Do high pension contributions count against mortgage applications?

Oasis1

Context: I'm hoping to be in a position to get a first mortgage later this year. I'm also considering paying significant pension contributions in 2023/24 (e.g. ~40% of my salary) to avoid higher rate tax and build up a sizeable pot (aim is atleast £175k which, along with state pension and my gov DB scheme, should buy sufficient annuity to place me in the moderate camp per this website).

My question is: when applying for a mortgage, do providers focus on net income, or will they consider gross, knowing that I can easily decrease my pension contributions if my outgoings significantly increase (e.g. higher mortgage rates etc).

amnblog

Generally the latter. In most cases Lenders will ignore voluntary pension contributions for affordability.

housebuyer143

If you are doing a salary sacrifice scheme and your gross pay is lowered on your payslip then they will only look at your gross pay and it will affect it..

If the pension is deducted after the gross pay it will be fine as your actual pay before pension will be shown.

JMA74

housebuyer143 said:

If you are doing a salary sacrifice scheme and your gross pay is lowered on your payslip then they will only look at your gross pay and it will affect it..

If the pension is deducted after the gross pay it will be fine as your actual pay before pension will be shown.

A payslip would generally itemise this to show as Salary and then Pension.  And if its a voluntary contribution most lenders will ignore it and add it back on to gross pay

TheJP

Lenders will most certainly ask you how much per month your pension is and use that as part of the affordability process. Get the mortgage first then change pension contributions.

ACG

Generally speaking pension contributions are ignored. 
However some lenders will count them as a commitment and would want to see 1 payslip without it being paid in order to ignore it. 

housebuyer143

JMA74 said:

housebuyer143 said:

If you are doing a salary sacrifice scheme and your gross pay is lowered on your payslip then they will only look at your gross pay and it will affect it..

If the pension is deducted after the gross pay it will be fine as your actual pay before pension will be shown.

A payslip would generally itemise this to show as Salary and then Pension.  And if its a voluntary contribution most lenders will ignore it and add it back on to gross pay

Not always which is why I stated it. My husby did a salary sacrifice pension (which is used mainly for tax avoidance and is different to the other workplace pension schemes) and the pension was not listed on his payslip. Instead he had a lower gross pay under his annual pay. 
No mention of his pension contributions at all apart from in the pension column where the annual tax is listed.
 When we tried to get a mortgage we were offered 100k less than we should have been able to get because the lender would only look at the gross pay listed on the payslip and didn't care that we had a contract stating the salary 40% higher.

We were told to cancel the pension and then reapply with a new payslip showing his real gross pay.

kingstreet

Skipton recently rejected one of our cases on affordability grounds where the mortgage-free couple had been maximising pension conts for several months and intended to reduce them again when their newbuild completes.

We found it inconsistent that had they been making credit payments of equal size and said the commitment would be ended on/before completion, the lender would have ignored it for affordability.

This is the kind of thing that drives a broker absolutely mad with frustration.

Still, Accord said we don't take pension contributions into account and as good as their word they didn't and we got from app to offer in four working days on a newbuild purchase.

housebuyer143

kingstreet said:

Skipton recently rejected one of our cases on affordability grounds where the mortgage-free couple had been maximising pension conts for several months and intended to reduce them again when their newbuild completes.

We found it inconsistent that had they been making credit payments of equal size and said the commitment would be ended on/before completion, the lender would have ignored it for affordability.

This is the kind of thing that drives a broker absolutely mad with frustration.

Still, Accord said we don't take pension contributions into account and as good as their word they didn't and we got from app to offer in four working days on a newbuild purchase.

Funny thing is, it was Skipton who were funny about our pension as well 🤔

kingstreet

housebuyer143 said:

kingstreet said:

Skipton recently rejected one of our cases on affordability grounds where the mortgage-free couple had been maximising pension conts for several months and intended to reduce them again when their newbuild completes.

We found it inconsistent that had they been making credit payments of equal size and said the commitment would be ended on/before completion, the lender would have ignored it for affordability.

This is the kind of thing that drives a broker absolutely mad with frustration.

Still, Accord said we don't take pension contributions into account and as good as their word they didn't and we got from app to offer in four working days on a newbuild purchase.

Funny thing is, it was Skipton who were funny about our pension as well 🤔

Consistently inconsistent then.

Grumpy_chap

housebuyer143 said:

JMA74 said:

housebuyer143 said:

If you are doing a salary sacrifice scheme and your gross pay is lowered on your payslip then they will only look at your gross pay and it will affect it..

If the pension is deducted after the gross pay it will be fine as your actual pay before pension will be shown.

A payslip would generally itemise this to show as Salary and then Pension.  And if its a voluntary contribution most lenders will ignore it and add it back on to gross pay

Not always which is why I stated it. My husby did a salary sacrifice pension (which is used mainly for tax avoidance and is different to the other workplace pension schemes) and the pension was not listed on his payslip. Instead he had a lower gross pay under his annual pay. 
No mention of his pension contributions at all apart from in the pension column where the annual tax is listed.

I also have SS pension and the total before the pension is not shown anywhere.
That is, as I understand it, entirely correct.  A SS scheme should be processed by change to employment contract and, therefore, your gross pay is less after the change to contract has been implemented.
That is explained here:
https://thepeoplespension.co.uk/salary-sacrifice/#:~:text=Salary sacrifice, sometimes known as,pay the total pension contributions.
"Employees will need to agree to the change in their contract or through an agreement letter. Employers will need employees’ permission before entering them into a salary sacrifice scheme. If they don’t agree to salary sacrifice, employers will need to take their employees’ pension contributions in the usual way."

It makes sense to be this way.
The OP says they SS ~40% salary to be at £50k taxable income.
That indicates a "standard" salary around £80k from which £30k is SS pension.

A typical contract for the salary package might well be built up along the following lines:
 - £80k
 - plus 10% (£8k) employer's pension contributions matched by employee contributions
 - plus healthcare
 - plus annual leave entitlement
 - plus whatever else, car etc...

With the SS, that package is changed to something like:
 - £50k
 - plus £38k employer's pension contributions (none contributory)
 - plus healthcare
 - plus annual leave entitlement
 - plus whatever else, car etc...

Anyone making this change needs to be mindful of several factors:
 - watch that the initial 10% employer's contribution is maintained in absolute terms
 - aware of any impact to salary related benefits (overtime, DB accrual, redundancy etc)
 - "headline" salary for borrowing etc is lower.