decision<\/a> in the autumn Budget to impose a \u00a32,000 annual cap on salary sacrifice has sparked concern among higher earners who rely on the mechanism to boost pension savings.<\/p>\nLisa Picardo, chief business officer UK at PensionBee, said: \u201cSalary sacrifice has long been an important planning tool for those in the workplace navigating tapering thresholds, reclaiming personal allowances when they hit earnings cliff-edges, or simply trying to build larger pension pots in a tax-efficient and disciplined way.<\/p>\n
\u201cThe cap serves as a disincentive for employers to offer this facility, adding significant friction to this kind of planning.\u201d<\/p>\n
However, while the cap will limit National Insurance (NI) savings on contributions above that threshold, experts stress that there are still ways to be tax-efficient when saving for retirement.<\/p>\n
One of the most notable options is to utilise a self-invested personal pension (SIPP) \u2013 a type of UK pension scheme that offers some tax relief and allows individuals to manage their own retirement savings.<\/p>\n
Zohaib Mir, financing planner at EQ Investors, said: \u201cThe \u00a32,000 NI cap only applies to salary sacrifice. Personal SIPP contributions are paid from income that has already had NI deducted, as they always have, so this rule doesn\u2019t directly affect SIPP tax relief.\u201d<\/p>\n
But the question is whether it is best to move away from salary sacrifice \u2013 mostly done through auto-enrolment workplace pensions \u2013 and focus on growing your SIPP, to keep things as they are and take the NI hit or utilise both vehicles.<\/p>\n
\u00a0<\/p>\n
What does a SIPP have to offer?<\/p>\n
When paying into a SIPP, the government adds tax relief at your marginal income tax rate up to the \u00a360,000 annual allowance or 100% of your earnings \u2013 whichever is lower.<\/p>\n
Investments held within a SIPP can also grow free from income and capital gains tax while dividends and gains remain inside the wrapper.<\/p>\n
While most workplace pensions typically offer a sensible default fund and range of alternative funds designed to be simple and low-cost for members, a SIPP gives investors a broader menu of investment vehicles, including global funds, exchange-traded funds, investment trusts and more specialist or sustainable strategies.<\/p>\n
As such, utilising a SIPP can help savers diversify more widely outside a UK-biased default fund and also align investments more closely with their own risk appetite or values.<\/p>\n
\u201cThat extra choice is helpful for engaged investors, but it also brings more responsibility,\u201d Mir said. \u201cIt\u2019s easier to take on more risk than you realise, or to over-trade.\u201d<\/p>\n
\u00a0<\/p>\n
What are your options?<\/p>\n
Mir said there are three possible options for savers looking to build their pension pots and the right choice is dependent on earnings, employer terms and how much someone is contributing to their workplace pension.<\/p>\n
The first option is to stop using salary sacrifice and pay into a SIPP instead. While this will give the saver more control and a wider investment choice, it does mean they will lose NI savings on the first \u00a32,000 of salary sacrifice and any extra employer benefit tied to it.<\/p>\n
Mir said this option is logical only for those who have already secured all available employer contributions and value the flexibility and control of a SIPP more than the NI saving.<\/p>\n
Rachel Vahey, head of public policy at AJ Bell, added: \u201cMost savers may want to continue paying into their workplace pension and take advantage of the employers\u2019 pensions contributions on offer.\u201d<\/p>\n
This is because the employers\u2019 pension contributions are effectively \u2018free money\u2019 and can make a big difference to someone\u2019s final income in later life, Vahey said.<\/p>\n
The next option would be to carry on as normal via salary sacrifice as this will still get income tax relief, although pension contributions above \u00a32,000 will no longer get NI relief.<\/p>\n
\u201cFor many people, the extra NI cost will be relatively modest and keeping things simple may be attractive,\u201d Mir said.<\/p>\n
\u201cThis can be reasonable where contributions aren\u2019t far above \u00a32,000 a year, or where the admin and complexity of changing arrangements outweighs the benefit.\u201d<\/p>\n
At the very least, savers should consider \u201cmaximising\u201d what they can put aside via salary sacrifice ahead of the rule change taking effect in April 2029, Picardo noted.<\/p>\n
The third option is a blend between the two, with savers using salary sacrifice up to the \u00a32,000 cap and then topping up their pension savings beyond that via a SIPP.<\/p>\n
\u201cIn practice, this is likely to be the default approach for a lot of higher or mid-earners,\u201d Mir said.<\/p>\n
\u201cIt provides a good balance where you can keep the available NI benefit, retain valuable employer funding and still have the option to use a SIPP for extra flexibility.\u201d<\/p>\n
Of all three options, Mir said this latter option is the \u201cmost broadly credible starting point\u201d.<\/p>\n
A \u201cblended approach\u201d of saving into an active workplace pension and a personal pension will work well for the majority of savers, Picardo agreed.<\/p>\n
\u201cEnjoying the benefits of employer contributions and salary sacrifice where possible through the workplace and channelling additional pension contributions into a personal pension to utilise the annual allowance, maintain tax efficiency, investment flexibility and pension engagement gives the best of both worlds,\u201d she said.<\/p>\n
The right mix will be highly personal to the individual but experts emphasised that pensions should not exist in a vacuum, encouraging savers to also consider other saving vehicles, such as ISAs, general investment accounts, higher-risk tax-advantaged investments such as VCTs and overpaying mortgages or other debt.<\/p>\n
\u201cFor many people, the right answer will be a blend of pensions, ISAs and paying down debt rather than using just one wrapper,\u201d Mir said.<\/p>\n","protected":false},"excerpt":{"rendered":"The \u00a32,000 limit will bite from April 2029 but experts say savers can still maximise tax relief by…\n","protected":false},"author":2,"featured_media":1514,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[84,4176,4174,4175,56,54,55],"class_list":{"0":"post-308677","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-business","9":"tag-finance","10":"tag-personal-finance","11":"tag-personalfinance","12":"tag-uk","13":"tag-united-kingdom","14":"tag-unitedkingdom"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/308677","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/comments?post=308677"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/308677\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media\/1514"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media?parent=308677"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/categories?post=308677"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/tags?post=308677"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}