retire even earlier?

As with most things there is a trade off.
Pension brings a tax benefit, particularly for those who are higher rate taxpayers in employment and basic rate in retirement.
Pension ties the money up until you are probably 57.

One point is that 55/57 is not really a late age nowadays. The average 55 year old will live another 30 years and 50% will live longer. On the other side, retiring before 55/57 is still not that common in reality. The average retirement age is round 62/63.

Dazed_and_C0nfused

dllive said:

Hi guys. Ive had a quick chat with the accountant at work. Shes confirmed that I wont get HR tax relief because its based on my tax code that they have for me. So does that mean Id be better off putting it into the SIPP? (because Ill be presumably be getting the HR relief there) 

She also confirmed that I cant pay AVCs via Salary Sacrifice.

Thanks

I presume she's not an accountant who deals with personal tax 😳

The tax code in use during the tax year has no relevance to the tax relief due on a personal contribution to a relief at source scheme like a SIPP or personal pension.

Simes122

dllive said:

Hi guys. Ive had a quick chat with the accountant at work. Shes confirmed that I wont get HR tax relief because its based on my tax code that they have for me. So does that mean Id be better off putting it into the SIPP? (because Ill be presumably be getting the HR relief there) 

She also confirmed that I cant pay AVCs via Salary Sacrifice.

Thanks

What institution are you with?  The USS website lets you choose to make your AVCs via salary sacrifice, but maybe your institution ignores that.  Seems unfair!

with salary sacrifice you don’t actually get relief - your earned income is less (thus is not exposed to HR tax potentially or NI).  But your employer makes the contribution on your behalf.  

AlanP_2

You will sort of still get HR/40% tax relief with your split income sources but in dribs and drabs.

USS additional contributions will get an automatic 20% saving via payroll (ignoring any potential NI saving).

This will reduce your taxable income as shown on P60.

BTL income will be added to P60 income to get total for year and more of that will now fall in to BR 20% bracket than it currently does hence saving you the extra 20%.