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.

[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?

[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.

[HuntD]

PhilboSE said:

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

My pension charge is 1% (with Aegon), at the moment its in a high risk investment but I may tone it down.

Thanks for your help.