Pension Contributions-Salary Sacrifice - Good, Bad or Ugly?

[hatchy]

I'm happy to be in one of these auto enrolment pensions. I probably wouldn't be voluntarily put £50 a month away in a private pension. Benefit I see to it being in one of these is that the employer pays in as well and you get tax relief too. I'm in a NEST scheme and can check in on it online. Each month I see a payment of £96 a month going into the 'pot' and tax relief of something like £23 as well. So £120 a month in to the pension pot for an outlay of £50 a month seems OK to me. That will increase when the contribution goes up to 5%.  

[CWARD]

@hatchy  Thank you. Your comments echo what I hear constantly from the many employees who we administer payrolls for and have been put on Auto Enrolment pension scheme. There are very few, less than a handful , who have asked to leave. 

Some people think that getting people to provide for a pension who normally wouldn’t have is a bad idea even they themselves can afford to put £000's a year into a pension and claim tax relief on it. 

[lol-lol]

13 hours ago, hatchy said:

I'm happy to be in one of these auto enrolment pensions. I probably wouldn't be voluntarily put £50 a month away in a private pension. Benefit I see to it being in one of these is that the employer pays in as well and you get tax relief too. I'm in a NEST scheme and can check in on it online. Each month I see a payment of £96 a month going into the 'pot' and tax relief of something like £23 as well. So £120 a month in to the pension pot for an outlay of £50 a month seems OK to me. That will increase when the contribution goes up to 5%.  

 

You sound like the Government advert a bit there.  Worth remembering you may not even get out what you put in if the managers of the pension fund put your money in bad places.  Stock markets have been in a bad place for nearly half a year now.  FTSE 250 for Midcaps... below, so ensure mix up you risk with solid bonds/gilts if you can.  

 

Best plans, generally, I find, are to put in minimum amounts up to the near the end of the tax year ie Feb and March and then do a big dump of AVC ie additional Voluntary Contributions.   Always good to look at ones projections, that can even be minus for the low projections. 

Look at withdrawing a load (25%) at 55 years young as a tax free lump sum and enjoy it then !   It is a minefield. 

 

 

[KenONeill]

34 minutes ago, lol-lol said:

Best plans, generally, I find, are to put in minimum amounts up to the near the end of the tax year ie Feb and March and then do a big dump of AVC ie additional Voluntary Contributions

That's really bad advice when there's an employer's contribution involved as well.

 

In that event the best idea is to put in the highest amount the employer will match as salary sacrifice, and then, if you can afford it, do an AVC in March on top.

[lol-lol]

2 hours ago, KenONeill said:

That's really bad advice when there's an employer's contribution involved as well.

In that event the best idea is to put in the highest amount the employer will match as salary sacrifice, and then, if you can afford it, do an AVC in March on top.

 

Not suggesting one turns down "free" money from an employer even if it is locked in a scheme until one is 55 and may go down in value.  

 

Most pension schemes I come across the employer just pays in the minimum amount 2%, 3%, 5% and do not match employee contributions, that would be a good deal.

 

Main benefit of pension contributions is the tax avoidance at the 20% or 40% rate, and hopefully having a nice nest egg in the future, not guaranteed.

 

It will be interesting to see how many of the 10M auto enrolled decide they cannot endure the new 5% contribution level that starts on April 6th which is why I would have like to have seen 4% Employee and 4% Employer rather than the 5% and 3% that is going to happen. 

 

If workers do not get a near 5% pay rise they could be worse off just in at the time when inflation spikes upwards due to BREXIT. 

 

[CWARD]

1 hour ago, lol-lol said:

 

Not suggesting one turns down "free" money from an employer even if it is locked in a scheme until one is 55 and may go down in value.  

 

Most pension schemes I come across the employer just pays in the minimum amount 2%, 3%, 5% and do not match employee contributions, that would be a good deal.

 

Main benefit of pension contributions is the tax avoidance at the 20% or 40% rate, and hopefully having a nice nest egg in the future, not guaranteed.

 

It will be interesting to see how many of the 10M auto enrolled decide they cannot endure the new 5% contribution level that starts on April 6th which is why I would have like to have seen 4% Employee and 4% Employer rather than the 5% and 3% that is going to happen. 

 

If workers do not get a near 5% pay rise they could be worse off just in at the time when inflation spikes upwards due to BREXIT. 

 

 

They are not locked into the scheme.

 

When it goes to 5% from 3% I assume those dropping out will minimal, the same as when it went from 1% to 3%.

 

Again I find the hypocrisy of someone who has benefitted hugely from tax avoidance on his pension should portray a scheme designed to benefit the poorer in society as a tax fiddle and wrong. 

[KenONeill]

1 hour ago, CWARD said:

 

They are not locked into the scheme.

 

When it goes to 5% from 3% I assume those dropping out will minimal, the same as when it went from 1% to 3%.

 

Again I find the hypocrisy of someone who has benefitted hugely from tax avoidance on his pension should portray a scheme designed to benefit the poorer in society as a tax fiddle and wrong. 

Agreed; in fact that's why I'm saying that you should set your PAYE contribution to the level that maximises the employer's contribution, and I know of schemes where the employer's contribution is equal to or greater than the employee's.

[CWARD]

21 minutes ago, KenONeill said:

Agreed; in fact that's why I'm saying that you should set your PAYE contribution to the level that maximises the employer's contribution, and I know of schemes where the employer's contribution is equal to or greater than the employee's.

 

We've had a few clients who have matched the AE pension contributions like for like but the majority don't and just make the minimum, still this is more than they had contributed before.

Companies that were running pension schemes before or separate to AE usually contributed more but it wasn't available to all employees and usually limited to management where as AE is available to all who meet the criteria or anyone that wishes to join.

[lol-lol]

2 hours ago, KenONeill said:

Agreed; in fact that's why I'm saying that you should set your PAYE contribution to the level that maximises the employer's contribution, and I know of schemes where the employer's contribution is equal to or greater than the employee's.

 

You are a very lucky bunny if you employer will match the employee contributions over their minimum.  The history of pension contributions is that is the employers have taken holidays from their contributions when the fund gets a bit ahead of the anticipated need of course then the fund has a few bad years, a bit like the last year or two for equity based pension funds and the employee can lose out and may only get 90% of a fund that has done quite badly ie not even kept up with inflation over the latest years.

 

As I said above I actually might try and reduce my contribution an ask the company to not pay my current scheme the current 5% minimum they put in and go to the poorer on the face of it 5% employee and 3% Employer Auto Enrollment Scheme and see if they will put the 2% they would have put in the pension in to my salary so I can choose when I put it in ie what time of the year rather than have them dump it in to pension schemes when they have not been doing well like 2018 was.

 

Some people feel aggrieved as they were just abut to be enrolled on company pension schemes with 5% Employer contribution and then Auto enrollment came along and they got put on these much lower rates of Employer contributions ie 1%, 2% and soon to be 3% .........

 

Recommended contribution for a lifestyle consistent with in work lifestyle is 14% last I saw.  My employer and I am putting in a minimum percentage under the non Auto-enrollment pre-existing scheme which is just over £500 a month but how much of that is going on Scheme operating fees (even if half a percent of the investment that means can mean hundreds or thousands of pounds even if the investment are bad and losing value compared to inflation) and investing in stock market equity to pay FTSE company bosses fat bonuses whilst they fail to properly look after shareholder investments and do so unethically and un-ecologically.  I always proactively choose ethical and conservative, with a small c, investment such as  overseas gilts (is investing in Britain with the current F*** Business brigade in charge a wise move ?).        

 

https://www.thepensionsregulator.gov.uk/en/business-advisers/automatic-enrolment-guide-for-business-advisers/about-automatic-enrolment/minimum-contribution-increases-planned-by-law-(phasing)

Set 2: contributions calculated on gross earnings based on at least 85% of total earnings

Date effective	Employer minimum contribution	Total minimum contribution
Old rates, up until 5 April 2018	1%	2%
Currently, from 6 April 2018 to 5 April 2019	2%	5%
6 April 2019 onwards	3%	8%

   

 

Edited 25 February, 2019 by lol-lol

[cheezemonkhai]

Frankly it’s a lot better to try and save than hit retirement and be broke.

 

maybe scrap the MP and civil service defined benefit schemes! This would incentivise them to make sure the alternatives pretty much everyone else has to use work?

[lol-lol]

On 26/02/2019 at 09:38, cheezemonkhai said:

Frankly it’s a lot better to try and save than hit retirement and be broke.

 

maybe scrap the MP and civil service defined benefit schemes! This would incentivise them to make sure the alternatives pretty much everyone else has to use work?

 

Couple of points.

 

A pension pot is one place people save but many accrue wealth via property as a vehicle to financial well being in retirement.  Both can have their ups and down, a colleague a few years older than me was hoping to retire almost ten years ago but the big falls in the stock market, where his pension was mainly invested, meant a fall in value by about a quarter delayed his plans, property can do the same of course.  Bonds and Gilts, internationally spread ones can be a good option, are a more secure to stock market equity investments though return can be lower than equities on a good run.   Pension fund managers can take their 0.5% fee for management even though they actually lose you money in the funds they invest in, perhaps Mr Ward who appear to be involved in this can confirm or correct ?

 

As to Civil Service pension schemes, which I declare an interest as an Ex-HMRC Officer, much of the time involved in Anti-Smuggling rather than only imports taxation, my/their pension is paid out of the real-time public purse and foes not have a separate fund.  I can find out what my personal fund is valued at but that money does not exist.  I am not allowed to ask for it, remove a quarter as a tax-free lump sum like others with pensions (though there is a lump sum due at 60 or 65 depending on when ones DOB is) so many disadvantages with Civil Service Pensions.  Also it is not linked to the crappier CPI measure of inflation rather than RPI meaning the 8 million or so with such pensions, being taken or to be taken, effectively fall behind RPI by up to one percent per year so in 20 years of retirement one could be 20% worse off than previously.   UK governments would not want scrap Civil Servant pensions if it meant closing it down and giving these millions of people "normal" access to the pension pot like others with pensions.  I would love it, I would move my £100K or so to somewhere I wanted it to go.  As for the UK government coming up with a Trillion pounds or so to do this I cannot imagine anyone lending the UK such money to do this.  The UK has already gone from £1T in national debt from 2010 to 2019 to £2T in debt and £3T is just unimaginable.  The UK has already its AAA credit rating and is on negative watch due to BREXIT.   

https://tradingeconomics.com/united-kingdom/rating   

 

http://www.nationaldebtclock.co.uk/

Mainstream media headlines today are focused on Britain's record national debt, which just surpassed £1 trillion, a figure that can only exponentially increase unless the entire mechanism of Government finance is overhauled. The truth however is much worse, factoring in all liabilities including state and public sector pensions, the real national debt is closer to £4.8 trillion, some £78,000 for every person in the UK. 

 

[CWARD]

Yes, they do charge 0.5% fee on your AE  pension. This is low compared to some compared to many other schemes. 

The employee can change their pension risk and on the lower risk scheme it is spread on to slow growth investment including bonds as well as in stocks. No fees are made for these changes. 

 

Not quite sure what you’re trying to say in your second part about public sector pensions in that they are essentially risk free, paid out of the public taxation and if not money is borrowed to pay them adding to the national debt and interest paid. 

[shyVRS245]

I have been following this thread and decided to throw my thoughts in. Before 1996 I was advised to save my NI contributions into a private pension so opted out of SERPS. For the last 23 years this private pension has been growing slowly and steadily and I intend to take advantage of the 25% tax free lump sum before the goal posts are moved (which they will), which will be later this year. My company enrolled me into the NEST scheme 6 years ago and in that time I have never bothered to check what is in the account (online). Having bought our second property 7 years ago this will probably contribute the largest amount into the monthly retirement pot as the rent has risen by £50 per month during this period. As investments go property takes some beating.Two final points my parents bought their 4 bed detached property almost 40 years ago this month for £33,500 (taking out a massive mortgage of £13,500 LOL) and recently had it valued at £350,000 which is not a bad return. Also a recent study has forecast that in 34 years time (2055) the average house price in the UK will be £1.2 million (God help 1st time buyers then of course).

[lol-lol]

On 01/03/2019 at 08:05, CWARD said:

Yes, they do charge 0.5% fee on your AE  pension. This is low compared to some compared to many other schemes. 

The employee can change their pension risk and on the lower risk scheme it is spread on to slow growth investment including bonds as well as in stocks. No fees are made for these changes. 

 

Not quite sure what you’re trying to say in your second part about public sector pensions in that they are essentially risk free, paid out of the public taxation and if not money is borrowed to pay them adding to the national debt and interest paid. 

 

Worth pointing out to all pension holders that they can risk balance their pension pot.  My current employee-employer one has 5 different depositories and they are some bonds, some ethical and some index linked FTSE, of the low medium and the even the highest predicted returns are only 2 to 4% ie only just about inflation but at least they are, overall, likely to fall even if the stock markets crashed and lost a third of their value as happens every few years and can really screw people's pension plans especially if the pension investment mature just at a lull in the equity part of the their pension and some unscrupulous pension management firms seems to steer investors to high risk equity investments.

 

The second part is this nonsense that Civil servants, and presumably military, police, nurses in the same type of schemes,  is that there is a pension debt that the nation has to is public servants, it is quantified but the beneficiaries do not have the option to transfer, withdraw at 55 etc.  It was messed about with a few years ago when it's peg was moved from RPI to CPI which dis-advantaged the scheme substantially over time, retired public servants may still have housing costs ie rents and the like.  This debt to the millions of current and ex-public servants amounts to circa a trillion pounds, as to risk free, the worry has to be to you and me as current/future recipients of such pension payments that the state of the future UK finances that moves like the move from RPI to CPI could perhaps be similarly repeated ie Britannia waves the rules when it suits there purpose.  I look forward to my lump sum, I only did 10 years with HMRC so it will only be one quarter of full and the same for the pension ie 40/80 ths but hopeful that Uk Gov will not further go back on previous arrangements.     

    

 

[shyVRS245]

5 minutes ago, lol-lol said:

 

Worth pointing out to all pension holders that they can risk balance their pension pot.  My current employee-employer one has 5 different depositories and they are some bonds, some ethical and some index linked FTSE, of the low medium and the even the highest predicted returns are only 2 to 4% ie only just about inflation but at least they are, overall, likely to fall even if the stock markets crashed and lost a third of their value as happens every few years and can really screw people's pension plans especially if the pension investment mature just at a lull in the equity part of the their pension and some unscrupulous pension management firms seems to steer investors to high risk equity investments.

 

The second part is this nonsense that Civil servants, and presumably military, police, nurses in the same type of schemes,  is that there is a pension debt that the nation has to is public servants, it is quantified but the beneficiaries do not have the option to transfer, withdraw at 55 etc.  It was messed about with a few years ago when it's peg was moved from RPI to CPI which dis-advantaged the scheme substantially over time, retired public servants may still have housing costs ie rents and the like.  This debt to the millions of current and ex-public servants amounts to circa a trillion pounds, as to risk free, the worry has to be to you and me as current/future recipients of such pension payments that the state of the future UK finances that moves like the move from RPI to CPI could perhaps be similarly repeated ie Britannia waves the rules when it suits there purpose.  I look forward to my lump sum, I only did 10 years with HMRC so it will only be one quarter of full and the same for the pension ie 40/80 ths but hopeful that Uk Gov will not further go back on previous arrangements.     

    

 

Only paid into a private pension for 12 years upto 1996, however invested into Unit Trusts it has been steadily increasing by around £1,000 per annum despite the housing crisis of 2007/2008.

[lol-lol]

25 minutes ago, shyVRS245 said:

Only paid into a private pension for 12 years upto 1996, however invested into Unit Trusts it has been steadily increasing by around £1,000 per annum despite the housing crisis of 2007/2008.

 

Of course a thousand pound in 1996 is only worth about £500 in today's money and this is one of the concerns with pension ie do you look for index linked payouts via an annuity or if a fixed outcome this becomes degraded over time and as one might need more money with age in real terms the value of the payments are diminishing.   Downsizing housing can give a substantial injection of funds, bit more difficult now house prices in southern England are falling but still a very nice profit if one has had for a decade or two. 

 

My plan will be to withdraw quite regularly, ie every year or two, from the pension pot, using the 25% tax free extraction, and then feed back in to pension pot at up to £40K a year (the UK HMRC max without penalties), hence only a bit of PAYE tax on income over the £12K tax free allowance.   

The system seems flawed in this regard as it is effectively laundering in my view but hey ho the system is what it is.    

 

[lol-lol]

Well the new Tax Year has started and lots of people are going to see increased pension contributions and quite possibly lower net salary.

 

Not great when one has several bills that have gone up quite a lot this month ie Council Tax up 4.6% in my case.

 

I am looking to terminate some of my pensions to take quarter of the money out as many (safe) investments seem to be not keeping up with inflation (RPI currently 2.5%) https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23 

 

Still will do some pension saving in the year(s) ahead but the best plan seems to be to get the tax relief on it and then remove it as soon as possible as returns are not great in either equity or bonds.  So many people I know cannot wait until 55th birthday comes and one can dip in to the pension fund.  

 

[shyVRS245]

6 minutes ago, lol-lol said:

Well the new Tax Year has started and lots of people are going to see increased pension contributions and quite possibly lower net salary.

 

Not great when one has several bills that have gone up quite a lot this month ie Council Tax up 4.6% in my case.

 

I am looking to terminate some of my pensions to take quarter of the money out as many (safe) investments seem to be not keeping up with inflation (RPI currently 2.5%) https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23 

 

Still will do some pension saving in the year(s) ahead but the best plan seems to be to get the tax relief on it and then remove it as soon as possible as returns are not great in either equity or bonds.  So many people I know cannot wait until 55th birthday comes and one can dip in to the pension fund.  

 

Agree +1.

[lol-lol]

Some workers getting decent pay rises ie 3 to 4%, not sure who though (Asda/Bankers?)

https://www.dailymail.co.uk/news/article-178479/Average-pay-rises-jump-3-5.html

Average pay rises jump to 3.5%

 

Average pay rises have jumped to 3.5%, as higher inflation feeds through to wage settlements, a new report shows.

The average level of deals has risen from 3% in the first quarter of the year to 3.5% at the start of the second three-month period.

But the pay picture remained mixed, with wage freezes being imposed in parts of the manufacturing sector, while rises of up to 7% were being agreed by construction firms. Pay analysts Incomes Data Services said increases in private firms were running slightly ahead of those in the public sector.  Public sector increases in April ranged from 2.9% for teachers in England and Wales to 4% for local government workers in Scotland.   The 47 private sector deals recorded this month, covering half a million workers, were mainly worth between 3% and 4%.  Deals included a 4.5% rise for most workers at supermarket giant Asda and merit rises worth 3.4% for Barclays Bank staff.  A minority of manufacturing companies were deferring pay reviews or freezing pay because of tough trading conditions, said the report.

 

[PetrolDave]

19 minutes ago, lol-lol said:

Well the new Tax Year has started and lots of people are going to see increased pension contributions and quite possibly lower net salary.

 

Not great when one has several bills that have gone up quite a lot this month ie Council Tax up 4.6% in my case.

 

I am looking to terminate some of my pensions to take quarter of the money out as many (safe) investments seem to be not keeping up with inflation (RPI currently 2.5%) https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23 

 

Still will do some pension saving in the year(s) ahead but the best plan seems to be to get the tax relief on it and then remove it as soon as possible as returns are not great in either equity or bonds.  So many people I know cannot wait until 55th birthday comes and one can dip in to the pension fund.  

 

Agree +2

 

Over the last 2 years my Defined Contribution Pension pot has dropped £10k per year, so I'm taking it out now we're into the new Financial Year - 25% as cash and the rest as income.

[bigjohn]

On 02/03/2019 at 17:46, lol-lol said:

 

 

My plan will be to withdraw quite regularly, ie every year or two, from the pension pot, using the 25% tax free extraction, and then feed back in to pension pot at up to £40K a year (the UK HMRC max without penalties), hence only a bit of PAYE tax on income over the £12K tax free allowance.   

The system seems flawed in this regard as it is effectively laundering in my view but hey ho the system is what it is.    

 

 

Pay attention to the recycling rules though :- https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/pension-lump-sum-recycling . Also the £40k a year is for all pension contribution increases including employee, employer and  effect of other factors on a defined contribution pension (eg final or career average pay increase greater than CPI). If you ever take a penny of pension income after the 25% tax free lump sum then the pension limit drops to £4k from £40k. Get it wrong - BIG tax bill time and possibly a fine.

[lol-lol]

Just now, PetrolDave said:

Agree +2

 

Over the last 2 years my Defined Contribution Pension pot has dropped £10k per year, so I'm taking it out now we're into the new Financial Year - 25% as cash and the rest as income.

 

Me too.  I have managed to keep around 3% increase in my fund but only by using a good chunk of international bonds/gilts so not so hurt by the drop in the FTSE 100 over the last year or so though it is clawing it was back, maybe if BREXIT is going to be softer and other trade issue across the world. 

 

Need to understand more about draw-down for the 75% I do not take out. Need to read it several times and chat with knowledgeable people.

Google spiders found this which is suppose to be restricted..................     

https://www.aegon.co.uk/support/faq/pension-technical/flexiaccess-dd-faq.html

 

[Ootohere]

@lol-lol  As we know and has been discussed here before. 3.5% increase of not very much or even a 5% increase is not very much.

Then if the new Tax Bands have you not much more than pence better off and the Pension Contribution increasing from 3%-5% comes in as it has then taking into account the rising rents, or Council Tax and other things that must be paid for then 3.5% or 5% means having to scrimp as you did the year before & before that.

 

That 5% increase started this week. Big deal.  Not a concern to you.

Edited 7 April, 2019 by Skoffski

[lol-lol]

3 minutes ago, bigjohn said:

 

Pay attention to the recycling rules though :- https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/pension-lump-sum-recycling . Also the £40k a year is for all pension contribution increases including employee, employer and  effect of other factors on a defined contribution pension (eg final or career average pay increase greater than CPI). If you ever take a penny of pension income after the 25% tax free lump sum then the pension limit drops to £4k from £40k. Get it wrong - BIG tax bill time and possibly a fine.

 

Thanks. Something more to read and try and understand.  

[Ootohere]

Why worry, you could get run over tomorrow!

Or the stress of counting what you are worth or might have to pay in tax could have you away sooner than later.

 

Best get that TESLA bought while you can enjoy the benefits, or the HMRC will see you OK on whatever you buy as a tool of your trade like a car.

Edited 7 April, 2019 by Skoffski