Continue saving into a pension or change to an alternative

tiger1957

Hello, thanks for all the information on this site, it's been really helpful over the years. My current question is I have 2 pension incomes and a job so I am taxed at 40% on 15,000 of my income. I do not pay NI. My employer offers 6% pension contribution, salary  sacrifice, and I do the same at 6%. I'm considering upping my contribution to 20% of salary, which means a.monthly amount jointly  of about 940.00. I'm planning on retiring in 10 months, by which time (at 20%) I would have ( including current pot) about 30,000. Im planning on using this pension as a savings pot for a safety net in retirement  rather than income. I'm limited to 10000 a year as I have triggered MPAA.  . My question is. Is this the best vehicle for these savings or should I source a ISA or alternative? I tend to use the pension because of ease. But could drop my contribution to 3%  , with employer contribution of 6%, save via pension around 300.00 a month, and save around 600.00 in another savings vehicle.  Any suggestions as to keep my contributions at 20%, or decrease and save in an alternative manner. Grateful,as ever, for any thoughts. Thank  you 

Dazed_and_C0nfused

tiger1957 said:

Hello, thanks for all the information on this site, it's been really helpful over the years. My current question is I have 2 pension incomes and a job so I am taxed at 40% on 15,000 of my income. I do not pay NI. My employer offers 6% pension contribution, salary  sacrifice, and I do the same at 6%. I'm considering upping my contribution to 20% of salary, which means a.monthly amount jointly  of about 940.00. I'm planning on retiring in 10 months, by which time (at 20%) I would have ( including current pot) about 30,000. Im planning on using this pension as a savings pot for a safety net in retirement  rather than income. I'm limited to 10000 a year as I have triggered MPAA.  . My question is. Is this the best vehicle for these savings or should I source a ISA or alternative? I tend to use the pension because of ease. But could drop my contribution to 3%  , with employer contribution of 6%, save via pension around 300.00 a month, and save around 600.00 in another savings vehicle.  Any suggestions as to keep my contributions at 20%, or decrease and save in an alternative manner. Grateful,as ever, for any thoughts. Thank  you 

Why would you voluntarily pay (a lot) more 40% tax than is necessary just to make use of an ISA?

Making full use of the £10,000* that can go into your pension in this tax year seems a no brainer to be honest. 

*assuming MPAA was triggered in a previous tax year.

ColdIron

40% taxpayer? Pension every time

dunstonh

 My question is. Is this the best vehicle for these savings or should I source a ISA or alternative?

£10,000 into a pension has cost you £6,000.     Why would you consider £6000 into an ISA being better than £10,000 into a pension?

Draw that £6000 you paid into the ISA and you have £6000
Draw that £6000 you paid into the pension and you have £8500

Linton

If your  taxable income is close to the higher rate tax band an S&S ISA of income investmeItnts can be very helpful. You get perhaps nX£10k tax free annual income for the whole of your life’s with the added advantage of being very flexible.   

tiger1957

Thank you for your comments.  Linton, I'm not sure what you mean? I'm not sure what a S&S ISA IS? As I'm only anticipating 12 months further employment I think maximising my pension  contributions is the way forward.  One final question,if that's OK. If I do pay additional pension  contributions,  then does HMRC automatically adjust the tax I currently pay on my two current pensions, that  take as monthly income, or do I need to claim the tax at the end of the year? So, if I make additional payments from my salary, thus reducing my salary by that amount of contributions and thus paying less tax, does my pension of 14k then have less tax taken from it every month? Thank you again for your help

Dazed_and_C0nfused

tiger1957 said:

Thank you for your comments.  Linton, I'm not sure what you mean? I'm not sure what a S&S ISA IS? As I'm only anticipating 12 months further employment I think maximising my pension  contributions is the way forward.  One final question,if that's OK. If I do pay additional pension  contributions,  then does HMRC automatically adjust the tax I currently pay on my two current pensions, that  take as monthly income, or do I need to claim the tax at the end of the year? So, if I make additional payments from my salary, thus reducing my salary by that amount of contributions and thus paying less tax, does my pension of 14k then have less tax taken from it every month? Thank you again for your help

There are three common methods of getting money into a pension.

Salary sacrifice = you don't contribute anything and don't get any pension tax relief.  You do agree to a reduced salary in return for additional employer contributions.  You have a lower salary and avoid paying tax and NI on the amount sacrificed.

Net pay is fairly similar to salary sacrifice but you contribute (via payroll) and you only avoid paying tax on your contribution, it doesn't save you any NI.

Relief at source.  This is where you make a net contribution and 25% is added by the pension company.  You can then claim higher rate relief (limited by the amount of higher rate tax you would otherwise have paid) from HMRC.  There is no NI saving with relief at source contributions.

Relief at source contributions do not reduce your taxable income and you do need to claim any higher rate relief from HMRC.

You never need to claim anything tax relief wise, or even tell HMRC about salary sacrifice or net pay contributions.  You just end up with a lower taxable pay figure on your P60.

tiger1957

Thank you, that's a really clear explanation of the differences in making contributions,  although I had understood that I would still receive pension tax relief through salary sacrifice? although as you say, my pay slips do show my pension contributions as coming solely from my employer.  Does this mean I no longer benefit from pension tax relief, or that it's just not shown? I do benefit  from reduced tax, but I'm of an age that I no longer pay NI. Thank  you gor your help

ColdIron

Salary sacrifice contributions come before income tax is paid so cannot benefit from income tax relief

Dazed_and_C0nfused

tiger1957 said:

Thank you, that's a really clear explanation of the differences in making contributions,  although I had understood that I would still receive pension tax relief through salary sacrifice? although as you say, my pay slips do show my pension contributions as coming solely from my employer.  Does this mean I no longer benefit from pension tax relief, or that it's just not shown? I do benefit  from reduced tax, but I'm of an age that I no longer pay NI. Thank  you gor your help

Salary sacrifice means you are choosing to have a reduced salary in return for your employer contributing more into your pension.

You are not entitled to any pension tax relief on employer contributions.

But by having the reduced salary you are avoiding paying tax on the amount you have sacrificed.  Often this saves both tax and NI so the benefit is better than getting pension tax relief.  For a basic rate payer you can usually avoid paying 28% in tax and NI (previously 32% before the NI reductions).

If you aren't paying NI anymore there will be less benefit from salary sacrifice however sometimes employers add their own saving and it's also very simple, you never need to involve HMRC as you immediately get the full tax benefit (and NI where relevant) each pay day.