Stakeholder pension contributions

**Cowboy Bob** · 13 March 2006, 23:29

Originally posted by malandri

Hello,

I am trying ti undestand how much is the maximum i can contribute to a stakeholder pension plan. I am 32, so 17.5% of my salary that is. However, my salary, or my deemed salary i should say (as i am inside IR35 for the time being ) is company revenue - 5% allowance -(other expenses like mileage allowance, pension contributions )- employers NI . My problem with the calculation above is that my deemed salary changes depending on my pension contributions. Or should i calculate 17.5% of the deemed salary = company revenue - 5% allowance -(other expenses like mileage allowance but not pension contributions ) - employers NI

It would be so simple if it just was 17.5% of my company's revenue... I wouldn't even have to calculate it as it would be the same amount as the VAT i charge!

I feel i am asking something very obvious... Sorry for the silly question...

Forget the pension. It'll be worth bugger all when you retire anyway. Invest in property and/or land.

**IR35 Avoider** · 14 March 2006, 10:10

I am trying ti undestand how much is the maximum i can contribute to a stakeholder pension plan. I am 32, so 17.5% of my salary that is. However, my salary, or my deemed salary i should say (as i am inside IR35 for the time being ) is company revenue - 5% allowance -(other expenses like mileage allowance, pension contributions )- employers NI . My problem with the calculation above is that my deemed salary changes depending on my pension contributions. Or should i calculate 17.5% of the deemed salary = company revenue - 5% allowance -(other expenses like mileage allowance but not pension contributions ) - employers NI

Wait a few weeks until 6th April, when the rules change, then you can contribute as much as you like.

Well, more specifically
1. The most you will get tax relief on is that first £215,000 of you contributions
2. You personally cannot get tax relief on more than 100% of your salary. I think deemed salary is just the same as actual salary for this purpose.
3. But point 2 is irrelevant, as it should be the company that makes the contribution so that you can avoid employers NI as well, and there is no limit on what the company can contribute.

So after 6th of April, pay yourself whatever salary you want, and put the rest in your pension. Unless you are earning more than £215,000 per year there is no maximum pension contribution.

**Lucifer Box** · 14 March 2006, 10:11

Cowboy Bob is correct. 17.5% of your deemed salary into a pension, regardless of how you calculate it, is not the way to provide for the future. Be sure you have maxed out all other tax free investments (e.g. ISA, Friendly Society, etc), reduced/paid off your mortgage, and have a balanced cash/shares/property portfolio FIRST. The worst reason to take out a pension is just because it saves you some tax.

The thing is, with contributions to a pension the money is gone until the government says you can have it back. Can you trust the government not to change the rules in the future? Change the age at which you can collect (it has done this once already), remove the tax relief (it has partially done this already), nationalise private pension funds so that the shortfall in the public sector pension scheme can be plugged in the interests of fairness (a think tank has already suggested this)?

A modest pension is a good part of any investment portfolio, but do not rely on it alone to provide for your future.

**Lucifer Box** · 14 March 2006, 10:13

Originally posted by IR35 Avoider

So after 6th of April, pay yourself whatever salary you want, and put the rest in your pension. Unless you are earning more than £215,000 per year there is no maximum pension contribution.

However, if your pension pot exceeds £1.4m (rising to £1.5m in 10 or so years time), it will attract a punitive tax of 70% (presumably in the interests of fairness).

**IR35 Avoider** · 14 March 2006, 10:31

17.5% of your deemed salary into a pension, regardless of how you calculate it, is not the way to provide for the future. Be sure you have maxed out all other tax free investments (e.g. ISA, Friendly Society, etc), reduced/paid off your mortgage, and have a balanced cash/shares/property portfolio FIRST.

I would agree with this if you are not IR35 caught and can take income as dividends.

On the other hand, if money has to be taken as salary or pension, if your company is making contributions to keep you out of higher rate tax, you are avoiding tax at a marginal rate of 46% and in return, assuming you take the maximum tax-free lump sum, will probably pay tax at 75%*22%= 16.5% on your pension. In other words, you will have about 30% more money if you go down the pension route.

**Spartacus** · 14 March 2006, 10:35

Originally posted by IR35 Avoider

On the other hand, if your company is making contributions to keep you out of higher rate tax, you are avoiding tax at a marginal rate of 46% and in return, assuming you take the maximum tax-free lump sum, will probably pay tax at 75%*22%= 16.5% on your pension. In other words, you will have about 30% more money if you go down the pension route.

Except that you won't have the money. As LB says, you might have the money X years down the line as long as the government doesn't change the rules again and the stockmarket doesn't crash shortly before you cash in (assuming you can).

I agree with the sentiment that pumping a pension just to save tax is a poor choice. A modest contribution is fine, but 17.5% of earnings is nuts.

**IR35 Avoider** · 14 March 2006, 10:47

I don't really want to defend the goverment, but for the sake of balance.

Change the age at which you can collect

This doesn't mean you lose anything, it means you will have more savings at a later age. It just means you suffer some inconvenience, you have to juggle your finances to live off other savings/borrowings in the intervening period until the new retirement age.

remove the tax relief (it has partially done this already)

It hasn't removed the 46% you get on company contributions keeping you out of higher rate salary bands. This is far more significant that what it has removed, the roughly 0.3% per year of your fund value that you would have got back if your fund was fully invested in shares. If you invest in anything else (e.g. REITS = property funds) then you can still reclaim the tax on investment income.

nationalise private pension funds so that the shortfall in the public sector pension scheme can be plugged in the interests of fairness

I can't see them getting away with confiscating (effectively) private property on this scale, either politically or under human rights law.

**PerlOfWisdom** · 14 March 2006, 10:56

Originally posted by IR35 Avoider

I can't see them getting away with confiscating (effectively) private property on this scale, either politically or under human rights law.

I'm sure they can conjure up some war or other disaster to justify this.

**IR35 Avoider** · 14 March 2006, 11:00

Except that you won't have the money

There's no point in us having an argument, as the issue of how far to trust future governments is unresolvable without hindsight. I do sympathise with the "distrust" positon to a large degree.

However think probabilistically: you are advocating taking a certain 30% hit now in return for possibly avoiding a future hit of unknown size and uncertain probability of happening at all. If your judgement turns out to have been to pessimistic you will have lost a lot of money unnecessarily.

I say possibly because in a world where the government arbitrarily confiscates pension savings, why wouldn't they confiscate your home and other savings as well?

Stakeholder pension contributions