Salary Sacrifice vs Savings

wallace47931

Hi,

Im pondering increasing my pension contributions, which I already salary sacrifice into. Currently I pay in about 20% of my salary considering it a tax efficient way to save for my family retirement. Without getting too personal I would like to retire in the next 10 years around 56-58 along with my wife. 

My wife is a prudent saver but in my opinion are saving too much in traditional bank accounts and ISAs (already subject to 40% income tax) whereas I think it would be better to up the pension again. I know the trade off is not having immediate access to the money for 10 years and the risk is the pension reduces in value - but even if I save 20% of Income tax (top rate vs basic rate) I would expect the pension could theoretically reduce 20% and I would still be break even?

I know its entirely a personal decision but interested in peoples views.

J

eskbanker

Do you really mean 'top rate' tax (45%) or just the higher rate (40%)?

Anyway, pensions are generally tax-efficient, but while you do benefit from tax relief on the way in, you do have to factor in the effect of income taxation on the way out again, allowing of course for the 25% tax-free lump sum. 

In terms of risk, presumably your scheme allows you some choice over the investments made?

El_Torro

You should be able to access your pension when you are 58 so even if you're going to retire at 56 that's only 2 years worth of money that you need in other places. 

It's not as simple as I have made out (it's always nice to have access to money at a moment's notice) but you seem to be thinking in the right direction. Especially if you are a 40% tax payer today and will be a 20% tax payer at retirement. 

Remember that you probably won't access all the money in your pension on the day you retire, so most of your pension will be invested for a lot more than 10 years. Unless you buy an annuity of course.

wallace47931

Yes exactly my position @El_Torro. I hope to save enough to pay myself/my family enough to continue our current lifestyle paying 20% but avoid hitting the 40% tax bracket at retirement. So avoid as much of the 40% on the way in and maximize the 20% on the way out :-)

Sorry @eskbanker - Yes I meant 40% not 45%..im someway off that bracket :-)

I also hear the 25% tax free is running out in 3 years and may not be renewed :-(

J

Dazed_and_C0nfused

wallace47931 said:

Yes exactly my position @El_Torro. I hope to save enough to pay myself/my family enough to continue our current lifestyle paying 20% but avoid hitting the 40% tax bracket at retirement. So avoid as much of the 40% on the way in and maximize the 20% on the way out :-)

Sorry @eskbanker - Yes I meant 40% not 45%..im someway off that bracket :-)

I also hear the 25% tax free is running out in 3 years and may not be renewed :-(

J

The way things are going by the day of the general election the 25% TFLS will be rumoured to be changing to you have to pay additional rate tax on the first 25% 🙄

Marcon

wallace47931 said:

Yes exactly my position @El_Torro. I hope to save enough to pay myself/my family enough to continue our current lifestyle paying 20% but avoid hitting the 40% tax bracket at retirement. So avoid as much of the 40% on the way in and maximize the 20% on the way out :-)

Sorry @eskbanker - Yes I meant 40% not 45%..im someway off that bracket :-)

I also hear the 25% tax free is running out in 3 years and may not be renewed :-(

J

Absolutely no evidence that's the case...just another rumour, at least for now.

MallyGirl

If it is salary sacrifice you also benefit from the NI saving

wallace47931

MallyGirl said:

If it is salary sacrifice you also benefit from the NI saving

Yes indeed, but my company keep the employers saving but pass on mine of course. Seems like its a no brainer my plan, especially if we already have enough in the bank for "rainy day". Thanks for the input :-)

Albermarle

I also hear the 25% tax free is running out in 3 years and may not be renewed :-(

That's a new one on me. Presumably just some scare story on the internet.

The 25% tax free is very popular amongst all income groups, so stopping it would be very unpopular and would undermine the financial logic behind pension saving ( which the state is very keen in as you are less likely to claim benefits).

FIREDreamer

Albermarle said:

I also hear the 25% tax free is running out in 3 years and may not be renewed :-(

That's a new one on me. Presumably just some scare story on the internet.

The 25% tax free is very popular amongst all income groups, so stopping it would be very unpopular and would undermine the financial logic behind pension saving ( which the state is very keen in as you are less likely to claim benefits).

No reason it cannot be reduced from the current £268k or so - can’t have the plebs having too much tax free money to waste!

On a more serious note, I could see it capped at £100k needing a fund of £400k whick would be a well above average pension pot for most people.

The Resolution Foundation want it cut lower than that, as well as capping ISAs - they have probably taken larger tax free cash themselves already - talk about raising the drawbridge!

MetaPhysical

Albermarle said:

I also hear the 25% tax free is running out in 3 years and may not be renewed :-(

That's a new one on me. Presumably just some scare story on the internet.

The 25% tax free is very popular amongst all income groups, so stopping it would be very unpopular and would undermine the financial logic behind pension saving ( which the state is very keen in as you are less likely to claim benefits).

Agreed.  Without venturing into politics, financially without the TFLS one of the key incentives to save into a pension would be lost, in fact, there'd be no incentive at all for a 20% taxpayer other than employer contributions and growth.  It would be a catastrophic decision to scrap TFLS, it would destroy pensions and ruin many people's plans to pay off mortgages/debts etc.  This would need a long, advanced warning.