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Pension Salary Sacrifice... Does it really work like this?


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OK, I know Frank and The Disciples of Frugal have been over this before, but I'm PAYE and currently in a DB pension scheme, so havent given it much thought:

Currently paying a big wodge of higher rate tax. If I salary sacrifice enough into a DC pension scheme does all that tax go 'away' into my pension pot as if by magic? And I'm 55 next birthday so can access it any time if needs be? Is there really no downside, apart from pension fund charges?

 

Before you all get jealous of my current DB scheme it is currently 1/90th average salary accrual at the highest contribution level so its way past time to be put out to pasture. And even at that my employer says it is unsustainable and thats why its going in a few months. Its a long way from what the public sector gets.

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2 minutes ago, Melchett said:

OK, I know Frank and The Disciples of Frugal have been over this before, but I'm PAYE and currently in a DB pension scheme, so havent given it much thought:

Currently paying a big wodge of higher rate tax. If I salary sacrifice enough into a DC pension scheme does all that tax go 'away' into my pension pot as if by magic? And I'm 55 next birthday so can access it any time if needs be? Is there really no downside, apart from pension fund charges?

 

Before you all get jealous of my current DB scheme it is currently 1/90th average salary accrual at the highest contribution level so its way past time to be put out to pasture. And even at that my employer says it is unsustainable and thats why its going in a few months. Its a long way from what the public sector gets.

Mrs B and I put all our 40% taxable income into pension AVC's (additional voluntary contributions). 

Even after the stock market rout we are still quids in because of the tax relief. Our pensions in theory wont be taxed at 40% (although by then basic rate tax may have risen to 40% to pay for COVID). 

Further more for us it means we get full child benefit for Jnr at £84.50 every 4 weeks. 

it also means you get additional savings tax free allowance £1000 each instead of £500 outside of ISAs. 

If you are in a big company usually they run an AVC scheme alongside the DB scheme with very low pension charges. I pay <0.5% on mine. 

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4 minutes ago, Melchett said:

OK, I know Frank and The Disciples of Frugal have been over this before, but I'm PAYE and currently in a DB pension scheme, so havent given it much thought:

Currently paying a big wodge of higher rate tax. If I salary sacrifice enough into a DC pension scheme does all that tax go 'away' into my pension pot as if by magic? And I'm 55 next birthday so can access it any time if needs be? Is there really no downside, apart from pension fund charges?

Mainly, yes.

But it isn't so useful to think of the tax 'going away'.

A better way to think of it is that with pensions you only pay tax once.  You could pay tax 'as you go' and pay into an ISA, or you could use a pension and defer the tax to when you're retired.  The obvious point being, if you're a higher rate taxpayer there'll be a net gain by deferring paying tax until you're a base rate (or, I suppose, lower) tax pensioner.

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12 minutes ago, Melchett said:

OK, I know Frank and The Disciples of Frugal have been over this before, but I'm PAYE and currently in a DB pension scheme, so havent given it much thought:

Currently paying a big wodge of higher rate tax. If I salary sacrifice enough into a DC pension scheme does all that tax go 'away' into my pension pot as if by magic? And I'm 55 next birthday so can access it any time if needs be? Is there really no downside, apart from pension fund charges?

 

Before you all get jealous of my current DB scheme it is currently 1/90th average salary accrual at the highest contribution level so its way past time to be put out to pasture. And even at that my employer says it is unsustainable and thats why its going in a few months. Its a long way from what the public sector gets.

To add at your age I chuck all my 40% taxable salary into an AVC if I could afford it . On retirement you can take 25% tax free and draw the rest down as if it were income and taxed at your income tax rate which is likely to be basic not the 40% band. 

 

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3 minutes ago, Kurt Barlow said:

To add at your age I chuck all my 40% taxable salary into an AVC if I could afford it . On retirement you can take 25% tax free and draw the rest down as if it were income and taxed at your income tax rate which is likely to be basic not the 40% band. 

 

That is essentially what I am planning on doing with the 'new' DC scheme. A complication is I need cash to pay 2 kids Uni expenses right now, but seeing as I have various things like NS accounts and BS accounts paying next to no interest, even when ISAs, I might as well liquidate them to pay the Uni costs is my thinking. 

Edited by Melchett
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Finally, I feel like Ive found a way to give the pensions/tax/PAYE the finger... And it makes the closing of the DC scheme much easier to bear. B|

 

My big problem now will be persuading the HR department that when I go, yes I am retiring, but no, I may not want to take my pension yet, but please still tell the shares people I am retiring not resigning as otherwise they will tax me on my company shares.... And seeing as HR are comprised of uncontactable, misandrist sociopaths called Karen and Debbie I dont see that being quite as clear cut as Ive just typed it.

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8 minutes ago, Melchett said:

That is essentially what I am planning on doing with the 'new' DC scheme. A complication is I need cash to pay 2 kids Uni expenses right now, but seeing as I have various things like NS accounts and BS accounts paying next to no interest, even when ISAs, I might as well liquidate them to pay the Uni costs is my thinking. 

Is it worth getting them to borrow under the student loan scheme and then pay off when you retire with the tax free lump sum? 

As you say cash accounts are worthless now. I see PB's have dropped to 1% 

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7 minutes ago, Melchett said:

Finally, I feel like Ive found a way to give the pensions/tax/PAYE the finger... And it makes the closing of the DC scheme much easier to bear. B|

 

My big problem now will be persuading the HR department that when I go, yes I am retiring, but no, I may not want to take my pension yet, but please still tell the shares people I am retiring not resigning as otherwise they will tax me on my company shares.... And seeing as HR are comprised of uncontactable, misandrist sociopaths called Karen and Debbie I dont see that being quite as clear cut as Ive just typed it.

Dont tell them you are retiring . You can claim your pensions at 57 anyway. 

Just resign saying you are off to pastures new, new job, full time DOSBODS blogger etc and you will claim your pension when you retire. The pension will just sit there accumulating benefits. 

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11 minutes ago, Kurt Barlow said:

Dont tell them you are retiring . You can claim your pensions at 57 anyway. 

Just resign saying you are off to pastures new, new job, full time DOSBODS blogger etc and you will claim your pension when you retire. The pension will just sit there accumulating benefits. 

The problem with that is the tax implications for share save schemes. I could get hit for 10s K tax.....

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17 minutes ago, Kurt Barlow said:

Is it worth getting them to borrow under the student loan scheme and then pay off when you retire with the tax free lump sum? 

As you say cash accounts are worthless now. I see PB's have dropped to 1% 

Id rather not get them involved in the criminal and exploitative students loan company. My fear is that like BBC, Sky TV, and financial fraudsters, once they have your name and, worse, signature, getting out of their clutches may not be so easy. Plus I have raised two numerate daughters, one doing maths, the other engineering. They understand the financial implications of a student loan and it upsets and terrifies both of them. I dont want them losing sleep worrying that they could be on the hook for one.

Edited by Melchett
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47 minutes ago, Melchett said:

Currently paying a big wodge of higher rate tax. If I salary sacrifice enough into a DC pension scheme does all that tax go 'away' into my pension pot as if by magic? And I'm 55 next birthday so can access it any time if needs be? Is there really no downside, apart from pension fund charges?

Its better than that.

On the salary that you sacrifice...

1. You dont pay income tax

2. You dont pay national insurance (which doesn't really help you anyway as you are above the min level and dont get S2P or SERPS any more)

3 Your employer doesnt pay national insurance and will probably give you some or all of their savings

and of course, you can get your entitlement back for child benefit if you have kids.

 

You can only access 25% of it tax-free at 55.

You can access more as taxable income but you are then severely limited as to how much more you can put in.

 

I've been using salary sacrifice for many years. When I get to 55, I'll pull the 25% tax-free, live of that whilst dumping any new salary (part-time hours) above £12K into pension.

Instead of a marginal rate of ~40% (income tax an NI) via PAYE, I'll effectively be paying 0%.

When the tax-free sum runs out, I'll then retire completely and live off the fund, paying some tax at 0% (<12K income), some at 20%, no NI. (>12K income)

Yes, its too good to be true and will probably end at some point.

 

As for charges, you can nearly eliminate these by buying shares and investment trusts rather than unit trusts.  My Hargreaves Lansdowne SIPP only costs £200 per year.

 

 

 

 

 

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25 minutes ago, VeryMeanReversion said:

When I get to 55, I'll pull the 25% tax-free, live of that whilst dumping any new salary (part-time hours) above £12K into pension.

Instead of a marginal rate of ~40% (income tax an NI) via PAYE, I'll effectively be paying 0%.

I’ve seen this mentioned before but it’s only just clicked in my mind what a genius move that is. Cheers for the tip!:Beer:

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1 hour ago, dgul said:

Mainly, yes.

But it isn't so useful to think of the tax 'going away'.

A better way to think of it is that with pensions you only pay tax once.  You could pay tax 'as you go' and pay into an ISA, or you could use a pension and defer the tax to when you're retired.  The obvious point being, if you're a higher rate taxpayer there'll be a net gain by deferring paying tax until you're a base rate (or, I suppose, lower) tax pensioner.

 

I don't intend paying tax even the once!

You can avoid being taxed upon your pension by contributing to VCTs or similar when you draw it.

Whilst these may not exist in quite this form, for example when I started on VCTs they were allowing 40% relief, when the time comes there is likely to be something similar available.

Of the below I like VCTs best owing to their spread across loads of companies of various maturities and the tax fee dividends.  Which are nice and don't even need to be disclosed on the tax return.

 

image.png.70c47875a28e7eb2c162ef48a5fed3ca.png

https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors

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Just to butt in here, I also have the tax free lump sum option, but what concerns me is that the bar will keep getting raised over the next 20 years that it may not actually translate to a drastically earlier retirement?

Or is that not likely to happen for the lump sum?

It's all academic at the moment like cause I don't have a fucking house yet.

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1 hour ago, Melchett said:

Id rather not get them involved in the criminal and exploitative students loan company. My fear is that like BBC, Sky TV, and financial fraudsters, once they have your name and, worse, signature, getting out of their clutches may not be so easy. Plus I have raised two numerate daughters, one doing maths, the other engineering. They understand the financial implications of a student loan and it upsets and terrifies both of them. I dont want them losing sleep worrying that they could be on the hook for one.

Fair point. I have exactly the same view as regards our AVCs - in fact as a geriatric father (48 with a 5 year old) I view my AVCs and SIPPS as Jnrs Uni fund although with his current interests an investment in a course to drive a wreck ball machine would be more apt. :PissedOff:

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Just now, Melchett said:

With this 25% tax free business, how does that apply if you have more than one pension fund?

I've looked into that and emerged rather baffled.  They talk about a "pension event" but I'd rather stagger my taking of the various schemes (one in particular is acting like a tontine because it's a closed scheme with very conservative assumptions so the later I take it the more quids in I am, over and above the usual benefit of taking pension later) them so do I get multiple "pension events" and if so how do I declare a "pension event" on my SIPP.

It's all a dozen years away so I've given up in the hope that somebody else makes the effort and posts it here!

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56 minutes ago, Frank Hovis said:

 

I don't intend paying tax even the once!

You can avoid being taxed upon your pension by contributing to VCTs or similar when you draw it.

Whilst these may not exist in quite this form, for example when I started on VCTs they were allowing 40% relief, when the time comes there is likely to be something similar available.

Of the below I like VCTs best owing to their spread across loads of companies of various maturities and the tax fee dividends.  Which are nice and don't even need to be disclosed on the tax return.

 

image.png.70c47875a28e7eb2c162ef48a5fed3ca.png

https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors

I assume you are going to blow this all in retirement or you will be leaving alot to the Government in inheritance tax. 

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1 hour ago, Melchett said:

Id rather not get them involved in the criminal and exploitative students loan company. My fear is that like BBC, Sky TV, and financial fraudsters, once they have your name and, worse, signature, getting out of their clutches may not be so easy. Plus I have raised two numerate daughters, one doing maths, the other engineering. They understand the financial implications of a student loan and it upsets and terrifies both of them. I dont want them losing sleep worrying that they could be on the hook for one.

I assume they charge punitive interest now? 

When I was at Uni I had a paid sponsorship as a student drain sniffer. I still took out the student loan and invested these in 5 year NSI bonds paying RPI + 4.5% per year

Treated myself to a half decent Ford Fiesta 1.8D with the proceeds in 1996. 

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Just now, Kurt Barlow said:

I assume you are going to blow this all in retirement or you will be leaving alot to the Government in inheritance tax. 

The plan, such as it is, is once I've had all the big holidays I wish then to buy a house either here or abroad with boat mooring at the bottom of the garden from the investments and draw the pensions to replace the investment income that I'm relying upon currently.

I will then have a house rather than investments and get to enjoy the cash that way. 

That will get done for IHT but so be it.

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9 minutes ago, Melchett said:

With this 25% tax free business, how does that apply if you have more than one pension fund?

Friend of mine made additional voluntary contributions into his DB scheme, and was then able to take the whole of the additional contribution tax free, because the additional contribution value was less than 25% of the total value of his DB pension plus the additional contributions.

This ruse may not be available in all schemes, but my friend was very happy with himself.

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4 minutes ago, SpectrumFX said:

Friend of mine made additional voluntary contributions into his DB scheme, and was then able to take the whole of the additional contribution tax free, because the additional contribution value was less than 25% of the total value of his DB pension plus the additional contributions.

This ruse may not be available in all schemes, but my friend was very happy with himself.

Thanks for posting this. 

I have two DB pensions (funded fortunately not vague promises) plus about £40K in SIPPS and AVC's. 

However if I do this and drop dead the next Day after Mrs B only gets half my pension. 

Probably better to take the TFLS from the DB's and draw down the AVCs as their value will remain if Im dead or not. 

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17 minutes ago, Frank Hovis said:

The plan, such as it is, is once I've had all the big holidays I wish then to buy a house either here or abroad with boat mooring at the bottom of the garden from the investments and draw the pensions to replace the investment income that I'm relying upon currently.

I will then have a house rather than investments and get to enjoy the cash that way. 

That will get done for IHT but so be it.

Motor or sail?

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6 minutes ago, Kurt Barlow said:

Motor or sail?

Ideally both.  I used to be in the yacht club and enjoyed it so would go for lessons again but for pottering around the coves that can only be reached from the sea a small motor boat with a cabin would be best.

I was eating lunch at a pub on the river with a big pontoon the other day and several boats came and went whilst we were there; mooring up for lunch is so civilised.

Pandora Inn on the Helford.

pandora-inn.jpg

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2 minutes ago, Frank Hovis said:

Ideally both.  I used to be in the yacht club and enjoyed it so would go for lessons again but for pottering around the coves that can only be reached from the sea a small motor boat with a cabin would be best.

I was eating lunch at a pub on the river with a big pontoon the other day and several boats came and went whilst we were there; mooring up for lunch is so civilised.

Pandora Inn on the Helford.

pandora-inn.jpg

Nice. Get a small - medium lift keel yacht (Parker 21 / 23, Gibsea 242) - you can still use as a motor boat for cove hopping 

I wanted to look at a parker 21 yacht at the weekend buts its gone sale agreed. :(

There are some nice GIBSEA 242's up for sale but they are all in the North East and thats too close to XYY for comfort. Bit of a trek towing the bstard back and Id need to hire a Hilux or Navarra. Thought about offering  a paid weekend away with Mrs B to go and view but again - 8 hour journey back with jnr...........

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