Author Topic: Pension contributions are a stupidly good deal  (Read 586 times)

daverobev

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Pension contributions are a stupidly good deal
« on: February 04, 2019, 07:52:41 AM »
I know most people won't be able to take full advantage, but man, if you can, getting money into a SIPP or other pension, especially via Salary Sacrifice, is just insane.

Say:

40k gross salary, and here is the kicker - you need none of it to live on because you have spare cash sitting in a savings account or whatever.

Normal salary will be 30.6k assuming no student loan. If you can put all that into a pension, the govt will top up by 25%, so you will get in your pension 38250. Not bad - you get top up on money you never paid tax on.

With salary sacrifice to the max? The minimum you can reduce your income to is minimum wage. On 40k assuming full time, that means 16k.

So, you salary sacrifice 24k, employer pays in the the NI they haven't had to pay the government of roughly 3k = 27k total.

Your take-home on 16k is just over 14k. You can only put a maximum of 40k in from all sources; you have 27k already, so if you put in 80% of the remaining 13k the government will do the rest - so you put in 10,400, the government puts in 2,600.

So you end up with 40k in your pension, plus just under 4k left over.

For a gross salary of 40k, you have received 43,850!

Yes I know pension withdrawals are taxable... except you get 25% tax free, and then there is a ten year gap between being eligible to take money out of a pension and the state pension starting up. If you are likely to have everything else in an ISA by that point, you have no taxable income -> you can take the full personal allowance from your pension tax free (assuming you've already taken 25% tax free). Ten years at 12.5k = 125k; even if you have 3-4k a year to come from there sustainably that's fine, the state pension is only at most 8.5k.

Phew. That's an increase of more than 40% on no pension contributions at all (and even more if you have student loans you're not intending on repaying...).

Zola.

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Re: Pension contributions are a stupidly good deal
« Reply #1 on: February 04, 2019, 08:09:25 AM »
Thankfully my employer does salary sacrifice. I earn 32,000 / year and I put in 11%, work puts in 6%, so I have a little over 450 going into my pension each month. Hopefully more soon...

I also invest in a S&S ISA each month with my wife, around 800 a month between us.

I am hoping that my pension fund will perform well and do much of the heavy lifting for later life. Then when we think about any sort of FI numbers we will hopefully be able to live on the S&S ISA comfortably until the private pension funds becomes accessible, then the state pension 10 years after that... (if it still exists then).

The only very minor annoyance is it reduces your income to HMRC, so the student loan amount taken each month gets reduced, which will take longer to pay off... I only owe about 3k now but would like it over and done with, been out of university 11 years now!!
« Last Edit: February 04, 2019, 08:17:47 AM by Zola. »

londonstache

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Re: Pension contributions are a stupidly good deal
« Reply #2 on: February 04, 2019, 09:48:22 AM »
Worth mentioning that not all employers will add in the NI you have saved them - of course, if they are nice they will add this in. Agreed that it is a ridiculously good deal, and gets even better at higher rate taxation.

daverobev

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Re: Pension contributions are a stupidly good deal
« Reply #3 on: February 04, 2019, 10:42:44 AM »
Worth mentioning that not all employers will add in the NI you have saved them - of course, if they are nice they will add this in. Agreed that it is a ridiculously good deal, and gets even better at higher rate taxation.

Indeed, though honestly I'd be pretty pissed with an employer that didn't - it costs them nothing.

vand

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Re: Pension contributions are a stupidly good deal
« Reply #4 on: February 04, 2019, 03:12:21 PM »
Yeah, with employer matching you can be getting 2.5 or more into your pension for every 1 you lose in net income. Yet I still quite frequently hear the arguments that people don't trust pensions, or that they would rather forego the pension, pay income tax, and then invest it in something else (usually property).  I shrug. You can lead a horse to water etc... People say they can't afford a pension. It's more like you can't afford NOT to have a pension.

Got a friend who earns at least twice as much as me (don't we all) but has never been good with money, doesn't have a pension or even any real savings, and only just got on the housing ladder a couple of years ago. Mid 40s. Gave him the pep talk a couple of weeks back. Live on half your income or less. 5 years, you house is paid. 10 years you've accumulated some assets for retirement. But you gotta change what you do right now. Every year your delay it makes it harder. I really want him to sort himself out, but it's one of those things that people just have to do for themselves.

« Last Edit: February 04, 2019, 03:16:32 PM by vand »

vand

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Re: Pension contributions are a stupidly good deal
« Reply #5 on: February 04, 2019, 03:27:55 PM »
Not sure some of those figures in the OP are accurate..
I was playing around with the calculator at listentothetaxman.com

from what I can tell, although I stand to be corrected:

- You can't escape employee NI contributions when you pay into a pension, only income tax

- You can avoid Income tax altogether by contributing all of your salary above the tax-free allowance into your pension, that way you will only pay NI. Eg if your salary is 40k you can pay 70.4% (28,160) into the pension to leave you with 11,840 which is below the tax-free allowance and so you pay no income tax on this part, only NI of 3789.


PhilB

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Re: Pension contributions are a stupidly good deal
« Reply #6 on: February 04, 2019, 03:43:58 PM »
Not sure some of those figures in the OP are accurate..
I was playing around with the calculator at listentothetaxman.com

from what I can tell, although I stand to be corrected:

- You can't escape employee NI contributions when you pay into a pension, only income tax

- You can avoid Income tax altogether by contributing all of your salary above the tax-free allowance into your pension, that way you will only pay NI. Eg if your salary is 40k you can pay 70.4% (28,160) into the pension to leave you with 11,840 which is below the tax-free allowance and so you pay no income tax on this part, only NI of 3789.
Salary sacrifice schemes work by agreeing with your employer to be paid a lower salary in return for getting higher employers' pension contributions.  Neither the employer nor the employee pay NI on employers' pension contributions so both save and the employer often passes on some or all of their savings to the employee.  You are limited in how much you can sacrifice in this way by the fact that you can't sacrifice down below minimum wage levels.

I Want to Believe

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Re: Pension contributions are a stupidly good deal
« Reply #7 on: February 05, 2019, 12:58:49 AM »
Worth mentioning that not all employers will add in the NI you have saved them - of course, if they are nice they will add this in. Agreed that it is a ridiculously good deal, and gets even better at higher rate taxation.

Indeed, though honestly I'd be pretty pissed with an employer that didn't - it costs them nothing.

Sounds like you're describing my boss, he even uses qualifying earnings to ensure he pays as little as possible, so he only has to make contributions of 2% of my weekly pay less the threshold for NI payments. Instead of 2% of my 472.50 weekly he only has to pay 2% of 356.

vand

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Re: Pension contributions are a stupidly good deal
« Reply #8 on: February 05, 2019, 02:22:25 AM »
Not sure some of those figures in the OP are accurate..
I was playing around with the calculator at listentothetaxman.com

from what I can tell, although I stand to be corrected:

- You can't escape employee NI contributions when you pay into a pension, only income tax

- You can avoid Income tax altogether by contributing all of your salary above the tax-free allowance into your pension, that way you will only pay NI. Eg if your salary is 40k you can pay 70.4% (28,160) into the pension to leave you with 11,840 which is below the tax-free allowance and so you pay no income tax on this part, only NI of 3789.
Salary sacrifice schemes work by agreeing with your employer to be paid a lower salary in return for getting higher employers' pension contributions.  Neither the employer nor the employee pay NI on employers' pension contributions so both save and the employer often passes on some or all of their savings to the employee.  You are limited in how much you can sacrifice in this way by the fact that you can't sacrifice down below minimum wage levels.

Thanks!
I need to further educate myself on the various types of pensions, as I think they are one of the most complicated and confusing areas of personal finance. :-/

shackleford

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Re: Pension contributions are a stupidly good deal
« Reply #9 on: February 05, 2019, 12:27:27 PM »
Huge fan of bashing extra money into my workplace pension pot to reduce income tax and NI.  So much so that I got a confused call from our HR woman asking me if the X% I'd specified on my additional contribution request form was a mistake....

I guess the drawbacks are inevitable changes in legislation - potential removal of tax relief, reduction of the 25% tax free allowance, increase in access age - all would make it a worse deal. 

mubington

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Re: Pension contributions are a stupidly good deal
« Reply #10 on: February 05, 2019, 02:30:09 PM »
To what extent do you factor in risk though?

For me, I want to FIRE at 45, and I have a perhaps irrational fear about SIPPs. Enough for me to question whether the top up is worth it. ( I pay my SIPP direct from ltd company that I plan to liquidate so for me, it's more about avoiding corp tax).

Is there is a high likelihood of increasing SIPP pension age to 57 or 58?  (I'm 39) Perhaps it could go even higher. It's not set in stone.

What happens if need the cash earlier? Is there a small chance of some random political event impacting access?

Hard to know what the tax regime will be in 18 years time. Maybe I'll end up paying just as much tax on it, it's not impossible.

I'm not really sure if there is substance to this. But it does seem like the returns are not as risk free as Gov makes out.


 

daverobev

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Re: Pension contributions are a stupidly good deal
« Reply #11 on: February 05, 2019, 02:44:33 PM »
To what extent do you factor in risk though?

For me, I want to FIRE at 45, and I have a perhaps irrational fear about SIPPs. Enough for me to question whether the top up is worth it. ( I pay my SIPP direct from ltd company that I plan to liquidate so for me, it's more about avoiding corp tax).

Is there is a high likelihood of increasing SIPP pension age to 57 or 58?  (I'm 39) Perhaps it could go even higher. It's not set in stone.

What happens if need the cash earlier? Is there a small chance of some random political event impacting access?

Hard to know what the tax regime will be in 18 years time. Maybe I'll end up paying just as much tax on it, it's not impossible.

I'm not really sure if there is substance to this. But it does seem like the returns are not as risk free as Gov makes out.

Nothing is risk free.

AFAIK personal pensions are currently set to track the state pension age - 10 years. So, yes, it will increase to 57 from 55 by the time we get there. That's fine - I'll have 'everything else' in an ISA. And yes it could go higher, and is likely to if life expectancy keeps going up - that's also fine.

For me, the 25% tax free is just the gravy - I can do without it. As long as the money can grow tax sheltered, you're winning. But with what looks like a 40% boost, it is very unlikely that any tax change on withdrawal will overcome the free money at the time of deposit.

The government wants you to take that money out and spend it, stimulating the economy.

PhilB

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Re: Pension contributions are a stupidly good deal
« Reply #12 on: February 05, 2019, 04:11:28 PM »
By the time you factor in the risks of future tax rises pensions get to be fairly marginal for basic rate tax payers unless they come with salary sacrifice and/or employer contributions.  I would always recommend a younger person in this position considers the option of parking savings in a S&S ISA in the hope that they may get a better deal further down the line  - either because they become a higher rate tax payer, or because the options available to them improve eg an employer offering sal sac or because the govt moves to a 'flat rate' of relief.
If you do end up as a HRT payer then pensions really can become stupidly good - I was able to manage some of my contributions to save me 40% tax, 12% NI and 18% child benefit clawback and my employer threw in a further 6% from their NI savings.

vand

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Re: Pension contributions are a stupidly good deal
« Reply #13 on: February 06, 2019, 03:05:35 AM »
Question..

I think I may already be benefiting from some sort of pension salary sacrifice. Can someone confirm..?

Officially my annual pay rate is 45500.
I contribute 10% on this towards my pension (company contributes 5%).

About 5 years ago the company announced they were changing the pension scheme. I seem to remember they called it an "accelerator" where pay rate would unofficially be slightly reduced, but the result would be that more would actually be going into the pension.

when I look at my payslip, I see that my monthly gross is 3761, or 45,125 annually.
However as promised I see that 446.08 goes into the pension each month, or 5353 annually, which actually equates to 11.7% of gross going towards the pension rather than the 10% that I'm supposed to be putting in. If I look on my pension statements I can see that get 635.55 total, so my employer puts in another 189.58, which is indeed their promised 5% of my gross pay.

I've tried looking up "pension accelerator" but it doesn't seem a common term, so I'm wondering if this was just they marketing speil for salary sacrifice..? I know my company is very on the ball finance-wise.. they seem to have implemented it in a very roundabout way that only reduces my gross pay slightly but increases my pension contribution by a whopping 17%.

PhilB

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Re: Pension contributions are a stupidly good deal
« Reply #14 on: February 06, 2019, 05:14:51 AM »
I can't make any sense of those numbers I'm afraid - certainly the NI savings on the difference between your nominal and actual salary aren't anywhere near enough to account for the increase in your pension contributions.

vand

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Re: Pension contributions are a stupidly good deal
« Reply #15 on: February 06, 2019, 08:28:27 AM »
Hey, don't worry.. I can see on my payslip that the scheme is indeed a Salary Sacrifice scheme.
Here's the breakdown:

Gross Pay 3319.2
Basic Pay   3791.67
   
Tax   479.2
Employees NI   314.06
Employers NI   361.17
   
Childcare vouchers   243
Pension EES Sal Sac   446.08
Pension ERS   189.59