Should I salary sacrifice more?
Discussion
Hoping for some help here. I should say first of all that I realise I'm in a fortunate position and this is a nice problem to have, but just want to make sure I set myself up as best as I can now while I can.
Owing to a pay rise this year, I'm currently in the income band where I've lost some of my personal allowance so marginal rate is currently 62%. , At work, I know my salary will go up by about £10k a year for the next three years (it's on a set scale). Current pension contributions are 7% from me and 8% from my employer (mine are salary sacrifice).
I'd intended to sacrifice my salary to keep it just below the threshold for losing personal allowance and pay that all into my pension. My thinking was that I'd be putting a good bit into my pension pot (so would be maxing out the annual allowance in two years time and going forward) whilst only paying 38p in the pound. The problem is I mentioned this to a colleague who said that's a terrible idea because I'm currently 26 and so would end up smashing through the lifetime allowance.
That's probably right on the maths, assuming investment returns outstrip CPI increases to the LTA, but I'm not sure it means my plan is a bad idea. Would it be better to get 62% tax relief now, tax free growth on my contributions over the next 30-40 years (hopefully retire closer to 30 years time...) and then suck up the lifetime allowance charge on the other end? Or should I just take the income and save it outside of a pension/spend it on cars?
I already fill an ISA and LISA every year so don't really have the option of more tax-free saving, and of course this is all assuming tax rates and treatment of pensions stays the same in the future.
Appreciate any thoughts!
Owing to a pay rise this year, I'm currently in the income band where I've lost some of my personal allowance so marginal rate is currently 62%. , At work, I know my salary will go up by about £10k a year for the next three years (it's on a set scale). Current pension contributions are 7% from me and 8% from my employer (mine are salary sacrifice).
I'd intended to sacrifice my salary to keep it just below the threshold for losing personal allowance and pay that all into my pension. My thinking was that I'd be putting a good bit into my pension pot (so would be maxing out the annual allowance in two years time and going forward) whilst only paying 38p in the pound. The problem is I mentioned this to a colleague who said that's a terrible idea because I'm currently 26 and so would end up smashing through the lifetime allowance.
That's probably right on the maths, assuming investment returns outstrip CPI increases to the LTA, but I'm not sure it means my plan is a bad idea. Would it be better to get 62% tax relief now, tax free growth on my contributions over the next 30-40 years (hopefully retire closer to 30 years time...) and then suck up the lifetime allowance charge on the other end? Or should I just take the income and save it outside of a pension/spend it on cars?
I already fill an ISA and LISA every year so don't really have the option of more tax-free saving, and of course this is all assuming tax rates and treatment of pensions stays the same in the future.
Appreciate any thoughts!
Max it out while you still can, if you have to back off later on (House/chicks/kids) then you’ll benefit from some decent compounding.
Hitting the LTA is a good thing, gives you options to retire before you die of old age hopefully.
I’ve been doing the same for a few years now, 1st year hurt after that it was “normal” and the pot is now growing fast.
Rgds
Jim
Hitting the LTA is a good thing, gives you options to retire before you die of old age hopefully.
I’ve been doing the same for a few years now, 1st year hurt after that it was “normal” and the pot is now growing fast.
Rgds
Jim
Twin1 said:
The problem is I mentioned this to a colleague who said that's a terrible idea because I'm currently 26 and so would end up smashing through the lifetime allowance.
He makes that sound like a bad thing. Hitting your lifetime allowance should be a target, not something to be avoided. Same as others have said.
I would make full use of it now!!!! Thinking about the future yes but with current tax rates makes sense to take advantage. Presumably your salary will keep increasing so you won’t get affected by the tax hit as much, then you can back off the payments if you wish.
£80k a year with an increase to £100k a year you take home an extra £11600
£100k-£120k take home an extra £7600 a year
£120k-£140k take home an extra £10475 a year
£140k-£160k extra £10600 a year.
£100-£123k is the worst earning bracket. With current rates you are better off either earning £100k or skip through that bracket to £123k plus. Eg pension.
I would make full use of it now!!!! Thinking about the future yes but with current tax rates makes sense to take advantage. Presumably your salary will keep increasing so you won’t get affected by the tax hit as much, then you can back off the payments if you wish.
£80k a year with an increase to £100k a year you take home an extra £11600
£100k-£120k take home an extra £7600 a year
£120k-£140k take home an extra £10475 a year
£140k-£160k extra £10600 a year.
£100-£123k is the worst earning bracket. With current rates you are better off either earning £100k or skip through that bracket to £123k plus. Eg pension.
Don’t mean to sound like a right arse... but your Bio says you work in “Pensions” and you’ve come here to ask this question ? ?? Surely you’re the professional? 
If you can afford it you should put as much as possible over 100k into your pension - even better if your company will match any of it. Like others have said, you may have allowance left over from previous years - if you’re thinking really long term then you could sell ISA and put it into pension to get 40% extra. Although if it’s not salary sacrifice then you’ll have to do self assessment ( which you need to do on 100k+ income anyway ).
I’d probably sacrifice up to 40k for the next few years and take money from the ISA if you need it - but it also depends on your short term goals - if you need to buy a home then putting it all into your pension may not be ideal.
If you can afford it you should put as much as possible over 100k into your pension - even better if your company will match any of it. Like others have said, you may have allowance left over from previous years - if you’re thinking really long term then you could sell ISA and put it into pension to get 40% extra. Although if it’s not salary sacrifice then you’ll have to do self assessment ( which you need to do on 100k+ income anyway ).
I’d probably sacrifice up to 40k for the next few years and take money from the ISA if you need it - but it also depends on your short term goals - if you need to buy a home then putting it all into your pension may not be ideal.
Edited by Tom-M on Thursday 12th November 23:09
Please be aware private pensions are being linked to the state pension date. Access will lag by 10 years. So if the state pension ages goes up to 80, the age at which you can access your pension will increase to 70. I was going to gradually increase my pension contributions, (currently at 10% and employer contributions maxes at 8%). So yes, it is tax efficient to put in as much as possible into your pension, but ask yourself if you are happy to access it then years before your state pension able age. I wish to bridge the gap (I wish to retire at 60 if possible), so am maxed out on company share scheme and am taking the tax hit and paying into a stocks and shares isa.
Thanks all, that's really helpful.
Sounds like it remains a good idea to crack on and get as much in as possible while I'm young and have the chance - who knows what might change in the future. House deposit is set aside already and I should be able to max out an ISA each year whilst still sacrificing everything over the £100k (and enjoying myself!). I want to keep doing that so I have some assets outside of a pension that can fund an earlier retirement or other things. Aiminghigh123 is spot on that my salary should get past the £125k mark in a few years time when the tax relief won't be as good as it is now - maybe at that point I can back off the contributions a bit and "give myself" a pay rise.
I think the maths are where I struggle and working out how the LTA charge would actually affect my benefits. I think it works like this (which wouldn't actually be so bad):
Wishful thinking pension pot of, say, £1.5m, and assume LTA at the time is £1.2m (figures just for talking's sake).
I could get tax free cash of 25% of the LTA so £300k, then if I took the rest in drawdown there would be a 25% charge on £300k of it so tax bill of £75k max. To be that doesn't seem very bad at all if I'm getting a high rate of tax relief on the way in and end up with substantial benefits - maybe my colleague was wrong.
Thanks for all the responses - really helpful folks!
Tom-M said:
Don’t mean to sound like a right arse... but your Bio says you work in “Pensions” and you’ve come here to ask this question ? ?? Surely you’re the professional?
Not arsey at all - quite right. The problem is I spend all day talking to trustees, providers and corporates about techy pensions issues and am rubbish doing the actual sums for myself! Sounds like it remains a good idea to crack on and get as much in as possible while I'm young and have the chance - who knows what might change in the future. House deposit is set aside already and I should be able to max out an ISA each year whilst still sacrificing everything over the £100k (and enjoying myself!). I want to keep doing that so I have some assets outside of a pension that can fund an earlier retirement or other things. Aiminghigh123 is spot on that my salary should get past the £125k mark in a few years time when the tax relief won't be as good as it is now - maybe at that point I can back off the contributions a bit and "give myself" a pay rise.
I think the maths are where I struggle and working out how the LTA charge would actually affect my benefits. I think it works like this (which wouldn't actually be so bad):
Wishful thinking pension pot of, say, £1.5m, and assume LTA at the time is £1.2m (figures just for talking's sake).
I could get tax free cash of 25% of the LTA so £300k, then if I took the rest in drawdown there would be a 25% charge on £300k of it so tax bill of £75k max. To be that doesn't seem very bad at all if I'm getting a high rate of tax relief on the way in and end up with substantial benefits - maybe my colleague was wrong.
Thanks for all the responses - really helpful folks!
Compound interest, etc. The earlier you shovel money into a pension, the larger the amount available at the end was always my understanding...
If you max out the allowance, that’s a nice problem to have, but there’s no telling if the allowance will be raised in 20 years’ time (say), so it may not be an issue anyway?
If you max out the allowance, that’s a nice problem to have, but there’s no telling if the allowance will be raised in 20 years’ time (say), so it may not be an issue anyway?
Assuming you’re a pensions actuary (like me), you’ve done well to hit £100k by age 26 - most of us were still fighting through the exams at that point, and I didn’t think salaries had gone up that much in the meantime.
I’d agree with some of the other responses - and what you are suggesting is almost exactly what I did.
Get the benefit of the 62% tax relief while you can. In a few years, you’ll probably be so far past £125k that you’ll “only” be getting 42% or 47% tax relief on pension contributions, and might well have other calls on your money then.
Don’t worry about the LTA - who knows what will happen 30 or 40 years from now. It’s also quite possible that some future government does decide to tackle marginal rate tax relief on pensions which could make them pretty pointless for a high earner and you would be pleased then to have taken advantage of really high tax relief when you could. If the worst comes to it and you pay a 55% tax charge you will still be ahead of the game compared to taking it as salary now.
Stashing some money in your pension now also gives you a bit more flexibility in later years to do something a bit less stressful and pressured while still being able to count on a comfortable retirement. I’ve still got at least 5 years to go until I can retire and I’m really in the mood to start taking it easier.
I’d agree with some of the other responses - and what you are suggesting is almost exactly what I did.
Get the benefit of the 62% tax relief while you can. In a few years, you’ll probably be so far past £125k that you’ll “only” be getting 42% or 47% tax relief on pension contributions, and might well have other calls on your money then.
Don’t worry about the LTA - who knows what will happen 30 or 40 years from now. It’s also quite possible that some future government does decide to tackle marginal rate tax relief on pensions which could make them pretty pointless for a high earner and you would be pleased then to have taken advantage of really high tax relief when you could. If the worst comes to it and you pay a 55% tax charge you will still be ahead of the game compared to taking it as salary now.
Stashing some money in your pension now also gives you a bit more flexibility in later years to do something a bit less stressful and pressured while still being able to count on a comfortable retirement. I’ve still got at least 5 years to go until I can retire and I’m really in the mood to start taking it easier.
Zigster said:
Assuming you’re a pensions actuary (like me), you’ve done well to hit £100k by age 26 - most of us were still fighting through the exams at that point, and I didn’t think salaries had gone up that much in the meantime.
I’d agree with some of the other responses - and what you are suggesting is almost exactly what I did.
Get the benefit of the 62% tax relief while you can. In a few years, you’ll probably be so far past £125k that you’ll “only” be getting 42% or 47% tax relief on pension contributions, and might well have other calls on your money then.
Don’t worry about the LTA - who knows what will happen 30 or 40 years from now. It’s also quite possible that some future government does decide to tackle marginal rate tax relief on pensions which could make them pretty pointless for a high earner and you would be pleased then to have taken advantage of really high tax relief when you could. If the worst comes to it and you pay a 55% tax charge you will still be ahead of the game compared to taking it as salary now.
Stashing some money in your pension now also gives you a bit more flexibility in later years to do something a bit less stressful and pressured while still being able to count on a comfortable retirement. I’ve still got at least 5 years to go until I can retire and I’m really in the mood to start taking it easier.
Not an actuary - for my sins I'm a lawyer. Sounds like sage advice so thank you. Your point about doing something more relaxed in future years is a very good one. Pre-Covid I shared an office with a senior partner. In their words "I do what I do so I don't have to do it for long". There's definitely more to life than a big pay packet... I’d agree with some of the other responses - and what you are suggesting is almost exactly what I did.
Get the benefit of the 62% tax relief while you can. In a few years, you’ll probably be so far past £125k that you’ll “only” be getting 42% or 47% tax relief on pension contributions, and might well have other calls on your money then.
Don’t worry about the LTA - who knows what will happen 30 or 40 years from now. It’s also quite possible that some future government does decide to tackle marginal rate tax relief on pensions which could make them pretty pointless for a high earner and you would be pleased then to have taken advantage of really high tax relief when you could. If the worst comes to it and you pay a 55% tax charge you will still be ahead of the game compared to taking it as salary now.
Stashing some money in your pension now also gives you a bit more flexibility in later years to do something a bit less stressful and pressured while still being able to count on a comfortable retirement. I’ve still got at least 5 years to go until I can retire and I’m really in the mood to start taking it easier.
I think I'll go ahead and take the relief while I can get it. In 5/10 years' time it might be a luxury to scale back and like you say help meet other demands on my finances.
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