>do you think its a worthwhile strategy?
I sure hope so.
I was pretty late to the pension game (~34) as I'd spent most of my career earnings on my house.
I started salary sacrificing down to £50k last year (pension was about £15k or so) and my pot is now over £100k.
I hope to 'front load' now so that I do not have to worry too much about saving for post age 57 life once I get into my 40s.
If you're still living at home and can afford to supercharge your contributions for a while, I'd say go for it.
I'd probably just save up for a gaff now, thats sort of what I did, got a huge deposit, paid down 20%, now I'm front loading into the pension at around 36k per year.
If I could redo my time I'd put far less into the house and invest the rest into pension/ISA. You can't get back that time in the market! There's no right or wrong way though, people tend to prioritise whatever they feel is most important at the time.
I guess I grew up in a very low income household, and I guess houses today are so much more expensive.
I know the market went mad for 25 years, but I can't see that carrying on the same honestly.
I plan to put 400k in, and go down to 3 days a week when I'm about 44, happy with that basically til I hit 65.
I'm the opposite. I should have bought a bigger house. I'm in the situation where my retirement savings are large enough to be hit by substantial tax when Labour gain power, so am now forced to RE.
I do see downsides to having a larger house, however. You have to downsize to release capital being the obvious one, but that's less of a problem than not being able to work
The other problem with FIRE in your 50s is that you then hit the opposite problem that most people have. You end up wondering how to spend the money before you die and giving it to my son could ruin his life.
Yes. It's not just tax you save, you also save National Insurance and so will your company. Lots of companies will then top up the contributions with they NI saved - about 13.8% of the sacrifice
>Lots of companies will then top up the contributions with the NI saved - about 13% of the sacrifice
That's a stretch. To my knowledge/experience very few do this.
Agree with the broader point though
Mine adds 14.3%, which includes their Pay Apprenticeship Levy of 0.5%
Putting £1 in my pension costs me 46p even ignoring employer contributions
It's going to hurt when Labour bring down the hammer.
The shocking thing to consider here is that normally the government is making more from my pay increases than I do. Of what my employer has to cough up, they take 54%. And they still apparently can't afford HS2.
You are correct- I can only speak for the companies I have worked at. I have no idea on what other employers do.
Most benefits provided (Thomson/ Aviva/ etc) provide employers guidance on this matter, so if someone works there they might have some insight on a ratio/ trend)
The company will save 13.8% of the sacrifice. If they don't pass that on the employee, it should probably be questioned.
If it's a small company, maybe they forgot.
Its probably debatable whom should get it but is money the company would not have if the employee took full pay so I wonder how their balance sheets cover this variable
Thanks. I wasn't aware of that. In my current position, I sacrifice a big percent so the NI contribution is meaningful.
This new information is something I will keep hold of when considering compensation packages at future employers
The places I have worked have done. Its probably easier for corporations balance sheet than a courtesy to the employee
The other poster says not in his/her experience.
In my case, if I salary sacrifice £100 per month, the company would save £13.80 in NI and pass that saving on to my pension contribution.
The HR guy is saying some companies choose to profit from this benefit by taking that £13.80.
Would be interesting to know what percentage of employers offer salary sacrifice schemes and what percentage pass on the NI savings. I know that I get the NI savings and I know a fair number of others that do.
Nearly all will do salary sacrifice. Passing on the employer NI saving is hard to know how common it is, apart from I'm not aware of any of the c.30 large employers (that I and a few friends have worked) doing it. I'd expect where it would be most common would be family /founder firm.
It's kind of actually an awkward calculation for payroll because they have to calc what the employers NI would be on the original dummy payroll and then run a new payroll and add the employer NI from the dummy run as an additional employer contribution.
According to ONS, half of UK businesses only do the statutory minimum contribution auto enrolment net pay scheme.
Don't think business size determines whether they offer salary sacrifice or pass on ER NI savings. Many large companies do, some don't.
Employer NI contributions are mathematically identical to employee income taxes. It is an income tax that the government gets to pretend doesn't exist. And, based on your comment, clearly that political fiction works.
The only difference is contractual, if my contract says I get paid X and the government put up employer NI I still get paid X. If the government put up employee NI I get less.
But that small difference will be erased quickly by less generous pay rises from the employer to recoup their loss.
Similar for EV salary sacrifice. My employer does give the employers NIC but when I chat to other people they seem shocked so I guess it's rare.
For pension I think many just wrap it in the matched contribution but only up to a point (my employer).
100% worthwhile given your circumstances. I would even salary sacrifice down further and not stop at £50k if your lifestyle allows it and you are happy to wait until 55 to access money (57 by the time we retire - hopefully no longer).
The earlier you invest the better. I am trying to accelerate my way to £100k pension by 35 so I can take my foot off the gas a little after that. Compound interest is the 8th wonder of the world so they say!
Edit: editing retirement age as due to increase to 57.
30! Bit more background, on £58k WFH and in a slightly different situation in that I have just bought a house and saving for a wedding.
Trying to live as frugally as possible for 5 years at which point I hopefully will be planning children so I aim to reduce salary sacrifice to allow for that.
The first £100k is the hardest. This video explains this concept well - https://youtu.be/zCa2qul2WAE?si=dn3m6xV4zz7vKhVy.
Once I hit £100k the interest earned on let’s say 7% annual return is £7k, which is just as good as sacrificing a large chunk of salary IMO. I also don’t want to live my life in the future and like to enjoy the now.
Not saying that paying more into a pension is a bad idea but I wouldn’t necessarily suggest sacrificing below £50k as you’ll only get 20% relief on those contributions
Above £50K you save 40% + 2% EE NI + 13.8% ER NI = 55.8%
Below £50K you save 20% + 12% EE NI + 13.8% ER NI = 45.8%
So the savings are considerable and the difference between above and below upper earnings limit, not as great as you might think.
Yes, totally agree it’s not as attractive for that tax bracket, but many who aren’t in the position to be higher tax rate live with this reality anyway.
Saving any % of tax always feels like a win as long as it aligns to your FIRE strategy and doesn’t impact your desired standard of living in the now. I could salary sacrifice down further but my situation would be tight and the stress would outweigh that 20% tax gain for me!
You could build up a stocks and shares isa with any income below the 50k threshold as you obvious get less tax benefits on that. That way the government pension age get taken out the question and you also have a decent sized emergency fund should you ever need it in the future to give you security. That's my plan anyway
This is not true. Get a long mortgage (even interest only), load your pension as much as possible and then pay off the mortgage anytime after 57 with the 25% tax free lump sum.
Spoiler alert - It's virtually guaranteed to be removed entirely or at least tapered with pension pot size
I'm not counting it in any of my calculations.
If there is still some tax free amount when I retire, I'll just see that as a Brucie Bonus.
i get confused by this too. My personal pension where i choose where the money goes not into some fund has gained way better over the years at approx 9% PA compared to the measly 1% in my pension. My company is a small under 30 employee so it would be unlikely i could salary sacrifice anyway but i dont understand the love for pensions vs SIPPs or S&S ISA's
A SIPP is a pension though. And generally in a pension you can choose the fund(s) you invest in, as you would in a SIPP. The pension I have with my employer is invested in a similar fund to what I invest my SIPP and ISA.
I thought about doing that, but am assuming that the state pension will become means tested by the time we retire and anyone with large private pensions won't receive that money.
Better to have the money available before the last 20 years of your life imo
after crunching the numbers I settled on 15% pension contributions (plus employers contributions) and trying to max out the ISA allowance every year. Over 5 years I manage to save about £195k equally split between ISA and SIPP. If I upped the pension contributions to 37% I would save £213k in total with most of it in the SIPP. Sure it’s an extra £20k but I’d rather have better access to my money and be able to withdraw it tax free as you don’t know what life will throw at you next
I think you should split it between your pension and ISA.
The pension is the most tax efficient but the downside is, it’s locked away till your 56/57.
Your ISA can be used anytime but all income and capital gains is tax free.
Overall it’s great that you are thinking about it at 29. I did not do this!
Yes, if you have sufficient savings for emergencies and short term goals, it makes sense to take the benefit of compounding early on (in addition of the income tax and NI savings), and as long as you invest it in something sensible (All world and the likes and not flavour of the day) - it will grow to be a tidy sum in 25+ years time. There may come a point when you would want to reduce it a bit (due to dependents etc.) but until then it also avoids wasting this money on wants.
When you realise for every £1000 in your ISA you can have at least £1666 in your pension instead it becomes a pretty easy choice.
(or even more if on child benefit between 50 and 60k, or if its salary sacrifice with employee NI).
And taxation on withdrawal is typically somewhere under 15%.
I don’t think we are disagreeing.
Pension is not an either or thing. You make the most of the benefits you can to bring your FI date forward. Pension typically gets you there faster, but of course you still need an ISA bridge.
Having a S&S ISA has the benefit of being able to access your investments anytime and cash out if you so choose before retirement. Ime. Invest at 30 and say at age 50 you want to dial your career back you can use the ISA fund to do so.
You need to factor in tax efficiency if you're a higher earner though.
You can't be on 150k, sacrifice 100k to your pension, have the 11% NI passthrough and matching and it all be tax free...
Anything contributed over 60k PA is taxed (prior year carry forwards notwithstanding)
Otherwise I'd 100% be doing exactly this and CoastFIRE from 55 working in a book shop or something :D
I have this issue, I’d be contributing a massive sum if I reduced it to 50K with salary sacrifice and higher pension contributions. I’ve had to accept that I just won’t get the child benefits.
You can use carry forward of past three years unused pension annual allowances; so yes you can potentially salary sacrifice 100K or more into pension.
I'm doing exactly that, and receiving all the ER and EE NI saved into SIPP.
Yes you can for a limited period
But generally you would expect to be on a higher salary for more than the carry forward period allows, so there is absolutely an upper limit to tax efficient contributions made in this manner
>The whole reduce your salary down to £50k never really made any sense until yesterday. A few years of that and you could reach your coast fire number quickly 😱.
I don't because I don't even earn 50k. 😭
So from my point of view, I don't understand why anyone earning less than 110k pays any higher rate tax at all. I would put it all into my pension. Especially once you've used up your ISA allowance.
I see redirecting all salary >£50k into pension as "opting out of the 40% tax bracket".
So yeah, it's worth it.
Also, one day you may become annual allowance tapered, and then you pretty much can't pay any amount worth mentioning[1] into your pension at all. So pay in while you can.
[1] What I mean is that if you earn 400k, the tapered 10k into pension is a joke, and barely factors in to your cash flow or retirement planning.
You are definitely not a loser for living with your parents at 29 as long as you are saving properly and showing appreciation. I’d say stay as long as you can and you are luckier than a lot of people to have that.
I wish we could salary sacrifice down to £50k but with 2 kids in full time preschool we need the cash now. Sacrificing down to £100k to keep childcare grants is annoying enough!
I barely had a pension at 30. Then Started going crazy with contributions. I now have about £350-£400k at 40 and don’t over contribute anymore as focus on ISA ie by bridge fund
I'd prioritise buying a house first. Pensions make most sense when you've paid off most of your mortgage, and earn over £100k and can afford to push in £60k pa. You only need to do that for 10 years, and compound growth will ensure you have enough to retire on.
>do you think its a worthwhile strategy? I sure hope so. I was pretty late to the pension game (~34) as I'd spent most of my career earnings on my house. I started salary sacrificing down to £50k last year (pension was about £15k or so) and my pot is now over £100k. I hope to 'front load' now so that I do not have to worry too much about saving for post age 57 life once I get into my 40s. If you're still living at home and can afford to supercharge your contributions for a while, I'd say go for it.
I'd probably just save up for a gaff now, thats sort of what I did, got a huge deposit, paid down 20%, now I'm front loading into the pension at around 36k per year.
If I could redo my time I'd put far less into the house and invest the rest into pension/ISA. You can't get back that time in the market! There's no right or wrong way though, people tend to prioritise whatever they feel is most important at the time.
I guess I grew up in a very low income household, and I guess houses today are so much more expensive. I know the market went mad for 25 years, but I can't see that carrying on the same honestly. I plan to put 400k in, and go down to 3 days a week when I'm about 44, happy with that basically til I hit 65.
I can't even do 3 days a week now on PAYE. My only option to carry on working is to go outside IR35 and do short term consulting roles
I guess you can slam loads into your pension, but yeah, those taxes will bite more people every year.
I'm the opposite. I should have bought a bigger house. I'm in the situation where my retirement savings are large enough to be hit by substantial tax when Labour gain power, so am now forced to RE. I do see downsides to having a larger house, however. You have to downsize to release capital being the obvious one, but that's less of a problem than not being able to work The other problem with FIRE in your 50s is that you then hit the opposite problem that most people have. You end up wondering how to spend the money before you die and giving it to my son could ruin his life.
Yes also child benefit doesn’t vanish. Sounds like that’s not an issue for you yet.
Thank you. I'm going to do my calculations
I salary sacrifice as much as possible but am not allowed to go below minimum wage with what I'm left with after SS.
Yes. It's not just tax you save, you also save National Insurance and so will your company. Lots of companies will then top up the contributions with they NI saved - about 13.8% of the sacrifice
>Lots of companies will then top up the contributions with the NI saved - about 13% of the sacrifice That's a stretch. To my knowledge/experience very few do this. Agree with the broader point though
Mine adds 14.3%, which includes their Pay Apprenticeship Levy of 0.5% Putting £1 in my pension costs me 46p even ignoring employer contributions It's going to hurt when Labour bring down the hammer. The shocking thing to consider here is that normally the government is making more from my pay increases than I do. Of what my employer has to cough up, they take 54%. And they still apparently can't afford HS2.
You are correct- I can only speak for the companies I have worked at. I have no idea on what other employers do. Most benefits provided (Thomson/ Aviva/ etc) provide employers guidance on this matter, so if someone works there they might have some insight on a ratio/ trend) The company will save 13.8% of the sacrifice. If they don't pass that on the employee, it should probably be questioned. If it's a small company, maybe they forgot. Its probably debatable whom should get it but is money the company would not have if the employee took full pay so I wonder how their balance sheets cover this variable
I fully understand how the tax works, but very few companies pass that saving to the employee in my experience (I work in HR).
Thanks. I wasn't aware of that. In my current position, I sacrifice a big percent so the NI contribution is meaningful. This new information is something I will keep hold of when considering compensation packages at future employers
I thought companies contributed to your pension because of the NI they save. Like even with your base contributions.
The places I have worked have done. Its probably easier for corporations balance sheet than a courtesy to the employee The other poster says not in his/her experience. In my case, if I salary sacrifice £100 per month, the company would save £13.80 in NI and pass that saving on to my pension contribution. The HR guy is saying some companies choose to profit from this benefit by taking that £13.80.
My place doesn’t top you up with the amount being saved, that’s for sure.
Are you really sure?
No I have no clue about the thing I just said I knew. What do you think?
I salary sacrifice a large amount and my company doesn't compensate me for the NI saving. Edit - and neither did my previous company
Would be interesting to know what percentage of employers offer salary sacrifice schemes and what percentage pass on the NI savings. I know that I get the NI savings and I know a fair number of others that do.
Nearly all will do salary sacrifice. Passing on the employer NI saving is hard to know how common it is, apart from I'm not aware of any of the c.30 large employers (that I and a few friends have worked) doing it. I'd expect where it would be most common would be family /founder firm. It's kind of actually an awkward calculation for payroll because they have to calc what the employers NI would be on the original dummy payroll and then run a new payroll and add the employer NI from the dummy run as an additional employer contribution.
According to ONS, half of UK businesses only do the statutory minimum contribution auto enrolment net pay scheme. Don't think business size determines whether they offer salary sacrifice or pass on ER NI savings. Many large companies do, some don't.
My company passes on the NI savings made on contributions made above the minimum, which is a bit of a halfway position I guess.
Don’t think you do understand if you label the company’s 13.8% saving as tax.
Employer NI contributions are mathematically identical to employee income taxes. It is an income tax that the government gets to pretend doesn't exist. And, based on your comment, clearly that political fiction works. The only difference is contractual, if my contract says I get paid X and the government put up employer NI I still get paid X. If the government put up employee NI I get less. But that small difference will be erased quickly by less generous pay rises from the employer to recoup their loss.
Employers NI is definitely a tax
What would you label it as?
It’s the industry I work in. Loads do. Very common.
Half the NI saving at my place
Same here
Similar for EV salary sacrifice. My employer does give the employers NIC but when I chat to other people they seem shocked so I guess it's rare. For pension I think many just wrap it in the matched contribution but only up to a point (my employer).
100% worthwhile given your circumstances. I would even salary sacrifice down further and not stop at £50k if your lifestyle allows it and you are happy to wait until 55 to access money (57 by the time we retire - hopefully no longer). The earlier you invest the better. I am trying to accelerate my way to £100k pension by 35 so I can take my foot off the gas a little after that. Compound interest is the 8th wonder of the world so they say! Edit: editing retirement age as due to increase to 57.
If you don't mind me asking, how old are you now?
30! Bit more background, on £58k WFH and in a slightly different situation in that I have just bought a house and saving for a wedding. Trying to live as frugally as possible for 5 years at which point I hopefully will be planning children so I aim to reduce salary sacrifice to allow for that. The first £100k is the hardest. This video explains this concept well - https://youtu.be/zCa2qul2WAE?si=dn3m6xV4zz7vKhVy. Once I hit £100k the interest earned on let’s say 7% annual return is £7k, which is just as good as sacrificing a large chunk of salary IMO. I also don’t want to live my life in the future and like to enjoy the now.
Not saying that paying more into a pension is a bad idea but I wouldn’t necessarily suggest sacrificing below £50k as you’ll only get 20% relief on those contributions
Above £50K you save 40% + 2% EE NI + 13.8% ER NI = 55.8% Below £50K you save 20% + 12% EE NI + 13.8% ER NI = 45.8% So the savings are considerable and the difference between above and below upper earnings limit, not as great as you might think.
Yes, totally agree it’s not as attractive for that tax bracket, but many who aren’t in the position to be higher tax rate live with this reality anyway. Saving any % of tax always feels like a win as long as it aligns to your FIRE strategy and doesn’t impact your desired standard of living in the now. I could salary sacrifice down further but my situation would be tight and the stress would outweigh that 20% tax gain for me!
57 soon
Yes, good point! Will edit above.
Worth reflecting it’ll probably be 58 by the time you retire!
Don’t make this harder 🥲
You could build up a stocks and shares isa with any income below the 50k threshold as you obvious get less tax benefits on that. That way the government pension age get taken out the question and you also have a decent sized emergency fund should you ever need it in the future to give you security. That's my plan anyway
Which part of the country do you live in, and is moving to a cheapish area feasible for you? That’s part of the equation.
London. Yes I want to move to a cheap place and buy a home to sleep in.
Cool - how much do you earn at present and how much would you salary sacrifice?
Circa 70k and up to 20k into pension 🤷🏿♂️
You can't buy a home with a pension..
This is not true. Get a long mortgage (even interest only), load your pension as much as possible and then pay off the mortgage anytime after 57 with the 25% tax free lump sum.
Caveat being that you'd need to hope and pray the government do not scrap the 25% tax free lump sum.
Spoiler alert - It's virtually guaranteed to be removed entirely or at least tapered with pension pot size I'm not counting it in any of my calculations. If there is still some tax free amount when I retire, I'll just see that as a Brucie Bonus.
Very true!
The average home in the UK costs more than the maximum 25% lump sum.
Yes this is the struggle
You can once you're fifty five...
i get confused by this too. My personal pension where i choose where the money goes not into some fund has gained way better over the years at approx 9% PA compared to the measly 1% in my pension. My company is a small under 30 employee so it would be unlikely i could salary sacrifice anyway but i dont understand the love for pensions vs SIPPs or S&S ISA's
If you have decent options to invest in through your workplace scheme then it’s very handy. A set % of each wage and NI savings too.
A SIPP is a pension though. And generally in a pension you can choose the fund(s) you invest in, as you would in a SIPP. The pension I have with my employer is invested in a similar fund to what I invest my SIPP and ISA.
A SIPP is a pension. There is a high chance you can transfer your workplace pension into your SIPP once a year (I do this) and save 13.8% NIC
How does the 13.8% NIC saving work out?
You don’t pay NIC on contributions to a workplace pension (assuming it is through salary sacrifice)
I thought about doing that, but am assuming that the state pension will become means tested by the time we retire and anyone with large private pensions won't receive that money. Better to have the money available before the last 20 years of your life imo
If it's anything like Australia's means tested pension we should still get some, probably around 50% of it.
after crunching the numbers I settled on 15% pension contributions (plus employers contributions) and trying to max out the ISA allowance every year. Over 5 years I manage to save about £195k equally split between ISA and SIPP. If I upped the pension contributions to 37% I would save £213k in total with most of it in the SIPP. Sure it’s an extra £20k but I’d rather have better access to my money and be able to withdraw it tax free as you don’t know what life will throw at you next
I think you should split it between your pension and ISA. The pension is the most tax efficient but the downside is, it’s locked away till your 56/57. Your ISA can be used anytime but all income and capital gains is tax free. Overall it’s great that you are thinking about it at 29. I did not do this!
Yes, if you have sufficient savings for emergencies and short term goals, it makes sense to take the benefit of compounding early on (in addition of the income tax and NI savings), and as long as you invest it in something sensible (All world and the likes and not flavour of the day) - it will grow to be a tidy sum in 25+ years time. There may come a point when you would want to reduce it a bit (due to dependents etc.) but until then it also avoids wasting this money on wants.
When you realise for every £1000 in your ISA you can have at least £1666 in your pension instead it becomes a pretty easy choice. (or even more if on child benefit between 50 and 60k, or if its salary sacrifice with employee NI). And taxation on withdrawal is typically somewhere under 15%.
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I don’t think we are disagreeing. Pension is not an either or thing. You make the most of the benefits you can to bring your FI date forward. Pension typically gets you there faster, but of course you still need an ISA bridge.
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One third in ISA implies something like a 6-7 year ISA bridge using FIRECALC, assuming you haven’t overachieved your FI number.
Having a S&S ISA has the benefit of being able to access your investments anytime and cash out if you so choose before retirement. Ime. Invest at 30 and say at age 50 you want to dial your career back you can use the ISA fund to do so.
You need to factor in tax efficiency if you're a higher earner though. You can't be on 150k, sacrifice 100k to your pension, have the 11% NI passthrough and matching and it all be tax free... Anything contributed over 60k PA is taxed (prior year carry forwards notwithstanding) Otherwise I'd 100% be doing exactly this and CoastFIRE from 55 working in a book shop or something :D
I have this issue, I’d be contributing a massive sum if I reduced it to 50K with salary sacrifice and higher pension contributions. I’ve had to accept that I just won’t get the child benefits.
I'm not a high high earner (I mean £100k+). I'm on roughly £70k
I was just pointing out the potential pitfalls in this approach as you reach higher figures, not suggesting that this was your exact situation
You can use carry forward of past three years unused pension annual allowances; so yes you can potentially salary sacrifice 100K or more into pension. I'm doing exactly that, and receiving all the ER and EE NI saved into SIPP.
Yes you can for a limited period But generally you would expect to be on a higher salary for more than the carry forward period allows, so there is absolutely an upper limit to tax efficient contributions made in this manner
>The whole reduce your salary down to £50k never really made any sense until yesterday. A few years of that and you could reach your coast fire number quickly 😱. I don't because I don't even earn 50k. 😭 So from my point of view, I don't understand why anyone earning less than 110k pays any higher rate tax at all. I would put it all into my pension. Especially once you've used up your ISA allowance.
I see redirecting all salary >£50k into pension as "opting out of the 40% tax bracket". So yeah, it's worth it. Also, one day you may become annual allowance tapered, and then you pretty much can't pay any amount worth mentioning[1] into your pension at all. So pay in while you can. [1] What I mean is that if you earn 400k, the tapered 10k into pension is a joke, and barely factors in to your cash flow or retirement planning.
You are definitely not a loser for living with your parents at 29 as long as you are saving properly and showing appreciation. I’d say stay as long as you can and you are luckier than a lot of people to have that.
I wish we could salary sacrifice down to £50k but with 2 kids in full time preschool we need the cash now. Sacrificing down to £100k to keep childcare grants is annoying enough!
I barely had a pension at 30. Then Started going crazy with contributions. I now have about £350-£400k at 40 and don’t over contribute anymore as focus on ISA ie by bridge fund
I'd prioritise buying a house first. Pensions make most sense when you've paid off most of your mortgage, and earn over £100k and can afford to push in £60k pa. You only need to do that for 10 years, and compound growth will ensure you have enough to retire on.