DC Pension Contributions

Cleagarr

I am 45 and earn £59,000 from my teaching job (been teaching since 2002) and around £7k from rental income. My current pension benefit statement indicates a around £17,000 at age 60 if I stop paying in.

I'm now coming out of the TPS and into a DC scheme. The employer has offered to pay into this scheme at rates of 8%, 15% or 22%. Anything less than 22% will result in an increase in take home pay for the difference.

Calculating what my teacher's pension will be should it until 60, I have decided I want to to invest  22% (it's actually 23.68% with the 1.68% funidng Death in Service and loss of employment benefits) into the DC scheme. I currently  make 10.2% contributions and I am looking to keep this as extra income (less tax). 

My question is, does it matter how this 22% contribution is made? Is there a 'best way' to do it i.e. is it better to just let the school pay tthe 22% or if I pay part and they do? 

Are there any questions I should be asking in terms of these contributions?

Dazed_and_C0nfused

Given you are clearly paying plenty of tax you not paying those contributions would be the best option (assuming remaining in the TPS in a non starter).

Sacrificing salary in return for additional employer contributions would mean you avoid paying both tax and National Insurance on the amount sacrificed.  And it means you get the tax saving immediately and don't have to involve HMRC at any point.

Your employer would also save some employers NI and it's possible they may agree to add some or all of that to your DC pension as well.

badmemory

Is this because your employer is becoming an academy so no choice otherwise I fail to see the benefit of going into a DC scheme.

Cleagarr

badmemory said:

Is this because your employer is becoming an academy so no choice otherwise I fail to see the benefit of going into a DC scheme.

Independent school leaving the scheme.

JoeCrystal

There's no surprise about independent schools leaving the scheme in droves since it is so eye-watering expensive. The schools had to pay 25% higher contributions now (compared to the previous rate), which kicked in this tax year until 2027 (which may be even more expensive by April 2027 based on this year's vaulations).

Which DC pension scheme are you paying into? I am confused by the offer to pay into this scheme at rates of 8%, 15%, or 22%. Do you have to match the contributions or pay a specific amount to get that amount from the employer? An 8% contribution makes sense since it is an auto-enrollment legal minimum, assuming you are not paying any at all.

badmemory

Cleagarr said:

badmemory said:

Is this because your employer is becoming an academy so no choice otherwise I fail to see the benefit of going into a DC scheme.

Independent school leaving the scheme.

Thanks for explaining.  I will assume you have checked out your future pension options versus requirements.

Cleagarr

JoeCrystal said:

There's no surprise about independent schools leaving the scheme in droves since it is so eye-watering expensive. The schools had to pay 25% higher contributions now (compared to the previous rate), which kicked in this tax year until 2027 (which may be even more expensive by April 2027 based on this year's vaulations).

Which DC pension scheme are you paying into? I am confused by the offer to pay into this scheme at rates of 8%, 15%, or 22%. Do you have to match the contributions or pay a specific amount to get that amount from the employer? An 8% contribution makes sense since it is an auto-enrollment legal minimum, assuming you are not paying any at all.

In essence the school is honouring its current contribution and we can choose to take this as pension or salary (beyond the 8%). We are not expected to pay anything in at all if we don’t want to.  

In answer to the other chap about future pension requirements versus options I’m not sure what that means but I feel that what I have in TPS plus state pension at 67 is more than enough for my needs (my wife is also in TPS and is staying in) so what I’m looking for is enough to bridge the gap to 67.  

Sarahspangles

So whatever the school pays in, comes from your salary i.e. you would be sacrificing 22% of salary and they aren’t ‘matching’ it? But you’re also reducing your NI payment in so doing.

I think the first calculation is the level of contributions that take you out of higher rate tax, and whether the 22% achieves that. And how much the NI saving is.

Then consider whether the provider chosen by your employer has higher charges or a reduced choice of funds. Because an alternative is to opt for 8% or 15% in this scheme, and to additionally pay into a personal pension. You can still get tax relief added/claim back higher rate tax but wouldn’t benefit from the saving on NI.

There are some posters in this forum who periodically transfer chunks out of an employer scheme to save on fees or get a better choice of funds. But not all employer schemes allow this.

The final thing you might want to consider - though it’s a way off - is whether you want the DC scheme(s) to fund retirement pre 67 rather than TPS. Although you can get a projection now of what TPS will pay out at 60, it has better inflation proofing. For the same reason I’m aiming not to commence any of my DB schemes early, I feel I may be better able to adjust my lifestyle around variable returns from my SIPP pre-67.

JoeCrystal

Cleagarr said:

In essence the school is honouring its current contribution and we can choose to take this as pension or salary (beyond the 8%). We are not expected to pay anything in at all if we don’t want to.  

In answer to the other chap about future pension requirements versus options I’m not sure what that means but I feel that what I have in TPS plus state pension at 67 is more than enough for my needs (my wife is also in TPS and is staying in) so what I’m looking for is enough to bridge the gap to 67.  

Ah, that makes more sense. It's worth double-checking how long they will contribute at that level. Does the pension section in your contract, if any, mention anything regarding new pension contributions? (It is much easier to reduce the pension contributions compared to the salary after all). It would be a shame if they decided to stop paying high contributions next time and spend a bog standard of 8% instead. The school may focus on the overall cost of pension contributions as much as possible in the long run. 

Albermarle

Cleagarr said:

JoeCrystal said:

There's no surprise about independent schools leaving the scheme in droves since it is so eye-watering expensive. The schools had to pay 25% higher contributions now (compared to the previous rate), which kicked in this tax year until 2027 (which may be even more expensive by April 2027 based on this year's vaulations).

Which DC pension scheme are you paying into? I am confused by the offer to pay into this scheme at rates of 8%, 15%, or 22%. Do you have to match the contributions or pay a specific amount to get that amount from the employer? An 8% contribution makes sense since it is an auto-enrollment legal minimum, assuming you are not paying any at all.

In essence the school is honouring its current contribution and we can choose to take this as pension or salary (beyond the 8%). We are not expected to pay anything in at all if we don’t want to.  

In answer to the other chap about future pension requirements versus options I’m not sure what that means but I feel that what I have in TPS plus state pension at 67 is more than enough for my needs (my wife is also in TPS and is staying in) so what I’m looking for is enough to bridge the gap to 67.  

This is good, as if a DC scheme is 'only' getting 22% being paid in, it is unlikely to give the same level of pension as the TPS.
With a following wind on investment performance, it might get close, but the key point it is not guaranteed, especially if we have periods of high inflation like recently and/or extended periods of poor stock market growth.
Presume you are aware that you the DC scheme will be invested in the financial markets? In this case some awareness of basic investing principles will be useful, rather than just letting it do its own thing ( as most people do) .