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Started a new job recently and I'll be starting on the company pension scheme soon.
In fact, I got the letter today telling me it needs signing by tomorrow and I can't get hold of anyone from the people team.
Is it me, or are the two types of pension named counter intuitively?
Net pay arrangement takes money directly from your salary pre tax.
At source tax relief arrangements actually tax your net pay and HMRC contribute to your scheme later.
My letter from work says my contributions will be deducted from NET pay and will be a % of monthly basic salary.
I've no idea what type of scheme I'm on.
Yep, pretty standard now: https://www.gov.uk/workplace-pensions/joining-a-workplace-pension
Almost certainly a "money purchase" / "defined contribution" type.
They may or may not add in extra money above the legal minimum employer contribution, depending on how nice they are.
NB You can opt out (eg I have), but obviously you'll have less money when you retire...
Yeah, I'm happy that it's a money purchase scheme, well, I'm not, but I understand it.
What I'm struggling with is trying to work out which tax relief model it is and whether it not I'll have to do self assessment at the end of each year for any part of my salary that's in the 40% bracket
The deduct the money at source and you'll have to do a tax return (or just write a letter to HMRC) to recover the extra 20% tax relief.
I used to just write a 3 line letter each year with a copy of the statement from my SIPP. They would then send me a cheque for the 20%...
You'll get a statement at the end of year, which details exactly what went it etc.
As an employer I have to enrol staff just so that they can decide they don't want it and I can unenrol them.
A total waste of everyone's time.
A total waste of everyone’s time.
It has significantly increased the number of people with workplace pensions in the UK, so overall a massive success!
Total membership of occupational pension schemes in the UK was an estimated 45.6 million in 2018, compared with 41.1 million in 2017 and is the highest level recorded by the Occupational Pension Schemes Survey.20 juin 2019
My staff have already retired!
Well there are always corner cases, but overall a good thing...
The deduct the money at source and you’ll have to do a tax return (or just write a letter to HMRC) to recover the extra 20% tax relief.
This is where I'm struggling. How do you know it's that, and not the net pay arrangement where it's all sorted at the source of payment? (Hence why I think the names are counter intuitive)
This is where I’m struggling. How do you know it’s that, and not the net pay arrangement where it’s all sorted at the source of payment? (Hence why I think the names are counter intuitive)
I've never heard of a scheme where the higher rate deduction occurs at source, but again you'll see it all in your pension statement at the end of each year.
How do you know it’s that, and not the net pay arrangement where it’s all sorted at the source of payment?
you could just log into the account and see how much is there. Then use those numbers to see what tax relief has been applied.
you could just log into the account and see how much is there. Then use those numbers to see what tax relief has been applied.
Tax relief lags by many weeks though (IMO), so if you've just joined it won't be in there....
Isn't the scheme where that take pension contributions from the gross salary the one that sorts higher rate tax out automatically? The scheme they then confusingly call "net pay arrangement"?
I've not joined it yet. Only had the invite letter today, which they want returned by tomorrow. But without understanding what scheme they're actually running, I'm struggling to work out what contribution I want to make each month to leave enough money in the bank while optimising/minimising the 40% tax liability
What's the employers contribution - just the minimum 3%? Or is it one of the (rare) matching ones that will go up if you put in more?
My wife's employer is currently in a bit of strife - a small start-up that was just the owners with too small a paye income (plus a large dividend - another story) below minimum for enrollment. But for a couple of years before she joined they had employed a handful of people and had assumed/been poorly advised that if they persuaded their employees to just pocket the 3% in their pay packet they didn't need to auto enroll them. Now they are a bit bigger and got auto enrollment sorted they have been found out in retrospect. Just waiting to find out how big the fine is going to be.
But yes, in general the idea of auto enrollment seems a damned good one to me.
It has significantly increased the number of people with workplace pensions in the UK, so overall a massive success!
An overall success for who/what exactly?
An overall success for who/what exactly?
You don't think pensions are a good thing for people to have?
An overall success for who/what exactly
…for the employees who will now have more pension savings in retirement than the would otherwise have had. This will help to reduce the number of pensioners in poverty in the long run.
An overall success for who/what exactly?
Spin that - exactly why would it be a good idea for large swathes of the population to have nothing but the state pension in their dotage? People are slow and lazy about planning their future finances - making them electively opt out rather than opt in is at least a step to counter this. The most head in the sand, jam today financially obdurate with be at least a little bit better off in the future through not having the motivation to go to the trouble of opting out. And the least generous of companies will be compelled to do at least something.
I'm asking why it's an 'overall success'. So far the replies are about potential employee benefits in later life, which is of course, necessary.
I’m asking why it’s an ‘overall success’.
if you read above you'll see that was in response to an issue with having to un-enroll some people and that being a hassle and the scheme having created unnecessary extra work.
My point was that, yes there are some cases where it just creates pointless work, but overall it's a good thing...
E.g. I'm not enrolled in my work scheme, so someone had to add me then remove me - but no big deal.
I’m asking why it’s an ‘overall success’. So far the replies are about potential employee benefits in later life, which is of course, necessary.
You obviously think differently - so why does the nation's employees, taken as a collective, having better future financial planning (or rather the very long tail of those that didn't do anything, now having at least something) not constitute an overall success in and of itself?
My staff have already retired!
Still free money provided you are putting in less than 4k per year, and soon to be 10k.
I’ve never heard of a scheme where the higher rate deduction occurs at source, but again you’ll see it all in your pension statement at the end of each year.
That's what I've got. (Major high Street bank). I see my pension contribution in the corner of my pay slip and AFAIK it is completely ignored as far as tax is concerned.my taxable pay for last year excluded all my pension contributions.
Isn’t the scheme where that take pension contributions from the gross salary the one that sorts higher rate tax out automatically?
I reckon so. That's what I have I think.
The scheme they then confusingly call “net pay arrangement”?
How weird!
You obviously think differently
I really don't, honestly. But I am very hesitant about saying it's been an 'overall success'.
my taxable pay for last year excluded all my pension contributions
same here. Including AVCs.
That’s what I’ve got. (Major high Street bank). I see my pension contribution in the corner of my pay slip and AFAIK it is completely ignored as far as tax is <span class="skimlinks-unlinked">concerned.my</span> taxable pay for last year excluded all my pension contributions.
Same here.
Salary = X
Pension = Y
Net salary = X-Y
Tax payable on net salary = Z
The scheme they then confusingly call “net pay arrangement”?
Makes more sense when you look at my (paraphrased) payslip?
The scheme they then confusingly call “net pay arrangement”?
Is that the same as salary sacrifice?
Thinking back, we used to be in one of those, where it came out of gross pay, so none of it was taxed. But I also paid into a SIPP so still had to claim back 20% of that.
Not paid into a pension for several years now, so all going a bit rusty...
The scheme where all your tax relief gets applied directly is usually called Salary Sacrifice, where effectively you give up x% of your salary in return for the company putting that given up salary into your pension. As you don't "earn" the money you don't pay any tax on it, and therefore don't have claim it back further down the line. Your pension will probably show the whole contribution as being from the employer (not the employee).
Some advice I was given a few years ago was to put in at least the amount that would get he biggest contribution from your employer (so if they match up to 3%, then put the 3% in) otherwise you will not get the full benefit - This assumes that the % you have to give up is affordable.
Salaey sacrifice you don't need to claim any relief, pension payments are 'sacrificed from your salary' before tax. So you don't pay tax on the contributions.
Relief at source is when pension payments are taken after tax, pension company will then claim 20% and you'll have to claim the remaining 20% relief by phoning HMRC and telling them what you are contributing. They will then adjust your tax code.
Also companies only have to base the % contribution upto a maximum of circa 44k, another sneaky way they end up paying less!
Why anyone thinks people having savings for retirement isn't a good thing seems crazy to me. It's a disaster we are heading for.
People need to work out how little they will actually have to live on from contributing the minimum amounts- it's not a lot at all. Or alternatively work until they are 85
Net pay arrangement isn't quite the same as salary sacrifice or salary exchange from what I understand so far.
The net pay arrangement is the employee making a contribution from gross salary. You pay national insurance on your gross amount, but income tax on the net amount hence a saving on tax only. That's how it's different from salary sacrifice or salary exchange.
E.g. I’m not enrolled in my work scheme, so someone had to add me then remove me – but no big deal.
Only asking because I am sure there is some logic in this but would you like to share? Interested particularly as I am rejoining the rat race tomorrow and as I have started taking my pension I will have to consider how I manage this. My new role does not have a generous pension...
Either net pay or salary sacrifice will save you higher rate tax assuming you are a higher rate taxpayer. However with a workplace pension I don’t think they typically pay out anything beyond basic rate salary anyway, so either way you don’t have to inform HMRC for higher rate tax relief.
Only asking because I am sure there is some logic in this but would you like to share?
Once you pass the lifetime allowance, the tax benefits diminish significantly. I stopped paying in and went part time (as all I was doing with my salary was paying it into pensions).
Although the rules have changed in the last budget, but Labour have promised to reverse them if they get elected, so who knows where it will end up.
Anyway, enough uncertainty to not put any more money where I have no control over it's tax status.
The tax outcome appears the same for net pay vs relief at source? Just depends on whether you want the higher rate relief paid into your pension (net pay) or in your hand, after going through self-assessment (relief at source). If you are then going to put that rebate back into your pension anyway, my 2p is probably better via net pay as then you are drip feeding monthly, rather than big bang many months later.
It may though be different for NIC... IIRC net pay means the company does not need to pay employers NI, e.g. 13.8%. Companies can use zero/some/all of that to further top-up your pension (mine does 50% of the 13.8% for additional salary sacrifice, my wife's is zero).
The other difference that doesn't seem relevant for the OP... if you don't pay income tax, you get no relief via net pay. But via relief-at-source, you do get 20% extra as the scheme gets this from the govt independent of what income tax you actually pay.
Oh and net pay seems to sometimes affect base salary used to calculate benefits such as death-in-service.
Bottom line though: schemes can only do net pay or relief-at-source for all the members, not individuals, so you may not get a choice anyway.
IANAFA.
Net pay arrangement isn’t quite the same as salary sacrifice or salary exchange from what I understand so far.
The net pay arrangement is the employee making a contribution from gross salary. You pay national insurance on your gross amount, but income tax on the net amount hence a saving on tax only. That’s how it’s different from salary sacrifice or salary exchange.
It may though be different for NIC… IIRC net pay means the company does not need to pay employers NI, e.g. 13.8%
Sofakan. Did you mean to say "net pay" or did you mean "salary sacrifice?" which would put you in agreement with Onza?
That additional 13.8% is an absolute belter. Means I get almost exactly twice as much if I put it in my pension than if I take it as pay.
I realise I'm not getting a choice, but I am trying to figure out what I want my contributions to be. That is affected by what time of scheme it is because although it all works out roughly the same in the end, I also want to make sure there's enough money in the bank to cover all the bills each month.
Edit. Just found out that it's a relief at source scheme despite the letter containing the phrase "net pay".
@thegeneralist... ah yes - it seems salary sacrifice is yet more confusion. I give up 🙂
> That additional 13.8% is an absolute belter
YMMV, but for me it means e.g. GBP100 less in my gross pay, but GBP106.90 sent to the pension scheme (i.e. half of the GBP13.8 saved by my company).
…for the employees who will now have more pension savings in retirement than the would otherwise have had. This will help to reduce the number of pensioners in poverty in the long run.
FWIW - anyone relying on an auto-enrolment pension in retirement will be living in poverty AND claiming pension benefits.
FWIW – anyone relying on an auto-enrolment pension in retirement will be living in poverty AND claiming pension benefits.
Do you mean if they only pay in the bare minimum or are you saying it's a poorly performing investment when compared to alternatives?
FWIW – anyone relying on an auto-enrolment pension in retirement will be living in poverty AND claiming pension benefits.
Not sure what you mean by 'pension benefits'?
But, everyone is currently entitled to the state pension (assuming enough NI contributions) regardless of the size of any private pension.
The auto-enrollment minimum of 8%, which I guess most people will be on, won't provide for a life of luxury, but it could make a decent difference. Just ran some numbers on https://www.moneyhelper.org.uk for someone on £30k saving 8% all their life and the end result is it doubles their pension ie SIPP is the same as the state pension. Obvs, who knows what the state pension will be in 40 years time etc, but it shows that it will make a significant difference....
FWIW – anyone relying on an auto-enrolment pension in retirement will be living in poverty AND claiming pension benefits.
as sweeping statements go that's a cracker.
OP what are you trying to work out? If I understand you are on a salary over higher rate tax, let’s say 60k and you want to know how much pension contribution you should make to make sure you are under 50271 limit where higher rate tax will be payable?
So let’s say you can afford to pay in 17% which is 10200. So that would take your taxable pay down to 49800 and below the 40% rate. Is this what you’re trying to do?
sorry if it’s not, it’s been a long day
Yeah, that's pretty much exactly what I was trying to do. The form from work asks was % I want to contribute, not how many ££s.
It was so much easier in the last job with salary sacrifice AVCs to work out how much of a contribution cost how much out of my pay packet.
An overall success for who/what exactly
…for the employees who will now have more pension savings in retirement than the would otherwise have had. This will help to reduce the number of pensioners in poverty in the long run.
I’ve been working past retirement age, because I was in a job I enjoyed, and I was payed pretty well for it. I was made redundant last month, so when that was announced, I put in for my State pension, and started to hunt down all of the workplace pensions that I’ve accumulated over the years, including two remaining ones out of six that were set up to pay off my mortgage. My State pension has given me just over £1000/month, (£930, before the 10.5%rise), with a lump sum of £12,300, I’m not sure about the accumulated amount of the workplace pensions, I’ve got an independent advisor working on that, to give me the maximum amount to add to my state pension, but the two left over from my mortgage settlement totalled £91,000, some of the others brought that up to around £130,000, IIRC, so I’m hoping I’ll be reasonably ok going forward.
Oh, and I got a shade under £5000 redundancy money as well, so I’m happier than I was when the redundancy process started back in January.
For auto enrolment you shouldn’t need to sign anything - the point of it that they must enrol you and you can then choose to 'opt out'. As it’s a legal requirement, your permission isn’t required (like deducting tax/NI).
And they should have a default contribution rate on which you are enrolled. The minimum contribution is 8% of Qualifying Earnings (effectively the earnings on which you pay NI). At least 3% QE must be paid by the employer. The letter you received should tell you the rates, and the pay to which they are applied (eg we apply the rates to Basic Pay, with a check that the 8% minimum is met).
If your contributions are expressed as a percentage and it’s a relief at source arrangement (personal pension/SIPP) then the deduction should be net of BR tax (ie if it works out at £100, £80 should be deducted and the £20 tax relief claimed by the scheme makes up the difference. You then claim any further tax relief through self assessment.
Do you mean if they only pay in the bare minimum or are you saying it’s a poorly performing investment when compared to alternatives?
The former, as the majority of folk will only pay the bare minimum.
as sweeping statements go that’s a cracker.
But likely true for a vast swath of the population.
Using Aviva’s retirement calculator, if you are a 26-year-old earning the average salary in the UK (£30,420 per year according to the ONS) and you paid 8% of your salary into your pension, at a retirement age of 66 your savings would generate an income of around £7,000 per year based on your estimated life expectancy.
Add on the State Pension and you're basically halving your income - along with the reduction in folk owning their houses, how would you pay the rent, without getting benefits?
In the last year I have joined the Police and enrolled in the pension scheme, this is the Care 2015 scheme.
I currently have a SIPP pension which has circa £30k in it would, it be beneficial to transfer this into the Police pension scheme ?
XPS who operate the Devon and Cornwall Police Pension can’t give advice 🫤
I currently have a SIPP pension which has circa £30k in it would, it be beneficial to transfer this into the Police pension scheme ?
Well you'd have to look at what benefit £30k would actually buy you and then try to guess how many changes to the pension scheme governments will make over the time between now and when you retire and then try and guess how well your SIPP would perform outside that and the compare the two completely made up numbers and come to a decision.
Unless £30k buys you an amazing benefit, like 10 years of contributions, no one can really know whether it's a good idea or not as so much will change before you retire...
XPS who operate the Devon and Cornwall Police Pension can’t give advice
I can understand why, it's a nightmare as if, 30 years down the line, circumstances change they could end up being sued for miss-advising you. Pension transfers are a nightmare subject....
It's a good idea, many people had no private pension, and if you know better you can opt out.
How good the particular scheme is, is another matter, but it's still an investment of sorts over and above the national pension, which will probably be bankrupt within the nest couple of decades.