100% Salary Sacrifice Pension

[HuntD]

I have recently started paying into a pension under my employer’s salary sacrifice scheme (100% NI contribution), unfortunately I’m a bit late (wrong side of 20’s) so I feel I have some ground to make up.

I was considering paying in a lump sum however this will not get my NI contributions, so I was wondering if it would be possible for me to sacrifice 100% of my salary for the next 12 months while I live off my savings.

Is this do-able or not? I’d rather ask on here rather than appear even more naïve at work If it’s not possible then how much can I pay in? I’m a 20% taxpayer.

[Viper]

sounds like you need some proper advice, I was advised just yesterday not to put any extra into my company pension. They aren't always the best place to put your cash into

[R1 Indy]

Am i missing something here, i am also on the wrong side of 20 with no form of pension yet.......

There are still 30 odd years to make it up??

[ATG]

R1 Indy said:

Am i missing something here, i am also on the wrong side of 20 with no form of pension yet.......

There are still 30 odd years to make it up??

rates of return are low at the moment, but nonetheless the sooner you start saving the better ... investments grow exponentially with time, so the It makes a big difference to start saving young.

[Neil G60]

Personally I'd find out what your current pension scheme arrangement is. The recent budget changes have made the current 'lifesytling' structure of most default funds unfit for purpose as they designed to put you into an annuity when you retire. See what you've got in place with your employer first. If it's a decent arrangement with some flexibility over fund choice and low charges go with it and choose a more risky or ambitious equity based investment choice - you're in your 20s so there's no point in holding any money in cash, gilts or bonds.

Using a corporate scheme is the best value for money because you get tax relief AND don't have to pay NI so you'll get an extra bump.

What size is your employer? Hopefully they have have auto-enrolled already and with any hope you'll have a more 'for for purpose' corporate scheme arrangement

[supersport]

I didn't think you were allowed to salary sacrifice so much that it would leave you below tax/ni/minimum wage thresholds, so you couldn't do it all.

[Neil G60]

Not sure actually. Although you can still invest after tax into a SIPP and if you're a lower rate tax payer as the tax is automatically rebated into the scheme. If you're at 40% you can get the rebate but you have to file a tax return. It's worthwhile but less so than doing it via your employer as you won't get NI tax relief in a SIPP (as the contributions are 'after tax')

[HuntD]

Neil G60 said:

Personally I'd find out what your current pension scheme arrangement is. The recent budget changes have made the current 'lifesytling' structure of most default funds unfit for purpose as they designed to put you into an annuity when you retire. See what you've got in place with your employer first. If it's a decent arrangement with some flexibility over fund choice and low charges go with it and choose a more risky or ambitious equity based investment choice - you're in your 20s so there's no point in holding any money in cash, gilts or bonds.

Using a corporate scheme is the best value for money because you get tax relief AND don't have to pay NI so you'll get an extra bump.

What size is your employer? Hopefully they have have auto-enrolled already and with any hope you'll have a more 'for for purpose' corporate scheme arrangement

Sorry, not sure I fully understand everything you are saying.

My employer is small (<20 employees), I was not auto enrolled. Pension fees are 1%, I can pay in as much or as little as I want (I was not told of an upper limit but I guess there will be?).

So my question still stands, can I sacrifice my entire salary or is there a minimum wage I have to maintain?

[williaa68]

You have to maintain the minimum wage but unless you have an external private income you will want to do that anyway as salary sacrificing below the tax free threshold (10k this year) doesn't make any sense. Salary sacrificing above, particularly in the employer kicks in the employers NI, which is rare, is a good deal.

[davepen]

HuntD said:

can I sacrifice my entire salary?

Possibly. The rules appear to change every year, but my boss (and others) did have a very aggressive scheme for a year or two before he (they) retired. It helped that they had a good old fashioned DB scheme, so the new linked DC scheme was basically used as a pot for the 25% Pension Commencement Tax Free lump sum, or for draw down, anything other than buying an annuity. An inheritance or savings provide income. They were also careful not to fall foul of the pension recycling rules. The DB pension was payable from 60.
In the recent budget the draw down rules were changed, so there may be other small print. However the risk in these schemes was mitigated because the time between paying in, and taking back out (tax free) was short. If your closer to 20 than 60, then you've got nearly 40 more budgets for the rules to change.

ETA: Not sure if it was all salary sacrifice, or included AVC (Employee Directed Contributions)
Also check the new rules on amount that can be credited each year, which has dropped again.

Edited by davepen on Saturday 5th April 07:50

[PhilboSE]

You can do a 100% salary sacrifice, up to the maximum allowable annual contribution, which is £40,000 this year.

If you have unused allowances from previous years (i.e. you haven't made any pension contributions) then you can use those allowances from up to three years ago for contributions "this" year. As the allowance was £50,000 before this year, the maximum possible pension contribution (assuming you didn't make any contributions) would be £190,000 or 100% of your salary, whichever is less.

However, contributing your tax-free allowance element of your salary to a pension is of dubious merit, because you don't get any extra benefit in the form of tax relief, but you are locking the money away into a restricted investment. Far better would be to invest that money into an ISA. Same effective contribution from you, same tax-free growth, but the benefit of flexibility on future access.

[Soupie69uk]

Good advice in the post directly above.

http://www.hmrc.gov.uk/pensionschemes/understandin...

[HuntD]

PhilboSE said:

You can do a 100% salary sacrifice, up to the maximum allowable annual contribution, which is £40,000 this year.

If you have unused allowances from previous years (i.e. you haven't made any pension contributions) then you can use those allowances from up to three years ago for contributions "this" year. As the allowance was £50,000 before this year, the maximum possible pension contribution (assuming you didn't make any contributions) would be £190,000 or 100% of your salary, whichever is less.

However, contributing your tax-free allowance element of your salary to a pension is of dubious merit, because you don't get any extra benefit in the form of tax relief, but you are locking the money away into a restricted investment. Far better would be to invest that money into an ISA. Same effective contribution from you, same tax-free growth, but the benefit of flexibility on future access.

Thanks for that, so only tax payers get tax relief? Makes sense I suppose.

So here are my thoughts based on my £30k a year salary and sacrificing £20k:

1. I will take home £10k a year and pay no income tax
2. I will pay no student loan, saving me £1,178.00 this financial year
3. Each month my pension contribution will receive £2276 (£1667 from my salary, £230 from £20k NI contribution, and £379 from tax relief).

Have I got this right? To be honest it sounds too good to be true.

If I am correct then I only need to do it for 9 months to get to where I think I would be if I started a pension when I was 18, in the meantime the £833 a month salary in conjunction with my savings would allow for no loss in lifestyle.

Thanks so much for your advice so far.

[ringram]

supersport said:

I didn't think you were allowed to salary sacrifice so much that it would leave you below tax/ni/minimum wage thresholds, so you couldn't do it all.

AFAIK you can sacrifice the lot.

[Jockman]

HuntD said:

Thanks for that, so only tax payers get tax relief? Makes sense I suppose.

No - my grandson gets tax relief and he is 3 years old.

Even non-earners can put £3,600 in a pension...£2,880 of their own plus £720 from the Government

[PhilboSE]

Jockman said:

No - my grandson gets tax relief and he is 3 years old.

Even non-earners can put £3,600 in a pension...£2,880 of their own plus £720 from the Government

Yes indeed. Anyone can get a stakeholder pension and get a 20% tax contribution even if not a taxpayer. You can even do this if you've already retired and taken a pension...although you can't use your pension income for this purpose.

The new Junior ISAs are alternatives to stakeholder pensions for grandchildren, the difference being that the child gets all the money at 18 with a JISA, but they have to wait until at least 55 to have access to the stakeholder pension.

You get 20% "bonus" contribution in the pension but it will be another 52 years before a 3 year old can have access to it. If you think they may benefit from that money beforehand then an JISA/ISA strategy may be the better option. Remember that agedb between 16-18 someone can get BOTH the JISA and ISA allowances!

I'm doing a combination of the above - stakeholder pension for my wife and a JISA/ISA plan for the kids to maximise benefit of tax-free growth on some money which they can have to set them up.

[PhilboSE]

HuntD said:

Thanks for that, so only tax payers get tax relief? Makes sense I suppose.

Not quite true, absolutely anyone (inc child/pensioner) can have a stakeholder pension up to a maximum contribution of £3600 p.a., 20% of which would come from HMRC.

HuntD said:

So here are my thoughts based on my £30k a year salary and sacrificing £20k:

1. I will take home £10k a year and pay no income tax

Yup

HuntD said:

2. I will pay no student loan, saving me £1,178.00 this financial year

Not too sure about this one, your actual salary before sacrifice may still be used for this calculation.

HuntD said:

3. Each month my pension contribution will receive £2276 (£1667 from my salary, £230 from £20k NI contribution, and £379 from tax relief).

Those numbers seem about right to me.

HuntD said:

Have I got this right? To be honest it sounds too good to be true.

If I am correct then I only need to do it for 9 months to get to where I think I would be if I started a pension when I was 18, in the meantime the £833 a month salary in conjunction with my savings would allow for no loss in lifestyle.

Thanks so much for your advice so far.

The tax relief you get on pensions is the most attractive thing about them, for sure. Your next trick is to make sure you find a good home for your pension to invest; somewhere with low charges that will give a return in line with your risk profile.

The Budget changes to the pension law means that you now have many more options on what to do with the money in your fund. But you do need to be sure that you won't need that money for a different purpose (house, family etc) before you are aged 55.

Edited by PhilboSE on Monday 7th April 20:46

[Revisitph]

R1 Indy said:

Am i missing something here, i am also on the wrong side of 20 with no form of pension yet.......

There are still 30 odd years to make it up??

A fairly simplistic and very slow animated presentation, but the message is sound (so long as you have a low cost provider and remembering that the tax relief will boost the return even further).

http://www.bbc.co.uk/news/business-11876532

[ninja-lewis]

supersport said:

I didn't think you were allowed to salary sacrifice so much that it would leave you below tax/ni/minimum wage thresholds, so you couldn't do it all.

My understanding as well - you cannot sacrifice your salary below the equivalent minimum wage (i.e. you work out how many hours you work x 6.311 and that's your floor). I think some may be confusing it with the pension rules that limit the relief on pension contributions to 100% of taxable income, intended for situations where you're topping up your pension with non-income funds.

http://www.hmrc.gov.uk/payerti/payroll/special-pay...

PhilboSE said:

HuntD said:

2. I will pay no student loan, saving me £1,178.00 this financial year

Not too sure about this one, your actual salary before sacrifice may still be used for this calculation.

It's alright - student loan repayments will be based on the post-salary sacrifice income.

[ringram]

Ive been on zero income for years. Just living off the odd dividends.
No issue from our HR or Accountants etc.
So it can be done. Even got it confirmed a few years back.

So yes you can do it. I use my personal allowance against divi and other income.
Maybe not as efficient as I can be, but its close. Had to pay class 3 NI's the other day to catch up.