He keeps saying very very unusual, so what? A spike in interest rates much higher than 'usual' is entirely possible. Recent history shows us that. I dont think you can put a price on actually owning your house vs the bank owning it. Not least his plan is depending on pension rules of the future which is another big unknown.
Pension fund performance - do you monitor yours, how is it doing, do you actively change it?
- Thread starter danlightbulb
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Soldato
It's a good idea to be cautious as this wouldn't be suitable for everyone but for a lot of us we are not in a position to max out the LTA anytime soon but if you have reached the cap of £1.1m then congratulations I guess. I would also say it would be a good to run this idea past another paid financial advisor to get their take on it before making a profound change they could influence your future financial prospects.
Whilst rules can change as it stands you would likely be better off doing this overpaying your mortgage just because the tax savings makes it a very efficient of saving money.
Soldato
In the perfect world yes... everyone should be doing this but
mortgage rates can go up..
stocks and shares/pension pots can go down..
and if for whatever reason find yourself out of work for a lenghty period of time then you're stuff..
There is an idea to have a "small" amount of mortage, have an off set mortage so interest payments a super low.. then pay of interest only without paying off the captial on your house.
This way if you need additonal cash for whatever reason, it's easiler to re-mortage the house or take a loan against it with your mortage provider.
But again, I would personally rather pay off the mortage and have that fund saved in an account.
Just to add to the Vanguard Fund discussion. For my S&S ISA, I’m currently all-in on the Developed World Ex. UK (Acc) Fund.
I have enough exposure to the UK market in my pension, property, and my job. So a bit of diversification seems like a good shout.
Also, the last time I checked, the fund has performed well recently compared to other similar Vanguard funds plus the fees are low.
I have enough exposure to the UK market in my pension, property, and my job. So a bit of diversification seems like a good shout.
Also, the last time I checked, the fund has performed well recently compared to other similar Vanguard funds plus the fees are low.
The OH has Developed World Ex. UK (Acc) in her pension and has done well for her but was burdened with loads of other funds so they have been culled to go 100% but may have small % Emerging Markets to go along with it.
Is yours 100% Ex. Uk?
Yes, 100% of my S&S ISA is in that fund, but the value of my ISA is only ~17% of my pension. I thought about adding a small % of an EM fund, but when I looked, they weren't performing as well as the Developed World fund, so I just stuck with it. I might reassess it, though.
I have a question:
I'm currently paying into my pension after tax. My pension provider then claims tax relief "at source" and tops up the additional 20% (pretty standard stuff).
I was considering changing this to salary sacrifice, so I would pay into my pension before tax, thus reducing my income tax and national insurance contributions. Doing it this way, I would have to increase my pension contributions by 20% to maintain the same amount going into my pension each month, further reducing the amount of salary to be taxed. Or so I thought.
I've just run the numbers through the Salary Calculator website, and if I keep my employee contributions the same, this does indeed leave me with more net monthly pay. But when I increase my pension contributions to make up for the shortfall in tax relief, my take-home pay is less than it would be under the "at source" system. Plus, because of the salary sacrifice, I believe my "Qualified Earnings" will also be reduced, so my employer's pension contributions will also be lower.
I had assumed that the reduction in tax and NI would make up the difference, but it looks like doing it via Salary Sacrifice would leave me worse off each month in terms of take-home pay, and my net pension contributions would be lower.
Have I missed something? This seems completely counter to what I had understood about the two systems.
It doesn't seem right to me. My salary sacrifice is off my gross salary so I put 12% and my employer puts 6% of gross.
You then obviously only pay tax and NI on what is left after my contribution is deducted.
Because you get the NI saving too, you have to be better off I can't see how you can't be.
Yeah, when I keep the pension contribution the same as it is currently, it works out as expected (except I'm obviously paying less into my pension because I'm not getting the 20% relief at source). When I increase my pension contributions to account for the shortfall, I seem to lose out everywhere.
Hard to say without seeing your calculations.
If your salary was £30k and you put 10%.
Under salary sacrifice your pension contribution would be £3k and you'd pay tax/NI on £27k which is £4327.
Under the other method you'd pay tax and NI on £30k which is £5227 leaving you with £24772. If you put 10% of this as your pension that would be £2477 then the pension would claim back 20% on this. Now I'm not sure which way around it works do they say 20% of £2477 which is an extra £495 giving a total of £2972. Or do they say pension contribution X is post tax so pre tax would be X/(1-20%) which is an extra £619 on top of your contribution giving you total of £3096.
So because these calcs include percentages of figures taken at different points that's probably why it isn't quite working. You probably can't just increase your pre tax contribution by 20% and get the same figure at the end.
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let's say you pay in £100 a month, that would be made up of £80 from your take home pay and then topped up by 25% (£20) in your pension fund = £100
if you pay in using salary sacrifice you would pay in £100 from gross into you pension and pay less tax and NI so you should see a little increase in your take home pay.
Either way you still have £100 in your pension.
Ah that explains it then - they are using 25% top up not 20% (25% being equivalent to the reverse calculation of 20% tax I guess)?
Soldato
I have a look at mine once a year at most, its Nest so know there's a limited amount of stuff I can do with it so don't see the need to actively look at it.
Thanks, you were right, I was using 20% instead of 25%. It's better, but it still doesn't quite add up:
Salary/pension contribution figures are rounded for simplicity, and this is using the 2024/25 Tax Year on the Salary Calculator website:
Scenario 1 – At Source Tax Relief
| Gross Salary | £50,000 |
| Employee Pension Contribution | £6,600 per year / £550 per month |
| Tax Relief at source @ 25% | £1,650 per year / £137.50 per month |
| Total for the above | £8,250 per year / £687.50 per month |
| Qualified Earnings (between £6,240 and £50,270) | £43,760 |
| Employer Pension Contributions @ 3% of the above | £1,312.80 per year / £109.40 per month |
| Total pension contributions | £9,562.80 per year / £796.90 per month |
| Take-home pay after tax, NI, and pension | £34,239.60 per year / £2,853.31 per month |
Scenario 2 – Salary Sacrifice
| Gross Salary | £50,000 |
| Employee Pension Contribution | £8,250 per year / £687.50 per month |
| Qualified Earnings (less Salary Sacrifice, between £6,240 and £50,270) | £35,510 |
| Employer Pension Contributions @ 3% of the above | £1,065.30 per year / £88.78 per month |
| Total pension contributions | £9,315.30 per year / £776.28 per month |
| Take-home pay after tax and NI using Salary Sacrifice | £33,579.60 per year / £2,798.31 per month |
So, under salary sacrifice, my annual pension contributions would be £247.50 less due to the reduced Employer Contributions. But even if that weren't the case, my take-home pay would also be £660 less or £55 per month worse off.
Have I gone wrong somewhere?
Are you sure your scheme definitely takes the employer contributions from qualified earnings and not gross salary?
Are you sure your calcs are right as you've displayed the lower employee contribution under scenario 1 as a deduction from your gross pay not your net pay?
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Soldato
This fund has done amazingly over the past 4-5 years. It's the biggest chunk of my pension and over that period of time my investment has grown...... checks app.... 95.88%
Not surprising as nearly 14% of the fund is in Software & Computer Services with Apple and Microsoft combined forming 9.5% of the fund.
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Soldato
Normally if you have salary sacrifice its easier to think your on two wages
1) real wage, eg the wage your employer says you have and what it would be with no pension contribution
this one is what they should use for anything related to salary, bonuses, pension conts etc
2) outside world wage, which is your real wage after salary sacrifice amount(s)
this is the one that HMRC will see, you would normally use for mortgages etc*
* its less clear now you may be able to use your real wage, depends if you can prove it
So generally the only difference between a salary sacrifice scheme and a standard scheme, assuming you recall any higher rate tax, is the NI, sal sacrifice sees lower NI
With all the above said, I think that the position within public sector may not be quite as clear
1) real wage, eg the wage your employer says you have and what it would be with no pension contribution
this one is what they should use for anything related to salary, bonuses, pension conts etc
2) outside world wage, which is your real wage after salary sacrifice amount(s)
this is the one that HMRC will see, you would normally use for mortgages etc*
* its less clear now you may be able to use your real wage, depends if you can prove it
So generally the only difference between a salary sacrifice scheme and a standard scheme, assuming you recall any higher rate tax, is the NI, sal sacrifice sees lower NI
With all the above said, I think that the position within public sector may not be quite as clear
The way I'd work it out is this.
Say you have £50k salary and put £5k a year into your pension.
Under salary sacrifice that is easy, its 10%.
So you'd have £50k gross, minus £5k pension, gives £45k taxable.
Tax and NI on £45k is £9,727 a year, leaving you after tax& NI with £35,272, plus £5k in your pension scheme.
If taking pension from net pay, you'd be taxed on the full £50k so this would be £11,277 in tax and NI, leaving you with £38,772.
From this you'd then take £4k pension, which would be topped up to £5k later through the tax relief. So you'd have £38,772 minus £4,000 = £34,772. Plus you'd get £5k in your pension the same as before.
This is £500 lower than under salary sacrifice.
Do you think some companies work out the employer pension contribution from net salary if doing if post tax? That's sneaky if so and could completely negate the NI benefits.
Yep, the figures in Scenario 1 match what's paid into my pension account. It's definitely 3% of Qualified Earnings not Gross.
I think you might be onto something. I've just had a play with the Salary Calculator, and there are four options for the Pension tab:
- Auto-enrollment
- Employer
- Salary Sacrifice
- Personal
So, I guess I need to select "Personal" even though my pension scheme is technically an auto-enrollment scheme… Anyway, the figures that come up using "Personal" for Scenario 1 more closely match my payslip*, so I think that's probably where I was going wrong.
*It's tricky because, with bonuses, etc., my current payslips don't match the neat figures in any of these calculators.
Here are the updated tables:
Scenario 1 – At Source Tax Relief
| Gross Salary | £50,000 |
| Employee Pension Contribution | £6,600 per year / £550 per month |
| Tax Relief at source @ 25% | £1,650 per year / £137.50 per month |
| Total for the above | £8,250 per year / £687.50 per month |
| Qualified Earnings (between £6,240 and £50,270) | £43,760 |
| Employer Pension Contributions @ 3% of the above | £1,312.80 per year / £109.40 per month |
| Total pension contributions | £9,562.80 per year / £796.90 per month |
| Take-home pay after tax, NI, and pension | £32,919.60 per year / £2,743.31 per month |
Scenario 2 – Salary Sacrifice
| Gross Salary | £50,000 |
| Employee Pension Contribution | £8,250 per year / £687.50 per month |
| Qualified Earnings (less Salary Sacrifice, between £6,240 and £50,270) | £35,510 |
| Employer Pension Contributions @ 3% of the above | £1,065.30 per year / £88.78 per month |
| Total pension contributions | £9,315.30 per year / £776.28 per month |
| Take-home pay after tax and NI using Salary Sacrifice | £33,579.60 per year / £2,798.31 per month |
So, Salary Sacrifice would leave me £660 per year better off in terms of take-home pay. My pension contributions would still be £247.50 lower, but if I topped that up myself, I'd still be £412.50 better off (net).
Thanks for all your help with this — I was convinced I was doing something wrong but I couldn't figure it out.
*Edit: If I switch to Salary Sacrifice, my Employer NI will also reduce. I might ask my boss if we can split the savings and have the company pay the difference into my pension.
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So at the moment you're paying your pension post tax anyway aren't you? So your gross salary and qualified earnings are the same figure?
So Im not sure if that helps you to know what they would do under salary sacrifice unless you have specifically asked?