Salary Sacrifice quandary’s

BattyJ

Hi,
I am just having thoughts about a salary sacrifice scheme that is being introduced by my company and if it is worth taking in my circumstances.

I pay tax in the 40% bracket, and my company pays pension at 8% and I contribute at 4% on gross salary.

I make full use of the tax relief on pension contributions up to £60,000 (ie 40% tax rebate on my personal salary contributions)

The pension contributions I make keep my salary below 100K which is a bonus tax wise.

If I sacrificed for example £10,000 a year my pension contributions should gain £10,000 a year. I however already contribute the maximum I can to have a total of 60K a year, and claim the 40% on my contributions. Either way, as I see it, I would get 10,000 into my pension pot.

The only gain I can see is I would get the 2% extra in my pay by way of the 2% employee NI  (earnings above £50270) not being paid on the sacrificed salary, ie £200 a year. To offset that though my company contributions go into NEST and it’s not the cheapest or best pension. I currently invest in low cost SIPP products through Vangard. If i sacrificed the 10k now the contributions would go to NEST and I would have no control of how its invested or the investment costs.
 
I am wondering what the benefit, if any would be on taking a salary sacrifice? 

Marcon

BattyJ said:

Hi,
I am just having thoughts about a salary sacrifice scheme that is being introduced by my company and if it is worth taking in my circumstances.

I pay tax in the 40% bracket, and my company pays pension at 8% and I contribute at 4% on gross salary.

I make full use of the tax relief on pension contributions up to £60,000 (ie 40% tax rebate on my personal salary contributions)

The pension contributions I make keep my salary below 100K which is a bonus tax wise.

If I sacrificed for example £10,000 a year my pension contributions should gain £10,000 a year. I however already contribute the maximum I can to have a total of 60K a year, and claim the 40% on my contributions. Either way, as I see it, I would get 10,000 into my pension pot.

The only gain I can see is I would get the 2% extra in my pay by way of the 2% employee NI  (earnings above £50270) not being paid on the sacrificed salary, ie £200 a year. To offset that though my company contributions go into NEST and it’s not the cheapest or best pension. I currently invest in low cost SIPP products through Vangard. If i sacrificed the 10k now the contributions would go to NEST and I would have no control of how its invested or the investment costs.
 
I am wondering what the benefit, if any would be on taking a salary sacrifice? 

The saving is, as you've spotted, the NI and not the income tax (which is the same whether your contributions are made by salary sacrifice or paid by you personally).

NEST has an initial contribution charge of 1.8% - which goes a long way towards wiping out the NI saving for you. It's really a case of which is more important: saving some NI by making all contributions by salary sacrifice, or having more flexibility by sacrificing the minimum needed to max out your employer's contribution in your workplace scheme, while making further personal contributions to your SIPP as just that - personal contributions.

BattyJ

The NEST 1.8% contribution charge really is a con. I prefer the money under my control and in Vangard or HL or T212 where I can control costs and what it is invested in. Annoying really…..

Albermarle

 I currently invest in low cost SIPP products through Vangard. If i sacrificed the 10k now the contributions would go to NEST and I would have no control of how its invested or the investment costs.

With Nest you do have some control, I think they have about 10 funds to choose from. Not a lot but still a choice that you can make via the website.
The initial contribution cost of 1.8% is a pain, but the ongoing charge of 0.3% all in is pretty competitive.

BattyJ

Albermarle said:

 I currently invest in low cost SIPP products through Vangard. If i sacrificed the 10k now the contributions would go to NEST and I would have no control of how its invested or the investment costs.

With Nest you do have some control, I think they have about 10 funds to choose from. Not a lot but still a choice that you can make via the website.
The initial contribution cost of 1.8% is a pain, but the ongoing charge of 0.3% all in is pretty competitive.

Yes thank you I have already fiddled with my NEST and moved it from the default options. Out of interest the 0.3% isn’t too bad but I can get it cheaper with others. As it ramps up over the years every pip makes a compounding difference

Marcon

Albermarle said:

 I currently invest in low cost SIPP products through Vangard. If i sacrificed the 10k now the contributions would go to NEST and I would have no control of how its invested or the investment costs.

With Nest you do have some control, I think they have about 10 funds to choose from. Not a lot but still a choice that you can make via the website.
The initial contribution cost of 1.8% is a pain, but the ongoing charge of 0.3% all in is pretty competitive.

Only five funds (+ the guided retirement fund for those aged 60-70 who are starting to withdraw funds from NEST): https://www.nestpensions.org.uk/schemeweb/nest/investing-your-pension/fund-choices.html

Sarahspangles

There might be a small timing advantage to going the salary sacrifice route, as you automatically get relief at your highest rate of tax* and the contributions are available for investment as soon as they’re deposited, you don’t need to reclaim tax. But if you don’t like the fee structure or fund choice that may not swing it.

* Someone kindly explained this to me this week!

BattyJ

Sarahspangles said:

There might be a small timing advantage to going the salary sacrifice route, as you automatically get relief at your highest rate of tax* and the contributions are available for investment as soon as they’re deposited, you don’t need to reclaim tax. But if you don’t like the fee structure or fund choice that may not swing it.

* Someone kindly explained this to me this week!

Agreed, however I claim my tax relief via my tax code, so in effect I automatically get all but the first 20% as soon as I am paid. That extra 20 % feeds in a few weeks later and could be thought of as pound cost averaging. 
I don’t think the NEST funds and costs make salary sacrifice  worth it in my case. (For pensions anyway)