Invest in SIPP pension via umbrella company for small fee or do this privately?

[Madmax86]

Hi all

I am currently contracting inside IR35 via an umbrella company (Workwell).

I've been auto-enrolled into NEST pensions and currently make the minimum required pension contributions.

By the end of the tax year, I am on track to go over the £100k mark so in order to avoid paying more tax, I want to sacrifice some of my salary into a pension.

Question is what is the best way to do this...

1. Leave my NEST pension as it is and just privately pay into a SIPP as and when I need to. I assume the GOV then tops up 25% of whatever I put in.
2. Tell my Umbrella company that I want to opt out of NEST and get them to pay into my private pension. They do offer this but there is a £7.50 weekly margin cost to do so. I currently have a £15 weekly margin so this would increase to £22.50. For this, I would be able to make a larger contribution and I assume the added benefit of this approach as opposed to the first one is additional savings in Employers NI.

So my question... Is the additional margin of approx £30/month worth it to contribute to a SIPP of my choice via my umbrella company or should I just leave my auto-enrolled NEST pension as it is and invest privately. Tax relief seems to be similar for both routes, I believe it is just the Employers NI I would benefit from.

Pretty new to pensions in general so any advice would be greatly appreciated.

[Smartie]

There are quite a few assumptions here and most of the answers are 'it depends'.

The important things to consider are:
How much will you pay into your pension annually?
What are the fees for your NEST pension? You can find them here https://www.nestpensions.org.uk/ but it sounds like 1.8% for every investment (high) + 0.3%/year (low)
What are the fees for your chosen SIPP? If you're saving quite a lot, Interactive Investor charge about £240 per year however much is in your account. Others are % based and can be a lot more expensive for large amounts.
Are you sure that there is a difference regarding Employers NI i.e. that it will be paid into a SIPP but not into NEST? That's about 15%. Ask the Umbrella.
Is the payment into your SIPP 'salary sacrifice' or similar? I.e. will you get your tax relief when it's paid into your SIPP? If not then you don't get it automatically for SIPP contributions, it's claimed on your annual tax return at your highest marginal rate which below £100k is 40% This also applies if you make separate personal contributions to your SIPP. Ask the Umbrella.
Bear in mind that the marginal tax rate above £100k is about 60% as you start losing your personal allowance so any amount above that should definitely be paid into your pension, if you can afford to do so.

If it's going to cost you £400 extra to put money into your SIPP then it's likely you need to be putting a fair bit into it to be worth it financially, but that's a good idea anyway.
The other advantage of a SIPP is much greater flexibility in what you can invest in and changing investments quickly and easily.

[Madmax86]

Thanks for your response Smartie. I will try and respond to all your points.

How much will you pay into your pension annually?

I intend to pay approx £20k annually into my pension.

What are the fees for your NEST pension? You can find them here https://www.nestpensions.org.uk/ but it sounds like 1.8% for every investment (high) + 0.3%/year (low)

Yes spot on.

What are the fees for your chosen SIPP? If you're saving quite a lot, Interactive Investor charge about £240 per year however much is in your account. Others are % based and can be a lot more expensive for large amounts.

I have not yet decided on a SIPP but it's a good point and I will be taking % into account. I have been looking at Hargreaves Lansdown as a potential.

Are you sure that there is a difference regarding Employers NI i.e. that it will be paid into a SIPP but not into NEST? That's about 15%. Ask the Umbrella.

I don't understand this question.

What I meant with reference to the Employers NI is that from what I understand, if I get my Umbrella company to make payments directly to my SIPP, I will benefit from... 1. Tax relief as my salary would reduce, so less tax and 2. As my salary as reduced, so would the employer's NI.

However if I paid into my SIPP directly from my personal account, I would still get tax relief in the form of a GOV top up of 25% however I obviously wouldn't get any employers NI savings (as I would have already paid it)

Is the payment into your SIPP 'salary sacrifice' or similar? I.e. will you get your tax relief when it's paid into your SIPP? If not then you don't get it automatically for SIPP contributions, it's claimed on your annual tax return at your highest marginal rate which below £100k is 40% This also applies if you make separate personal contributions to your SIPP. Ask the Umbrella.

I don't currently have a SIPP but the payment into my current NEST pension is salary sacrifice yes so the tax relief is at source (salary reduced so less tax).

Bear in mind that the marginal tax rate above £100k is about 60% as you start losing your personal allowance so any amount above that should definitely be paid into your pension, if you can afford to do so.

Exactly why I have posted this question. I want to avoid that happening.

[Chris Bryce]

I'm not going to offer any view on the original question but I do want to point out something which many of these salary sacrifice threads don't touch on.

By and large a decision to salary sacrifice £x in whatever permitted scheme (SIPP, e-car) cannot be reversed and the amount sacrificed cannot be easily adjusted during the year unless there's a "life event" such as marriage, a death, house move or some such. You can't just turn the salary sacrifice tap off and on or increase/decrease the flow (££s) willy-nilly.

This perhaps isn't so relevant for contractors who may move from end-client to end-client BUT if you stay with the same umbrella in continuous employment the rues will apply and you should take them into consideration.

[Madmax86]

I'm not going to offer any view on the original question but I do want to point out something which many of these salary sacrifice threads don't touch on.

By and large a decision to salary sacrifice £x in whatever permitted scheme (SIPP, e-car) cannot be reversed and the amount sacrificed cannot be easily adjusted during the year unless there's a "life event" such as marriage, a death, house move or some such. You can't just turn the salary sacrifice tap off and on or increase/decrease the flow (££s) willy-nilly.

This perhaps isn't so relevant for contractors who may move from end-client to end-client BUT if you stay with the same umbrella in continuous employment the rues will apply and you should take them into consideration.

Chris that is a very crucial piece of information and to be honest, something I had not considered (maybe because like you say it is rarely ever touched on). Thank you so much for posting it.

I absolutely do want the flexibility to increase/decrease my contributions as and when I need to, so based on this I'm assuming I'd be better off then with the first option in my original post - Leave my NEST pension as it is and just privately pay into a SIPP as and when I need to?

[Smartie]

HL are probably the most expensive SIPP. Service is good though and if you don't hold funds it can be cheaper. I'd also consider II and AJ Bell.
https://www.moneysavingexpert.com/savings/cheap-sipps/

You'll really need to ask the umbrella about how they treat employers NI.
For general salary sacrifice schemes, some companies give you the full saving that they make (from your lower salary), some pocket it all and others give you part of it.

As I mentioned before, it won't be 25% tax relief for personal contributions. If you're paying 40% tax will be that. If you're paying more it will be more.

On salary sacrifice, my previous umbrella stated definitively that their pension was not salary sacrifice however my salary was still reduced accordingly. The pension contributions went into their company scheme and was then transferred out to my SIPP. Because of this I could change payments whenever I liked, not on a 'life event'.

So, you need to ask the umbrella exactly how their system works - ideally get an illustration from them for your expected monthly contribution for both the NEST and SIPP options so you can compare it.

[Madmax86]

HL are probably the most expensive SIPP. Service is good though and if you don't hold funds it can be cheaper. I'd also consider II and AJ Bell.
https://www.moneysavingexpert.com/savings/cheap-sipps/

You'll really need to ask the umbrella about how they treat employers NI.
For general salary sacrifice schemes, some companies give you the full saving that they make (from your lower salary), some pocket it all and others give you part of it.

As I mentioned before, it won't be 25% tax relief for personal contributions. If you're paying 40% tax will be that. If you're paying more it will be more.

On salary sacrifice, my previous umbrella stated definitively that their pension was not salary sacrifice however my salary was still reduced accordingly. The pension contributions went into their company scheme and was then transferred out to my SIPP. Because of this I could change payments whenever I liked, not on a 'life event'.

So, you need to ask the umbrella exactly how their system works - ideally get an illustration from them for your expected monthly contribution for both the NEST and SIPP options so you can compare it.

Thanks for those recommendations and the link. Both II and AJ bell are on my Umbrella company's panel so that's good. I did originally consider Vanguard however they aren't on the Umbrella's list of providers so that was out.

Your last paragraph is a good suggestion. I already have a payslip with the NEST contributions so will ask them for an illustration with the SIPP and report back

[I am tired TIRED]

HL are probably the most expensive SIPP. Service is good though and if you don't hold funds it can be cheaper. I'd also consider II and AJ Bell.
https://www.moneysavingexpert.com/savings/cheap-sipps/

You'll really need to ask the umbrella about how they treat employers NI.
For general salary sacrifice schemes, some companies give you the full saving that they make (from your lower salary), some pocket it all and others give you part of it.

As I mentioned before, it won't be 25% tax relief for personal contributions. If you're paying 40% tax will be that. If you're paying more it will be more.

On salary sacrifice, my previous umbrella stated definitively that their pension was not salary sacrifice however my salary was still reduced accordingly. The pension contributions went into their company scheme and was then transferred out to my SIPP. Because of this I could change payments whenever I liked, not on a 'life event'.

So, you need to ask the umbrella exactly how their system works - ideally get an illustration from them for your expected monthly contribution for both the NEST and SIPP options so you can compare it.

Regarding the "Life Event" rule, I thought that had been relaxed for Pensions Salary Sacrifice?

Thread below explains the changes?

https://forums.moneysavingexpert.com...it-really-mean

[Madmax86]

On salary sacrifice, my previous umbrella stated definitively that their pension was not salary sacrifice however my salary was still reduced accordingly. The pension contributions went into their company scheme and was then transferred out to my SIPP. Because of this I could change payments whenever I liked, not on a 'life event'.

So, you need to ask the umbrella exactly how their system works - ideally get an illustration from them for your expected monthly contribution for both the NEST and SIPP options so you can compare it.

I have requested an illustration from the umbrella based on a £1,000 contribution.

Here is a comparison of what the gross/net pay looks like with and without the contribution.



There is a higher margin for a plus package with the umbrella hence the difference.

Overall, it will cost me £522 to add £1k into my pension pot via the umbrella.

If I was to do this myself (not via the umbrella), it would cost me £600 (Based on £800 contribution, £200 GOV top up, and then £200 tax relief after submitting my tax return).

Is this an example of what you mean by this not being salary sacrifice?