Am I better off making AVCs salary sacrificed or not?

dllive

Hi all,

I have my pension with USS. At the moment I pay monthly £2.4k AVCs into the USS scheme.

I also pay £17k pa into my SIPP. (Im aware this tips me over the AA. I know this removes the tax incentive, but my thinking is that at least I know Im using my AA, and the few K Im contributing above this, I would only invest in a general investment account anyway.)

Im currently employed, and self employed.

My University is soon to offer AVCs salary sacrificed. But to do this I need to make sure I reduce my AVCs so I am paid the minimal wage. Which - I think Ive worked it out - as being about £1k per month I can AVC salary sacrifice.

Am I better off to continue my £2.8k AVC non-salary sacrifice; or to reduce my AVCs to £1k salary sacrificed?

Thanks

DRS1

I am not sure I completely understand your figures.

Are the AVCs £2.4k pm or £2.8k.  Are they paid using net pay or relief at source?  I am going to assume they are gross relief at source contributions.  Some of what I say may not be right if they are net pay.

If £2.4k then that is £48k pa plus £17k to the SIPP. I am going to assume the £17k is also gross relief at source contributions.

That makes personal contributions of £65k pa.  I assume your  taxable earnings are more than £65k pa?

As you say that is a bit over the £60k annual allowance.

But the annual allowance isn't just looking at your personal contributions.  With a scheme like the USS there will be something called the pension input amount.  You need to include that when looking at the annual allowance.  That means you could be over the annual allowance by quite a lot.

Depending on how long you have been doing this you may have some unused annual allowance to carry forward from previous years which could help.

Have you been reporting excess contributions to HMRC?

On the salary sacrifice issue will your employer allow you to mix and match?  That is salary sacrifice £1k and then pay the rest of your AVCs by non salary sacrifice?  Salary sacrifice is better because of the NICs saved.

Just keep in mind that the salary sacrifice will reduce your taxable earnings for when you work out how much you can contribute to the SIPP (but then so does net pay).

dllive

Thanks – that’s helpful.

To clarify the figures: my current USS Investment Builder AVCs are £2.8k per month (£33.6k pa) and the £17k SIPP figure is gross (relief at source).

I’m aware that with USS the DB Pension Input Amount also counts towards the annual allowance, and that this likely puts me over the £60k AA once AVCs and SIPP are included. I’m comfortable with a modest AA excess and have been factoring that in, although, perhaps not enough! As you say, I may have mistakenly put myself quite a bit over AA. I think my PIA is about £13k, but I dont seem to be able to find the PIA amount anymore in my USS member statement! It used to be clearly stated.

I dont have any carry forward allowance.

On salary sacrifice: my understanding is that payroll will cap salary-sacrificed AVCs at around £1k per month to remain above minimum wage.

Thats a good point about mix-and-match.  I hadnt heard of that before. I’m checking whether they allow mixing salary sacrifice AVCs with non-sacrifice AVCs, as that would be preferable.

Given myself-employed earnings, the reduction in PAYE salary from salary sacrifice doesn’t constrain my ability to fund the SIPP.

The core question I’m trying to answer is whether, at the margin, it makes more sense to:

- continue higher non-salary-sacrifice AVCs, or

- reduce AVCs and prioritise salary sacrifice

Thanks.

af1963

Non-salary-sacrifice AVC contributions don't usually have any great advantages over making the same contribution to your SIPP.  You could salary sacrifice the max allowed to stay above min wage, then make any further contributions to the SIPP.

Contributing at those levels means you might also need to consider how close you are to reaching the tax free cash limit. Once you hit that, subsequent pension contributions have less benefit as they won't have any tax free element on withdrawal.  If you also end up paying higher rate tax on withdrawal, it means you're just deferring the tax rather than benefitting from any tax relief. ( Or potentially even paying *more* tax in the end, if you are sacrificing salary that would be taxed at 20% to create extra pension that will be marginally taxed at 40%)

And having a decent amount outside any pension wrapper ( e.g. in ISAs) can give more flexibility - you can access it before 55/57 for example.

Marcon

dllive said:

To clarify the figures: my current USS Investment Builder AVCs are £2.8k per month (£33.6k pa) and the £17k SIPP figure is gross (relief at source).

I’m aware that with USS the DB Pension Input Amount also counts towards the annual allowance, and that this likely puts me over the £60k AA once AVCs and SIPP are included. I’m comfortable with a modest AA excess and have been factoring that in, although, perhaps not enough! As you say, I may have mistakenly put myself quite a bit over AA. I think my PIA is about £13k, but I dont seem to be able to find the PIA amount anymore in my USS member statement! It used to be clearly stated.

I dont have any carry forward allowance.

If you don't know by how much you are exceeding the Annual Allowance, how are you dealing with paying the Annual Allowance Tax Charge?

dllive

Marcon said:

If you don't know by how much you are exceeding the Annual Allowance, how are you dealing with paying the Annual Allowance Tax Charge?

My accountant does my Self Assessment, so enters the relevant pension contributions details on their system.

Marcon

dllive said:

Marcon said:

If you don't know by how much you are exceeding the Annual Allowance, how are you dealing with paying the Annual Allowance Tax Charge?

My accountant does my Self Assessment, so enters the relevant pension contributions details on their system.

But you've said above that you don't know your PIA...

dllive

Marcon said:

But you've said above that you don't know your PIA...

Indeed. Ill need to remind myself whats going on here. Each year I send the accountant all he needs (USS annual statement etc) but from memory USS refer to PIA as something else. (I may be entirely wrong!).

Regardless, my post here is more just trying to establish am I better off paying £2.8k non-SS (as I currently do); or £1k per month SS (and additional contributions into my SIPP)

Apologies, as you can see, my knowledge on pensions is scant. 

af1963

Salary sacrifice up to the limit allowed will save you a bit of NI.