Pension advice for topping it up.

Alanmcm

Evening all, so I’m confused with the pensions and how to go about topping up my pension and the level of tax I will pay etc and save. 

I earn basic salary which puts it in the 20% tax bracket but then get additional benefits that I get taxed 40% on. 

So my question is, does the tax savings come from the 20% portion or the 40% portion? As I would then pay less tax and receive more in the form of pension savings. 

Or is there a better way of saving for the future? Guy in work has mentioned AVCs, although I’m not sure if that’s different to just increasing my total pension contribution from 5% to 10%. Think my employer matches up to 8% which is decent. 

Any advice would be great. Pension is with Irish Life if that matters. I also selected the high earning pension as I’m 41 and want to maximise what I can get back in return. 

On-the-coast

if your marginal tax rate is 40%
and your employer matches up to 8%,
and you're currently paying in 5%,
then very simplistically putting in an additional 3% will have this effect:
total pension contribution goes from 10% to 16% of salary, while you only lose about 1.8% of take home salary (possible only 1.5% depending on National insurance / Salary sacrifice).

That's a highly simplified view - others will explain about salary sacrifice, Net pay etc... but they all end up in approximately the same place.  Basically it's a hugely efficient way of saving.  once you've gone past employer matching then it doesn't really matter if you're doing AVC's or extra pension - unless it's a DB scheme.

Dazed_and_C0nfused

Alanmcm said:

Evening all, so I’m confused with the pensions and how to go about topping up my pension and the level of tax I will pay etc and save. 

I earn basic salary which puts it in the 20% tax bracket but then get additional benefits that I get taxed 40% on. 

So my question is, does the tax savings come from the 20% portion or the 40% portion? As I would then pay less tax and receive more in the form of pension savings. 

Or is there a better way of saving for the future? Guy in work has mentioned AVCs, although I’m not sure if that’s different to just increasing my total pension contribution from 5% to 10%. Think my employer matches up to 8% which is decent. 

Any advice would be great. Pension is with Irish Life if that matters. I also selected the high earning pension as I’m 41 and want to maximise what I can get back in return. 

How the tax works is entirely dependent on the method used to get the money into your pension.

Unless you know this you cannot understand the tax consequences.

The three usual methods are,

Net pay.  These reduce your income for tax purposes but you don't get any pension tax relief.  For example salary £50k with 10% net pay contribution = taxable pay of £45k and £5k goes into your pension

Relief at source.  These don't reduce your income but you get pension tax relief.  So salary £50k and 10% relief at source contribution = taxable pay £50k.  But then the £5k is added to your pension the pension company will add £1,250 in tax relief so you have a pension fund of £6,250.

Salary sacrifice is where you don't contribute to a pension but agree to a reduced salary in return for extra employer contributions.  There is no tax relief due to you on employer contributions but you have less income to pay both tax and NI on in the first place.

Alanmcm

Thank you for the very detailed replies I’ll not pretend I’m not more confused by it all than I was earlier but that has given me questions I can speak to the pension provider about and go from there. 

I do have the ability of changing the amount of contributions each month online, so I could increase the amount for a month or two and see what effect it has on the bottom line. 

My pay did increase by 10% so I won’t miss an extra few % going towards my pension pot. Really wish I cared about pensions a few years ago. 

Suppose my pay slip would detail how much I’m paying towards my pension already. If it’s the same amount each month then it’s based on my base salary rather than my overall salary. 

Brie

I would certainly ensure that you are maxing the amount you can get your employer to match - it's free money after all.  So if you're currently contributing 5% and the employer will match up to 8% then certainly go for that as a minimum.  

xylophone

Does your scheme use " net pay" or "relief at source"?

https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions/how-tax-relief-given-pension-contributions

Alanmcm

xylophone said:

Does your scheme use " net pay" or "relief at source"?

https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions/how-tax-relief-given-pension-contributions

Not sure which one they use. So I did contact them today to increase the contribution and the only option was to set it up as an AVC as I’ve maxed the current contribution my company will match. Possibly to avoid them contributing twice into which would’ve been a nice result. 

So based on that link I think I’m paying relief at source. I calculated my pension contribution this month based on my salary before tax and after tax and there was a £90 difference between the two. I’m assuming the other option of net pay is the better version as it means stronger contributions from myself and my employer. 

dunstonh

Not sure which one they use. So I did contact them today to increase the contribution and the only option was to set it up as an AVC as I’ve maxed the current contribution my company will match. Possibly to avoid them contributing twice into which would’ve been a nice result. 

AVCs are an old fashioned product that defined benefit (DB) schemes had to offer until the rules were changed in 2006.   Most DB pension schemes pulled their AVC option after that but some retained them but they haven't really been updated since then.  So, often they are more expensive than individual schemes (like personal pensions or SIPPs) and have very limited functionality.    However, a small number of AVCs can be linked to the main scheme and have the tax free cash diverted to them from the scheme.    That can be very beneficial if that option exists and would make up for the other failings.

Not many employers matched contributions into AVCs.    From memory, the only one I can recall was Tesco but it has long stopped offering an AVC.

If you are in a DB pension, which sounds like, then the employer contribution is just artificial.

On the other hand, the term AVC could be used incorrectly and its not an AVC they are talking about.

Alanmcm

dunstonh said:

Not sure which one they use. So I did contact them today to increase the contribution and the only option was to set it up as an AVC as I’ve maxed the current contribution my company will match. Possibly to avoid them contributing twice into which would’ve been a nice result. 

AVCs are an old fashioned product that defined benefit (DB) schemes had to offer until the rules were changed in 2006.   Most DB pension schemes pulled their AVC option after that but some retained them but they haven't really been updated since then.  So, often they are more expensive than individual schemes (like personal pensions or SIPPs) and have very limited functionality.    However, a small number of AVCs can be linked to the main scheme and have the tax free cash diverted to them from the scheme.    That can be very beneficial if that option exists and would make up for the other failings.

Not many employers matched contributions into AVCs.    From memory, the only one I can recall was Tesco but it has long stopped offering an AVC.

If you are in a DB pension, which sounds like, then the employer contribution is just artificial.

On the other hand, the term AVC could be used incorrectly and its not an AVC they are talking about.

I’m not sure about it all to be honest. All I know is that they told me it would show along side my other contribution and the employer contribution on my payslip. I can’t save by myself, so putting it away this way is the easiest option and I won’t miss it. I am hopeful that the pension plan I’m enrolled in generates extra money from the stocks they invest it into. 

Investing myself is not an option either. Tried it once and was literally spending the day watching it fluctuate. To be fair it was GameStop from two years ago and it was very volatile “that week”. 

Other thing I’m trying to do is buy back contributions to max out my UK state pension. At the minute I need 9 more qualifying years before it’s maxed. Not sure if that figure keeps increasing each year or it’s a set and if it’s worth while buying them back or not. 

I currently work and pay tax in Ireland but still live in Northern Ireland part of the week, for context. God chance I will work back in Northern Ireland again in the future so may just wait and see what the future holds, lottery win would speed up the process. 

I’m also very grateful for all the replies and explanations and I’m doing my best to research and understand it all, so again thanks for the replies.

hyubh

Alanmcm said:

Pension is with Irish Life if that matters.

Alanmcm said:

I currently work and pay tax in Ireland but still live in Northern Ireland part of the week, for context. God chance I will work back in Northern Ireland again in the future so may just wait and see what the future holds, lottery win would speed up the process.

At the risk of sounding like a DUP politician in campaigning mode... are we not talking about the pensions regime of a foreign country here...? The replies you've received in this thread have assumed a context of occupational pensions in the UK.

Alanmcm

hyubh said:

Alanmcm said:

Pension is with Irish Life if that matters.

Alanmcm said:

I currently work and pay tax in Ireland but still live in Northern Ireland part of the week, for context. God chance I will work back in Northern Ireland again in the future so may just wait and see what the future holds, lottery win would speed up the process.

At the risk of sounding like a DUP politician in campaigning mode... are we not talking about the pensions regime of a foreign country here...? The replies you've received in this thread have assumed a context of occupational pensions in the UK.

In my ignorance I assumed the systems were identical in the setup. I can transfer where my wages come from, so that the UK pay me from their office rather than the Irish branch. I’ve never gave pensions much thought until now, grandkids arriving soon and parents about to retire so it’s gave me the kick I needed to get it organised before it’s too late. 

Is there a massive difference between the two?