Workplace Pension Question

MasterG83

Morning All

My company have a Lifesight managed pension scheme provider. I pay in 8% of my salary and the company match with 12.5%

I earn £57300 and I'm slightly confused on the 40% tax sketch. If I increase my contributions to take my salary down to basic rate at £50270 will I benefit by not paying tax at Higher rate? 

af1963

Basically, yes.

There are different ways in which the company can make your pension contributions, and these can lead to different ways in which you get the tax relief.

"Relief at source" scheme:  company pays your 8% ( or increased) contribution and deducts it from your taxed pay so you have already been taxed on it - pension provider adds 25% (giving tax relief at 20%), and you claim the rest back via self assessment or via an HMRC claim form.

"Net pay": pension contribs are taken from your pre-tax pay so you never pay the 40% tax on it.

"Salary sacrifice": similar to net pay, but the payments are now technically *employer* contributions, and you save some extra National Insurance as well by having a nominally lower salary.


  

Woodstok2000

You will benefit in that you'll have tax free money going in to your pension rather than taxed money in your wage packet, but you'll be taking home less cash, so in terms of available funds you'll be worse off (as the pension fund is not available until you reach pensionable age).

So if youre paying 8% just now, and assuming no other deductions, you are paying 40% tax on about £2446 of earnings. That means you are taking home about £1467 of that amount.

If you pay an extra £2446 into your pension, you'll get the full amount in the pension so you gain £1000, but youre losing the £1467 from your pay packet. 

In very simple terms you are paying £1467 per year now to get an extra £2446 add to your pension for later (plus it will hopefully grow over time).

Assuming you can stay as a basic rate tax payer when you reach pension age, you'll get 25% tax free as a lump sum, and pay 20% on the rest, so still a decent upside if you can do without the money now.

Albermarle

. I pay in 8% of my salary and the company match with 12.5%

Worth noting that if you ever change jobs, your current employers contribution rate is pretty good compared to most.

MasterG83

https://forums.moneysavingexpert.com/discussion/comment/81855206#Comment_81855206

Yes agreed, at my age it makes up for 10 years of terrible pensions comms, I am trying to keep in the role for as long as I can, I've just raised my contribution to 10% now

Sam_666

Check what your pension is invested in.
"Lifestyle scheme/fund" is something to keep clear from.

SarahB16

https://forums.moneysavingexpert.com/discussion/comment/81862181#Comment_81862181

If I were you, I would have increased my contributions a little higher to avoid the 40% tax altogether however, of course, I don't know what you need in terms of take home pay now.

50,270 / 57,300 = 87.73% but perhaps in time you may wish to increase your contributions to 12 or 13%.

MasterG83

https://forums.moneysavingexpert.com/discussion/comment/81862761#Comment_81862761

Growth has been at 19% since I joined the scheme. Its a slightly more ambitious option I have chosen.

MasterG83

Yes agreed, I'm either saving £1000 a month from salary or will month by month increase this. Starting next month I will move to 11% and then after pay increases in April will review again.

Of course, jobs are never a given so I am also putting money into a liquid fund should I need it as too much tied up in the pension would be slightly foolish, Balancing act as always.

Sam_666

https://forums.moneysavingexpert.com/discussion/comment/81866628#Comment_81866628

You comment is completly out of context.
Growth sice 1 month? 1 year? 10 years? 100 years?

USA market has grown 15% per year over last 5 years. Has yours investment done same?