30 y/o, Contractor, Planning for Retirement

123imp

Pat38493 said:

123imp said:

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.

Yes - you will get 20% added to what you put into the SIPP automatically.  There are 2 separate limits that applies to what you can put in during each tax year.
- £40K per year hard limit
- You can only put in up to the amount you actually earned from qualifying earnings (e.g. your work income), including any tax relief, so you generally can't put in your entire salary as you have to take into account the 20%, but you can certainly put most of it in.

Actually there are technically 3 limits because even if you are not earning a penny, you can still put a few grand in and get the 20% top up, but that's not relevant here.

Keep in mind the trade offs - once it's in there, you cannot get at it until you reach the age where it's accessible and for you that will be at least 57.

For 40% tax yes if the money is paid into the pension from net income, you would have to fill in a tax return at the end of the tax year to get the further 20% relief paid back to you.  (if you were on salary sacrifice or what Albermarle described, as an employee it's a lot easier because you just don't pay any tax at all on the amount you pay into the pension so it's all taken care of by PAYE).

Thanks, this is very useful. It actually brings up more questions for me about my pension. Mainly what am I aiming for? If I start piling money in there now, it's all well and good, but as you say I can't access till 57 and there's only so much I will need surely - plus 30 years growth on top of whatever goes in.

123imp

Gary1984 said:

123imp said:

Gary1984 said:

What Umbrella form are you with? Are you able to move?

Oh I'm definitely able to move, I'm with NASA at the moment. It looks like Paystream are also well reviewed. I do worry about changing things like this though, just because I'm hesitant of change when things are working - and I've never had any problems with NASA. Guess I should probably check what they actually offer first.

That's understandable. In your situation though salary sacrifice where contributions are pre tax and NI is such a good deal it would be worth moving for. Talk to NASA first and see what they can accommodate. 

You may also find this forum useful:

https://forums.contractoruk.com/umbrella-companies/

If you do need to move another company that gets a very good write up is called Clarity which is generally the recommended option on the forum above.

Thanks, I am going to speak to them today and I will update. As you say, based on what I've been told on here, it would be senseless not to move if I can get salary sacrifice elsewhere. I guess I should have asked these questions when I started as a contractor, but haven't put any money away in a pension yet so, I guess, technically haven't missed out.

123imp

Albermarle said:

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.

Regarding paying pension contributions from your taxed pay, a couple of points for clarity.

1) Whatever you add to the pension, the provider will automatically add 25% ( not 20%). It is up to you to make sure you are eligible for the tax relief, the provider has no knowledge of your salary etc. So even if your salary was £20K , you could add £50K and 25% would be added. However down the line it would be picked up and you would have to unravel it all.

2) You can add your whole gross ( before tax ) salary to a SIPP, including the 25% tax relief. So say you earned £25K, you could add £20 K and £5K would be added in tax relief.

3) When you take the pension, 75% of it is potentially taxable, depending on your personal circumstances at the time, so the full benefit can be less than the tax relief initially added. This tends to improve a lot if you become a 40% taxpayer and get 40% tax relief.

4) Just be clear that the tax you pay on your salary is unaffected by pension tax relief. You pay the same amount of tax but you get the tax relief on the contributions paid into your pension.

Hi, thanks, I'm struggling to get my head around this, so have a lot of questions.

1. Why would the provider add 25% rather than the 20% as tax relief, if I'm a 20% rate tax payer? Also, does this scenario where 25% is added relate to payments made into the SIPP post net income?

2. I understand the maximum I can put into the SIPP every year is 40k. Does this include the tax relief added on payments in if I'm not salary sacrifice? As in, would that mean with 25% added by the provider, I could only add 32k? And if I'm salary sacrifice, can I divert 40k into the SIPP, or would that total amount include NI contributions?

3. If I'm paying into the SIPP from my net income, and 25% is added by the supplier, does this basically make it the same as the LISA in terms of what I get from the government (except the LISA is entirely tax free when I withdraw)?

Thanks again.

Gary1984

Honestly I wouldn't worry too much about these questions as they all relate to contributions from net pay which will never be optimal for an umbrella contractor.

123imp

Gary1984 said:

Honestly I wouldn't worry too much about these questions as they all relate to contributions from net pay which will never be optimal for an umbrella contractor.

I did just give them a call, and the lady seemed to think they did do salary sacrifice. They are going to get someone from Payroll to call me back.

Albermarle

123imp said:

Albermarle said:

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.

Regarding paying pension contributions from your taxed pay, a couple of points for clarity.

1) Whatever you add to the pension, the provider will automatically add 25% ( not 20%). It is up to you to make sure you are eligible for the tax relief, the provider has no knowledge of your salary etc. So even if your salary was £20K , you could add £50K and 25% would be added. However down the line it would be picked up and you would have to unravel it all.

2) You can add your whole gross ( before tax ) salary to a SIPP, including the 25% tax relief. So say you earned £25K, you could add £20 K and £5K would be added in tax relief.

3) When you take the pension, 75% of it is potentially taxable, depending on your personal circumstances at the time, so the full benefit can be less than the tax relief initially added. This tends to improve a lot if you become a 40% taxpayer and get 40% tax relief.

4) Just be clear that the tax you pay on your salary is unaffected by pension tax relief. You pay the same amount of tax but you get the tax relief on the contributions paid into your pension.

Hi, thanks, I'm struggling to get my head around this, so have a lot of questions.

1. Why would the provider add 25% rather than the 20% as tax relief, if I'm a 20% rate tax payer? Also, does this scenario where 25% is added relate to payments made into the SIPP post net income? If you earn £125 and pay 20 % tax , you are left with £100. So if you contribute £100 to a pension, then £25 tax relief needs to be added.

2. I understand the maximum I can put into the SIPP every year is 40k. Does this include the tax relief added on payments in if I'm not salary sacrifice? As in, would that mean with 25% added by the provider, I could only add 32k? Correct And if I'm salary sacrifice, can I divert 40k into the SIPP, or would that total amount include NI contributions? You can add £40K, the NI benefit is a separate point ( you will see that as increased take home pay) 

3. If I'm paying into the SIPP from my net income, and 25% is added by the supplier, does this basically make it the same as the LISA in terms of what I get from the government (except the LISA is entirely tax free when I withdraw)? Yes.

Thanks again.

Comments in bold.
You can actually add more than £40K, if you have added less than £40K in the last 3 years. However you can never add more than your gross salary in one tax year.
Also normally the amount you can salary sacrifice is limited by the fact that your salary can not be reduced below the minimum wage.

123imp

Gary1984 said:

Honestly I wouldn't worry too much about these questions as they all relate to contributions from net pay which will never be optimal for an umbrella contractor.

Albermarle said:

123imp said:

Albermarle said:

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.

Regarding paying pension contributions from your taxed pay, a couple of points for clarity.

1) Whatever you add to the pension, the provider will automatically add 25% ( not 20%). It is up to you to make sure you are eligible for the tax relief, the provider has no knowledge of your salary etc. So even if your salary was £20K , you could add £50K and 25% would be added. However down the line it would be picked up and you would have to unravel it all.

2) You can add your whole gross ( before tax ) salary to a SIPP, including the 25% tax relief. So say you earned £25K, you could add £20 K and £5K would be added in tax relief.

3) When you take the pension, 75% of it is potentially taxable, depending on your personal circumstances at the time, so the full benefit can be less than the tax relief initially added. This tends to improve a lot if you become a 40% taxpayer and get 40% tax relief.

4) Just be clear that the tax you pay on your salary is unaffected by pension tax relief. You pay the same amount of tax but you get the tax relief on the contributions paid into your pension.

Hi, thanks, I'm struggling to get my head around this, so have a lot of questions.

1. Why would the provider add 25% rather than the 20% as tax relief, if I'm a 20% rate tax payer? Also, does this scenario where 25% is added relate to payments made into the SIPP post net income? If you earn £125 and pay 20 % tax , you are left with £100. So if you contribute £100 to a pension, then £25 tax relief needs to be added.

2. I understand the maximum I can put into the SIPP every year is 40k. Does this include the tax relief added on payments in if I'm not salary sacrifice? As in, would that mean with 25% added by the provider, I could only add 32k? Correct And if I'm salary sacrifice, can I divert 40k into the SIPP, or would that total amount include NI contributions? You can add £40K, the NI benefit is a separate point ( you will see that as increased take home pay) 

3. If I'm paying into the SIPP from my net income, and 25% is added by the supplier, does this basically make it the same as the LISA in terms of what I get from the government (except the LISA is entirely tax free when I withdraw)? Yes.

Thanks again.

Comments in bold.
You can actually add more than £40K, if you have added less than £40K in the last 3 years. However you can never add more than your gross salary in one tax year.
Also normally the amount you can salary sacrifice is limited by the fact that your salary can not be reduced below the minimum wage.

I have contacted my Umbrella company and got all the information I needed. I am able to pay into a SIPP via salary sacrifice. They also have their own workplace pension but the salary sacrifice was clearly the way to go from what I was told on here. I ended up setting up a SIPP with AJ Bell, and they only needed 5 days notice to start paying into it. So thanks for all the help everyone.

On a separate note, my wife got a letter from her last job the other day, where she was enrolled in a LGPS. The letter said that she had about £1800 in the pension upon ceasing work, and they could offer a one time refund of £600 and close the account. Would it be better for her to take the one-off payment, or leave as is? No idea if she will end up working in "local authority" again in the future.

Thanks.

123imp

Hi again,

In addition to the above, I was wondering if anyone could advise me on my AJ Bell SIPP. I will start receiving payments into the account soon, and these will arrive on a monthly basis. My plan was to invest the money in funds, and I have been told I have to allocate these every time payments come in - although there is a way to make these automatic. 

Is choosing a fund/funds a case of doing some research and picking one? Is it best to go for a single fund or multiple? And as there is a £1.50 charge every time I transfer into a fund, should I just pay this every month or save the payments up and do it once every so often (basically, should I treat the £1.50 charge as an irrelevant small payment)?

Thanks for your help.

Gary1984

I expect it's better to leave the £1800 where it is given it's more than the £600 offered unless I'm missing something.

Being a contractor means the amount going into your SIPP will vary each month depending on the number of days you work. As such you might not be able to make it automatic as the amount will keep changing.  Personally I just go in and invest the monthly contribution into a single fund each month to minimise the charges and also to keep things simple.  However having multiple months of contributions sitting uninvested in order to save £1.50 or £3 or whatever probably isn't a good idea.

Albermarle

And as there is a £1.50 charge every time I transfer into a fund, should I just pay this every month or save the payments up and do it once every so often (basically, should I treat the £1.50 charge as an irrelevant small payment)?

It is not irrelevant but is part of the A J Bell package along with a relatively low platform charge.

A lot more important that you pick a suitable investment fund with low charges.