Reducing window to draw pension income at basic rate

LL_USS

Glad to see you're back more regularly @Alexland

I've been a bit busy with work and was still on the way back from abroad on 26 Nov when the budget was published. A bit of panic, but I still have not had time to digest and consider what I can change in my money plan. 

It's embarassing but since I told you last, my 40K in LISA is still in Dodl cash-waiting for investment. The ETFs I had aimed at were already sky-high in valuation and still getting higher. I was happy to just get the 4%+ saving interest for a while - but now thinking, after investing this lot, what are the implications of when I want to cash out the LISA.

And indeed that new reg for sal-sac from Apr 2029- 2k/year threshold is just ridiculous. I will still put in anything over the basic tax band to DC but then what to do after Apr 29, I don't know. 

Albermarle

LL_USS said:

Glad to see you're back more regularly @Alexland

I've been a bit busy with work and was still on the way back from abroad on 26 Nov when the budget was published. A bit of panic, but I still have not had time to digest and consider what I can change in my money plan. 

It's embarassing but since I told you last, my 40K in LISA is still in Dodl cash-waiting for investment. The ETFs I had aimed at were already sky-high in valuation and still getting higher. I was happy to just get the 4%+ saving interest for a while - but now thinking, after investing this lot, what are the implications of when I want to cash out the LISA.

And indeed that new reg for sal-sac from Apr 2029- 2k/year threshold is just ridiculous. I will still put in anything over the basic tax band to DC but then what to do after Apr 29, I don't know. 

There has been speculation on these forums that due to the long time scale and 2029 being a possible election year, it might get scrapped before being implemented.
Although with the cost of lost NI from pensions salsac growing every year ( already several Billions) it was inevitable it would get curbed one day, in one way or another. So maybe it will get modified rather than scrapped.
 

LL_USS

@Albermarle interesting. It might be the case. These days there has to be a balance between still doing some investigation of the speculations but not rushing to act on them, preparing a bit for some regs that are set to be in effect in the future, at the same time knowing things can change so fast....

Alexland

LL_USS said:

my 40K in LISA is still in Dodl cash-waiting for investment. The ETFs I had aimed at were already sky-high in valuation and still getting higher. I was happy to just get the 4%+ saving interest for a while - but now thinking, after investing this lot, what are the implications of when I want to cash out the LISA.

4% is better than nothing but markets do tend to trend upwards over the long term which is why people invest in them. It's particularly evident when you look at total returns with dividends reinvested.

If you are investing for the medium to long term and nervous about current market valuations (AI bubbles, whatever) then you might consider a multi-asset fund such as Vanguard Lifestrategy 60 or 80 available on Dodl. Or maybe AJ Bell's own Balanced or Adventurous funds? Depends how big a drop you would find tolerable.

I've reduced the risk profile on my investments recently as there are good returns to be made on bonds now so less opportunity cost to being diversified.

LL_USS

@Alexland thanks. I am still leaving it there a bit longer and see if I want to do that Vanguard Lifestrategy 60 or 80, or still go into world index after the cash interest comes down really bad. Kind of delayed decision still. I suppose for LISA as it is still long till I take it out, it still should be invested - sometime soon.

LL_USS

Alexland said:

Thanks, no terror, but you guys have confirmed I'm probably not missing anything.

Agree it's a first world problem. If I reduce my contributions to only enough to get employer matching then with 2% growth above inflation (and half my pensions are now in IL gilts delivering that) then the 25% £268k cap at pension access ages will apply.
So additional contributions are only offering a 2% NI saving, until that's capped in a few years, which is not really enough compensation for the risk of adverse future pension policy changes. The £2k cap is so low even some of my contributions to get matching will be subject to NI.

End of an era of me pension stuffing sadly. I had hoped for a few more years.

Nebulous2 said:

It's going to be well nigh impossible to get the money out of my SIPP, which has had basic rate tax relief, without paying higher rate tax, unless I stop work and do it now before SPA. 

Yes looking back I regret making additional contributions from basic rate income earlier in my career as I would have only saved 32% (inc NI) at the time and if I had known this was going to happen then it would have been better to keep the headroom to continue to avoid 42% (inc NI) for the next couple of years.

Alex, I work my money to even things out and stay within the basic tax band for before and after retirement too. Anything in tax efficient/ exemption schemes I'll try to understand to see if I can use. I don't feel bad about it - as a single parent, often working as much as 2-3 people to improve our lives, I pay what is due but not more unnecessarily. 

I would like to ask, why only saving 2% of NI? 

I thought we have all additional contribution from gross salary NI exempted (i.e. 8%). Or is it because the part cut out to add in pension is the part over 50K so it's only additional 2%?

Sorry though I am curious at how numbers work, I am not great at it. Just want to ask to make sure my calculation to date is not wrong. 

Yesterday I looked into my spreadsheet to see if I need to change my additional contributions given the new reg with sal-sac from Apr29. For me so far it's still worth putting a bit more into pension, using the part that takes me over to higher tax band - whilst my official workplace salary is quite small and it's good to add to the pot to have an acceptable annual pension (DB=about 20K/year) at my planned (early) retirement April 2039. So even with SP later I should still be very comfortably within the basic rate. I have never intended to put more than that into pension, having the perk of a DB. The bulk of what I earn goes into tax wrappers, main residence upgrading, and to gradually give away to family. 

I still have some extra income till just before that Apr29 date so I'll reduce my additional contribution from the current 25% down to 8% from Apr 29 - this is my calculation to see if I should chunk the money in before the date or just spead out the contribution even after the NI exemption has gone (for over 2k/year sal-sac). I calculate the addtional NI costs as the amount (46.6K) times 8%. Do I understand it right? 

zagfles

LL_USS said:

Alexland said:

Thanks, no terror, but you guys have confirmed I'm probably not missing anything.

Agree it's a first world problem. If I reduce my contributions to only enough to get employer matching then with 2% growth above inflation (and half my pensions are now in IL gilts delivering that) then the 25% £268k cap at pension access ages will apply.
So additional contributions are only offering a 2% NI saving, until that's capped in a few years, which is not really enough compensation for the risk of adverse future pension policy changes. The £2k cap is so low even some of my contributions to get matching will be subject to NI.

End of an era of me pension stuffing sadly. I had hoped for a few more years.

Nebulous2 said:

It's going to be well nigh impossible to get the money out of my SIPP, which has had basic rate tax relief, without paying higher rate tax, unless I stop work and do it now before SPA. 

Yes looking back I regret making additional contributions from basic rate income earlier in my career as I would have only saved 32% (inc NI) at the time and if I had known this was going to happen then it would have been better to keep the headroom to continue to avoid 42% (inc NI) for the next couple of years.

Alex, I work my money to even things out and stay within the basic tax band for before and after retirement too. Anything in tax efficient/ exemption schemes I'll try to understand to see if I can use. I don't feel bad about it - as a single parent, often working as much as 2-3 people to improve our lives, I pay what is due but not more unnecessarily. 

I would like to ask, why only saving 2% of NI? 

I thought we have all additional contribution from gross salary NI exempted (i.e. 8%). Or is it because the part cut out to add in pension is the part over 50K so it's only additional 2%?

Sorry though I am curious at how numbers work, I am not great at it. Just want to ask to make sure my calculation to date is not wrong. 

Yesterday I looked into my spreadsheet to see if I need to change my additional contributions given the new reg with sal-sac from Apr29. For me so far it's still worth putting a bit more into pension, using the part that takes me over to higher tax band - whilst my official workplace salary is quite small and it's good to add to the pot to have an acceptable annual pension (DB=about 20K/year) at my planned (early) retirement April 2039. So even with SP later I should still be very comfortably within the basic rate. I have never intended to put more than that into pension, having the perk of a DB. The bulk of what I earn goes into tax wrappers, main residence upgrading, and to gradually give away to family. 

I still have some extra income till just before that Apr29 date so I'll reduce my additional contribution from the current 25% down to 8% from Apr 29 - this is my calculation to see if I should chunk the money in before the date or just spead out the contribution even after the NI exemption has gone (for over 2k/year sal-sac). I calculate the addtional NI costs as the amount (46.6K) times 8%. Do I understand it right? 

You pay 8% NI on pay between the primary threshold and the upper earnings limit. For monthly pay these figures are £1048 and £4189. Over the UEL you pay 2% NI. 

So if your annual salary is £60000 (monthly £5000) and you want to sal-sac to get higher rate relief, you sal-sac £9730 a year, ie £811 a month, so your pay is now £50270, ie £4189 a month. So the tax saving is 40%, and the NI saving is 2%. 

If you're a bit more clever you can do lumpy sal-sac, ie sal-sac down to minimum wage for part of the year and no sal-sac for the rest. Min wage is around £26k depending on hours worked, ie £2167 a month. So you sal-sac £2833 for 3 months, £1231 for one month and nothing for the rest of the year. This would give you 8% NI relief on £6486 of your £9730 total sal sac, so you get 8% relief on two thirds of your sal-sac. 

But make sure to max company contributions, for instance if they base their conts on how much you contribute. So it may require a min sal sac to get max company conts. 

LL_USS

@zagfles thank you - I did vaguely feel something along that line as Alex gave the 2% figure for NI saving. 

ALL THE WAY along the past 8 years of extra sal-sac into pension I thought I got all the 8% (or higher in the past) full rate as what I saved  because I thought, say if my gross pay was 3,000/m and I took out 1,000 from the gross pay to put into pension then I'd save 8% x 1,000 in NI as my NI at the end of the day was only counted on the remaining 2,000.

Had lunch with a colleague and funny enough without me prompting about pay and pension, he also mentioned this 2%NI saving too. 

My my my..... so many things I know wrong 

PS: Reading again I can see I still did not understand right when saying the above. For my case, as I only sacrifice anything touching the £50,270 threshold - for that amount  NI should be 2% so I only save 2% NI (same as Alex - and this is what @zagfles says "sal-sac to get higher rate relief")
In general, YES we are given NI exemption on the ENTIRE amount of salary sacrificed into the pension, and it is saving of 8% for the amount under £50,270 or 2% above that mark.  

ali_bear

Every day a school day 

Alexland

LL_USS said:

@zagfles thank you - I did vaguely feel something along that line as Alex gave the 2% figure for NI saving. 

ALL THE WAY along the past 8 years of extra sal-sac into pension I thought I got all the 8% (or higher in the past) full rate as what I saved  because I thought, say if my gross pay was 3,000/m and I took out 1,000 from the gross pay to put into pension then I'd save 8% x 1,000 in NI as my NI at the end of the day was only counted on the remaining 2,000.

Had lunch with a colleague and funny enough without me prompting about pay and pension, he also mentioned this 2%NI saving too. 

My my my..... so many things I know wrong 

Yes that 2% is the employee NI saving when sacrificing income that would have otherwise been taxed at higher rate. At basic rate it's 8% NI currently but it was recently 10% and 12% before that see table 2.2 on the below page.

https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions