30 y/o, Contractor, Planning for Retirement

123imp

Hi All, thanks in advance for your help and advice.

I'm 30 y/o, I work as a contractor and have no work place pension (no employer contributions), I earn just below 50k before tax (so inside 20% bracket), I have a property with a mortgage, and a fair bit of cash in a bond which matures in a year.

I've started thinking about planning for retirement, but I have become confused about the best way to go about it. My Umbrella company said that if I want to pay into a pension I can set-up a SIPP. I have done some reading up on these. I already have a LISA which I opened last year, I maxed out the deposits for the year and got the 25% bonus. I'm trying to work out where I should be putting my money.

The way I understand it is the LISA can be accessed at 60, any money I put in there I'll have paid 20% income tax, there's a 25% bonus on top, and I can withdraw it tax-free when it eventually comes to it. Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, no bonus, and at 57 I can withdraw with no tax within my personal allowance, and on top the first 25% is tax free as a lump sum.

Is this all correct? Or am I misinterpreting how these work. If so, I would assume that the best thing for me to do would be to max out my LISA every year. I would have to pay 20% income tax before I put the 4k in each year, but then I get 25% bonus and tax-free withdrawals. Whilst the SIPP pension has no bonus and I likely will pay some tax on withdrawals.

On top of the 4k I have available to put in the LISA, I also end up with money I don't spend which is currently ending up in an ISA. Is this money that really should be going into a pension as salary sacrifice?

Thank you.

dunstonh

The scenario you describe sees LISA top of the pile, whilst you are a basic rate taxpayer, then pension, then ISA.

If you move into the higher rate band then it becomes pension, then LISA and then ISA.

Albermarle

Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, no bonus, and at 57 I can withdraw with no tax within my personal allowance, and on top the first 25% is tax free as a lump sum.

To be clear salary sacrifice is only one method of making pension contributions from your salary. It is the best one as you make some NI savings as well. If you move jobs you may find they use a different method where for example the contributions come out of your taxed pay and the SIPP provider adds the tax relief.

Hopefully your LISA is a stocks and shares LISA, as over 30 years this should give better growth than a cash LISA.

Also due to your age the investments in your pension should be in the more risky/targeted for growth type investments.

123imp

dunstonh said:

The scenario you describe sees LISA top of the pile, whilst you are a basic rate taxpayer, then pension, then ISA.

If you move into the higher rate band then it becomes pension, then LISA and then ISA.

Hi,

Thanks for the response.

This is the kind of thing I was hoping to see, as it's easy to follow. 

If you do end up in the higher tax bracket, would it then be a case of putting all of that 40% salary into a pension, and then a LISA, and then back to pension for any remaining salary you are happy to sacrifice at 20%?

123imp

Albermarle said:

Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, no bonus, and at 57 I can withdraw with no tax within my personal allowance, and on top the first 25% is tax free as a lump sum.

To be clear salary sacrifice is only one method of making pension contributions from your salary. It is the best one as you make some NI savings as well. If you move jobs you may find they use a different method where for example the contributions come out of your taxed pay and the SIPP provider adds the tax relief.

Hopefully your LISA is a stocks and shares LISA, as over 30 years this should give better growth than a cash LISA.

Also due to your age the investments in your pension should be in the more risky/targeted for growth type investments.

Hi,

Thanks for this.

The LISA was actually cash, but I recently transferred it to a S&S LISA with AJ Bell after doing some research. I'm a complete novice, so I picked a few funds considered "risky" and thought I'd just leave it there.

Now you mention it, I actually have no idea if the SIPP pension would be salary sacrifice, or if it would be contributions from taxed pay as you mentioned. I think I'll need to phone my Umbrella company and ask them about this. If this were the case, would it just be the NI savings I would miss out on?

Pat38493

123imp said:

Albermarle said:

Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, no bonus, and at 57 I can withdraw with no tax within my personal allowance, and on top the first 25% is tax free as a lump sum.

To be clear salary sacrifice is only one method of making pension contributions from your salary. It is the best one as you make some NI savings as well. If you move jobs you may find they use a different method where for example the contributions come out of your taxed pay and the SIPP provider adds the tax relief.

Hopefully your LISA is a stocks and shares LISA, as over 30 years this should give better growth than a cash LISA.

Also due to your age the investments in your pension should be in the more risky/targeted for growth type investments.

Hi,

Thanks for this.

The LISA was actually cash, but I recently transferred it to a S&S LISA with AJ Bell after doing some research. I'm a complete novice, so I picked a few funds considered "risky" and thought I'd just leave it there.

Now you mention it, I actually have no idea if the SIPP pension would be salary sacrifice, or if it would be contributions from taxed pay as you mentioned. I think I'll need to phone my Umbrella company and ask them about this. If this were the case, would it just be the NI savings I would miss out on?

If you are receiving your income as a salary from your umbrella company and they have offered a salary sacrifice into your SIPP, this could be a good way to take it, but it's not clear from what you are saying that this is the situation.

What you said about it in your first post was basically correct, it's just that the term "salary sacrifice" has a very specific technical meaning where you are paid by an employer and take a salary reduction in return for your employer making pension contributions on your behalf.   This means you pay no tax or NI on that part of your income.  If it's an umbrella company I'm thinking this probably won't be your situation but I don't know much about them.

It the money will be paid into the SIPP from your net income, the end result is pretty much the same... HMRC / pension provider will add an additional 20% on to the amount you contribute to "give you back" the 20% tax you already paid (although actually even if you weren't paying any tax at all with income < £12570 this would still happen).

In the latter scenario, if you eventually become 40% taxpayer, you can claim an additional 20% back in your SA tax return from that portion of income that you paid 40% on but went to your pension (at least that's how I understand it but I'm sure someone will be along to correct me if not).

MallyGirl

Keeping yourself below the higher rate tax bracket has benefits other than just tax and NI if you have a family. You would still qualify for family allowance for example.
Salary sacrifice into a pension is still a strong choice
under £50k you save 20% tax and 12% NI
over £50k you save 40% tax and 2% NI.

Gary1984

If you're contracting through an Umbrella company then you won't be able to beat Salary Sacrifice into a SIPP.  As well income tax you'll save on employee NI of 12% AND employer's NI of 13.8%. so a hefty saving of about 40%, rising to over 50% if you become a higher rate tax-payer.

Talk to your umbrella and check pension contributions come off before all tax and NI calculated. I'm with Paystream and they definitely do this.

Albermarle

There is actually a third  way to make pension contributions from your salary , just to make things confusing.

You get the normal salary but the contributions are taken out before tax is taken off.

123imp

Pat38493 said:

123imp said:

Albermarle said:

Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, no bonus, and at 57 I can withdraw with no tax within my personal allowance, and on top the first 25% is tax free as a lump sum.

To be clear salary sacrifice is only one method of making pension contributions from your salary. It is the best one as you make some NI savings as well. If you move jobs you may find they use a different method where for example the contributions come out of your taxed pay and the SIPP provider adds the tax relief.

Hopefully your LISA is a stocks and shares LISA, as over 30 years this should give better growth than a cash LISA.

Also due to your age the investments in your pension should be in the more risky/targeted for growth type investments.

Hi,

Thanks for this.

The LISA was actually cash, but I recently transferred it to a S&S LISA with AJ Bell after doing some research. I'm a complete novice, so I picked a few funds considered "risky" and thought I'd just leave it there.

Now you mention it, I actually have no idea if the SIPP pension would be salary sacrifice, or if it would be contributions from taxed pay as you mentioned. I think I'll need to phone my Umbrella company and ask them about this. If this were the case, would it just be the NI savings I would miss out on?

If you are receiving your income as a salary from your umbrella company and they have offered a salary sacrifice into your SIPP, this could be a good way to take it, but it's not clear from what you are saying that this is the situation.

What you said about it in your first post was basically correct, it's just that the term "salary sacrifice" has a very specific technical meaning where you are paid by an employer and take a salary reduction in return for your employer making pension contributions on your behalf.   This means you pay no tax or NI on that part of your income.  If it's an umbrella company I'm thinking this probably won't be your situation but I don't know much about them.

It the money will be paid into the SIPP from your net income, the end result is pretty much the same... HMRC / pension provider will add an additional 20% on to the amount you contribute to "give you back" the 20% tax you already paid (although actually even if you weren't paying any tax at all with income < £12570 this would still happen).

In the latter scenario, if you eventually become 40% taxpayer, you can claim an additional 20% back in your SA tax return from that portion of income that you paid 40% on but went to your pension (at least that's how I understand it but I'm sure someone will be along to correct me if not).

Hi,

I'm not sure as I have to speak to my Umbrella company, I'm going to assume that it is going to be payments from net income, based on what people have said. It's a shame its probably not salary sacrifice. 

So HMRC would give me 20% on anything I put in the SIPP? Then if I was to put in my entire salary, and live off my wife's income, they would basically give me £2-3k for free? That's very interesting. I would assume they know exactly what you earn and exactly what your owed in terms of tax back.

I am interested in the 40% tax scenario, as I could well end up their in future. So I would have to do a tax return submitted by January (for the previous financial year) to claim back the extra 20% from anything over 50k put into the SIPP?

Thanks.

123imp

MallyGirl said:

Keeping yourself below the higher rate tax bracket has benefits other than just tax and NI if you have a family. You would still qualify for family allowance for example.
Salary sacrifice into a pension is still a strong choice
under £50k you save 20% tax and 12% NI
over £50k you save 40% tax and 2% NI.

Hi,

Thanks for your post.

I can see myself moving back to direct employment eventually, and therefore receiving pension contributions. Knowing how it would affect us when we have children is useful, that would probably be the time to take the security and employer pension.

I do think that at the moment I'm not eligible for salary sacrifice.