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  • FIRST POST
    • Ballard
    • By Ballard 10th Mar 18, 11:13 AM
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    Ballard
    Salary Sacrifice - A no brainer?
    • #1
    • 10th Mar 18, 11:13 AM
    Salary Sacrifice - A no brainer? 10th Mar 18 at 11:13 AM
    I started a new job last summer and the pension contributions started immediately. My employer pays 10% and will match up to 7.5% of anything that I contribute. I have been paying the additional 7.5% since then. As a consequence I'm getting 25% paid into my pension on a monthly basis.

    I do have the option to increase or decrease my sacrifice and as I understand it I can pay up to 40% into the pot and avoid paying tax and NI on this portion. This has made me think that the thing to do for the upcoming year would be to sacrifice 22.5% which along with my employers 17.5% would give bring me to the 40% limit (it would actually still be below my 40% limit as not all of my salary is pensionable)

    Some pertinent points:

    My job security hasn't been great in recent years so I've saved in excess of a year's gross salary in cash. My prospects currently look good so I'm now looking to my retirement.

    I'm a higher rate tax payer but well under £100k so my 40% won't be £40k.

    I'm 49 and have a ball park retirement age of 62 but that's very much a flexible figure at this point.

    I live well within my means and probably wouldn't dip into my savings a great deal.

    The pension is trust based and operated by Standard Life. I have no idea whether or not this is relevant.


    As I see it the upside is that (roughly) for every £50 of my take home pay I sacrifice I'll get £100 added to my pension pot. The downside is that I can't access that pot for many years. Before I commit to putting this amount into my pension I want to make sure that I'm not missing something.

    I'm not keen on putting too much financial information on the forum but I hope that I've given sufficient for the purposes of my question.

    Thanks.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
Page 1
    • FatherAbraham
    • By FatherAbraham 10th Mar 18, 11:39 AM
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    FatherAbraham
    • #2
    • 10th Mar 18, 11:39 AM
    • #2
    • 10th Mar 18, 11:39 AM
    As I see it the upside is that (roughly) for every £50 of my take home pay I sacrifice I'll get £100 added to my pension pot. The downside is that I can't access that pot for many years. Before I commit to putting this amount into my pension I want to make sure that I'm not missing something.
    Originally posted by Ballard
    £50 in take-home is different to £100 in a pension fund. The money in a pension fund hasn't been income-taxed yet.

    You'd do better to compare £50 in your pocket now with £100 taxed at 75% of your likely tax rate in retirement. We use 75% to account for the 25% tax-free benefit at commencement of taking the pension.

    More simply, if you'll have a top tax rate of 20% in retirement, then your £100 in the pension fund is really only £85 in your pocket.

    At 40% in retirement, then it's only £70 in your pocket.

    Quoting gross pension-contribution figures is the sort of misleading stuff which salesfolk love to do. There are certainly tax advantages to pension-based investing, but they shouldn't be overestimated.

    Warmest regards,
    FA
    • Ballard
    • By Ballard 10th Mar 18, 12:03 PM
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    Ballard
    • #3
    • 10th Mar 18, 12:03 PM
    • #3
    • 10th Mar 18, 12:03 PM
    That's very interesting, FA, and exactly the sort of answer that I was looking for. I'm still of a mind to sacrifice the additional funds as I need to diversify from cash but you've given me something to ponder over the next couple of weeks.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
    • crv1963
    • By crv1963 10th Mar 18, 12:04 PM
    • 302 Posts
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    crv1963
    • #4
    • 10th Mar 18, 12:04 PM
    • #4
    • 10th Mar 18, 12:04 PM
    Hi Ballard


    I will be in a similar situation later this year when I retire from my current post, take my DB Pension and start agency work, I went through our figures and for us Salary Sacrifice to lower my income at 40% is worth doing. Although I wont be able to completely avoid some tax at 40% my thinking is reduce paying as much at 40% as I can.


    As long as you can live how you want with the reduced income and have a reserve (which you say you have at a years gross salary saved) and are comfortable with where your pension monies are then yes it is a no brainer. I would check two things- are your pension contributions going into a fund that is at a risk level you are comfortable with? and can you access them at a time you want to and if you cannot access them when you want to can you transfer them out to another scheme or SIPP where you can? If your scheme cannot be accessed before SPA or transferred out you may want to look at saving into a different place, but check first.


    CRV
    Last edited by crv1963; 10-03-2018 at 12:15 PM.
    CRV1963- Light bulb moment Sept 15- Planning the great escape- aka retirement!
    • starkiwi26
    • By starkiwi26 10th Mar 18, 12:12 PM
    • 60 Posts
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    starkiwi26
    • #5
    • 10th Mar 18, 12:12 PM
    • #5
    • 10th Mar 18, 12:12 PM
    As a thumb of rule (not 100% accurate, because some income/benefit is taxable but not NIable, but this rule is good enough for reference):
    Taxable income between £11.5k - £45k are taxed and NIed at 32%
    Taxable income between £45k - £150k are taxed and NIed at 42%

    As you are at higher tax band,
    therefore any £1 you sacrifice on your take home income, give you value of £1.72 of pension. This is not including your employer's subsidy.

    If I were you, I have less concern on tax rate when pension withdrawal. When you reach the pension age (age 55 and above), you can withdraw 25% of your pension tax free. But please note, once you start to withdraw pension fund, the tax free salary sacrifice pension contribution rule change! If you still continue to contribute to pension after first withdrawal, some of your pension contribution will be taxable (currently pension contribution is max £40k/year and 100% tax free). So, think twice before you make any pension withdraw if you are still working and making pension contribution as your employer's 17.5% subsidy is very generous!!

    Short answer to you, yes, your calculation is correct, my answer above match your calculation. Is this no-brainer? Yes & No. Yes, because this is 70% profit the moment you put to the pension and No, because this is a loophole the government purposely and intentionally leave it open, to encourage ordinary people likes you and me to escape tax by saving to the pension pot. I am much younger than you, this mean I have to wait decades before I can touch the pension pot, but I am happy to drink less beers and put more money to pension contribution instead.

    If my answer above clarifies your doubt, please click the "Thank you" button. I learned a lot from fellow MSE members here, it is time to contribute back.
    Last edited by starkiwi26; 10-03-2018 at 12:37 PM.
    • Ballard
    • By Ballard 10th Mar 18, 1:31 PM
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    Ballard
    • #6
    • 10th Mar 18, 1:31 PM
    • #6
    • 10th Mar 18, 1:31 PM
    Thanks to all of you for your thoughtful replies. I'm still very much leaning towards increasing to the total 40% even after considering the tax implications upon drawing a salary. I have online access to my pension pot and can change the plan should I not be happy with it.

    My plan would be not to touch the pot until retirement but obviously things can easily change in the minimum 13 years until I get to retire.

    I'm due a bonus in the next few weeks (definitely this tax year) and have sacrificed that I have no idea how much that'll be but I've been warned that bonuses aren't generally great at this place so it's not going to take me over the 40%. My employer boosts this by 5% as their NI liability will be lower.

    Oh blimey... Something else has popped into my head... Depending on the size of the bonus maybe I'd be better off sacrificing that every year for the 5% extra and sacrificing perhaps 32% monthly.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
    • atush
    • By atush 10th Mar 18, 2:29 PM
    • 16,806 Posts
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    atush
    • #7
    • 10th Mar 18, 2:29 PM
    • #7
    • 10th Mar 18, 2:29 PM
    You'd do better to compare £50 in your pocket now with £100 taxed at 75% of your likely tax rate in retirement.
    Not strictly true. As the OP wants to retire at 62, they will have a PA that wont be used by SP so therefore, a tranche of the 75% withdrawn each year will also be tax free.

    With SS, if you can afford to pay more in, I would.
    • FatherAbraham
    • By FatherAbraham 10th Mar 18, 2:48 PM
    • 765 Posts
    • 588 Thanks
    FatherAbraham
    • #8
    • 10th Mar 18, 2:48 PM
    • #8
    • 10th Mar 18, 2:48 PM
    As I see it the upside is that (roughly) for every £50 of my take home pay I sacrifice I'll get £100 added to my pension pot. The downside is that I can't access that pot for many years. Before I commit to putting this amount into my pension I want to make sure that I'm not missing something.
    Originally posted by Ballard
    This is a tangential point, which may not interest you, so feel free to ignore it...

    However, in some sense, one needs to provide for one's retirement. Even if the funds one has set aside for this aren't "locked up" in a pension fund, they are, conceptually, "fettered assets" -- if one spends them on something else, they won't be available for generating retirement income.

    Maintaining the "option" to access one's retirement funds (by keeping those funds in non-pension arrangements) carries costs (taxation of income today, rather than deferring to the poorer future; National Insurance contributions; accessibility for one's creditors in the case of financial difficulties), and exercising that option is likely to damage one's future self.

    Fettered assets -- even when they look accessible, they're not really (not without great cost).

    Warmest regards,
    FA
    • Alexland
    • By Alexland 10th Mar 18, 2:57 PM
    • 2,561 Posts
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    Alexland
    • #9
    • 10th Mar 18, 2:57 PM
    • #9
    • 10th Mar 18, 2:57 PM
    It's true to maintain your living standards in retirement you need to put money aside anyway so even if it was easily accessable you wouldn't want to access it.

    Ps welcome back to the forum FA it's been a while.
    • michaels
    • By michaels 10th Mar 18, 2:58 PM
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    michaels
    1 Is the 40% limit set by your employer for sal sac? Legal limit of pension contributions is annaul allowance, 40k (plus carryforward from unused previous years) plus must earn at least NLW per hour.
    2 Even if employer limit is 40% you can make personal contributions up to the annual allowance (min wage no longer comes into play), reducing below higher rate threshold may have advantages with regard to interest on your savings
    3 Many employers as well as matching may share the employers ni that they save on your sal sac pension contributions, they save 13.8%.

    4 As mentioned absolute lock up perid is just until you are 55 subject to drawdown ar this point curtailling future contributions
    Cool heads and compromise
    • Ballard
    • By Ballard 10th Mar 18, 3:46 PM
    • 1,848 Posts
    • 1,617 Thanks
    Ballard
    1 Is the 40% limit set by your employer for sal sac? Legal limit of pension contributions is annaul allowance, 40k (plus carryforward from unused previous years) plus must earn at least NLW per hour.
    2 Even if employer limit is 40% you can make personal contributions up to the annual allowance (min wage no longer comes into play), reducing below higher rate threshold may have advantages with regard to interest on your savings
    3 Many employers as well as matching may share the employers ni that they save on your sal sac pension contributions, they save 13.8%.

    4 As mentioned absolute lock up perid is just until you are 55 subject to drawdown ar this point curtailling future contributions
    Originally posted by michaels
    To the best of my (admittedly fairly limited) knowledge, contributions above 40% (or £40k) do not attract the same tax benefits so would be significantly less appealing. Additionally I don't want to reduce my take home pay too much as the idea of working a month without a half decent deposit into my bank account would be hard to take.

    There's no mention of my employer passing on any of their NI benefit but being as they will match 7.5% I see this as reasonable.

    As you say, at worst case scenario I can withdraw cash from 55 but this isn't a consideration at this point.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
    • cjking
    • By cjking 10th Mar 18, 7:35 PM
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    cjking
    There is nothing in tax law which changes tax treatment of employer contributions at 40%.

    The only reason I can think of that an employer would limit the amount of salary sacrifice you're allowed to make is that they cannot allow your salary to fall below the minimum wage.
    • AlanP
    • By AlanP 10th Mar 18, 9:32 PM
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    • 866 Thanks
    AlanP
    Are you confusing the 40k limit with 40% somehow?
    • Ballard
    • By Ballard 11th Mar 18, 6:47 AM
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    Ballard
    Thanks to the pair of you for clarifying the 40% issue (or more correctly non-issue). I donít know where that idea came from but thereís nothing in the pension literature that my employer gave me.

    There is a clause that you canít sacrifice enough to take you below the minimum wage or £7,500 per year.

    In all honesty Iím not planning to go higher than that anyway but itís good to know that Iím not going to exceed my limit unintentionally with my bonus at any point.

    Many thanks once again everyone.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
    • Triumph13
    • By Triumph13 11th Mar 18, 7:16 AM
    • 1,187 Posts
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    Triumph13
    How did you get to the figure of £50 takehome becoming £100 in a pension? If the employer isn't sharing any of their NI savings then the numbers would be £58 => £100 as you'd be saving 40% tax and 2% NI. If your sacrifice level takes you below the higher rate tax band then that changes to 20% tax and 12% NI so £68 becomes £100. In both cases the £100 becomes £85 when you eventually withdraw it (assuming you are already saving enough to use up your PA every year in retirement).
    Clearly getting the full employer match is a no-brainer. Beyond that things get a little more nuanced, especially if you are in danger of hitting the LTA as anything above LTA will effectively be taxed at 40% on the way out so tying it up in the pension for only 42% relief going in is probably not worth it, and any sacrifice that only gets the 32% relief would lose you money.


    One question for you. How often does your employer let you change your contribution level? If you have complete flexibility to change it each month then you can take advantage of the fact that tax is calculated annually, but NI paycheque by paycheque. Cram all of your additional contributions over the basic + matching into a few months where you sacrifice down to minimum wage levels then a big slug of it will get both 40% tax and 12% NI relief.
    • ffacoffipawb
    • By ffacoffipawb 11th Mar 18, 9:44 AM
    • 2,468 Posts
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    ffacoffipawb
    Thanks to the pair of you for clarifying the 40% issue (or more correctly non-issue). I donít know where that idea came from but thereís nothing in the pension literature that my employer gave me.

    There is a clause that you canít sacrifice enough to take you below the minimum wage or £7,500 per year.

    In all honesty Iím not planning to go higher than that anyway but itís good to know that Iím not going to exceed my limit unintentionally with my bonus at any point.

    Many thanks once again everyone.
    Originally posted by Ballard
    The minimum wage is about £16,000 per year depending on hours worked (about £8 per hour).
    • starkiwi26
    • By starkiwi26 11th Mar 18, 9:56 AM
    • 60 Posts
    • 13 Thanks
    starkiwi26
    One question for you. How often does your employer let you change your contribution level? If you have complete flexibility to change it each month then you can take advantage of the fact that tax is calculated annually, but NI paycheque by paycheque. Cram all of your additional contributions over the basic + matching into a few months where you sacrifice down to minimum wage levels then a big slug of it will get both 40% tax and 12% NI relief.
    Originally posted by Triumph13
    Most probably you have to fix a contribution rate for the year, if not it can be too complicated for payroll to adjust every month. But, I suggest you can discuss with payroll for one-off additional pension contribution (especially now - at the end of tax year), tell them this is one-off work, you wont do another one in this year 2018 (but do again March 2019 ), this immediately bring down your taxable income. If you are on PAYE, the HMRC will refund your overpaid tax to your pay check also automatically with payroll too.

    If my answer above clarifies your doubt, please click the "Thank you" button. I learned a lot from fellow MSE members here, it is time to contribute back.
    • Ballard
    • By Ballard 11th Mar 18, 1:46 PM
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    Ballard
    The minimum wage is about £16,000 per year depending on hours worked (about £8 per hour).
    Originally posted by ffacoffipawb
    You canít go below either the minimum wage or £7,500 per year.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
    • Ballard
    • By Ballard 11th Mar 18, 1:51 PM
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    Ballard
    Once I pick a rate I have to stick with it for a year with a few exceptions such as moving or marriage.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
    • michaels
    • By michaels 11th Mar 18, 5:50 PM
    • 20,805 Posts
    • 96,363 Thanks
    michaels
    Thanks to the pair of you for clarifying the 40% issue (or more correctly non-issue). I donít know where that idea came from but thereís nothing in the pension literature that my employer gave me.

    There is a clause that you canít sacrifice enough to take you below the minimum wage or £7,500 per year.

    In all honesty Iím not planning to go higher than that anyway but itís good to know that Iím not going to exceed my limit unintentionally with my bonus at any point.

    Many thanks once again everyone.
    Originally posted by Ballard
    I wondered if 40% = 40k was because the op was on 100k

    Don't forget you can carry forward any unused allowance from the previous 3 years as well and that if you go below higher rate threshold you get a larger tax free interest allowance (op mentions cash savings)

    Previously hmrc rules was only 1 change in sal sac per tax year, now any restriction will be employer imposed.
    Cool heads and compromise
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