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Frugal Git

Universal Credit, Pension Contributions

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This is a *very* interesting thread on MSE that covers something I had spotted.

http://forums.moneysavingexpert.com/showthread.php?t=3655837&page=1

We've all probably heard about the child benefit changes, and how over 50k it's tapered away. We've also probably read many articles saying - 'put extra into your pension to get it back'.

Let's take that further - what happens if you put all your (taxed) salary into your pension? It seems there was lobbying for 100% of pension contributions to be discredited in terms of working out your net income, so I tried this using the entitledto website....

A situation where there is one earner in a family of 3 (i.e. with a young child), who earns say 50k per annum. The other parent does not earn. If as a unit they were to contribute nothing to their pension, they would take home around 3k net per month. Not too shabby, but long term, not great. Let's also assume they have savings under 6k for the purposes of argument *.

So...what if they decide to increase their pension contribution to 40k per annum - leaving an amount just above their personal allowance threshold to be considered as 'net earnings'.

Well, from what I can work out, using the calculator they would be 'entitled to' quite a lot of universal credit. In the area I live, they would then be entitled to just over £310 p/w in universal credit, plus child benefit, plus around 5.5k net income per year after paying NI.

This equates to a net income just shy of 2k per month.....1k less than before, but, adding in 40k into a pension per year.

I.e. they are 'losing' 12k per year in net income now to contribute 40k into a pension. For those with a long term view (and who can budget themselves to 2k per month) that is surely exceptional deal...! Presumably the family would also qualify for every other 'low earner' thing - free school meals, dental, subsidised gym etc etc.

This could equally apply to a single person - I used the calculator. Stuffing everything above personal allowance into the pension, and then you'll get a net income upto around 1400 - not a lot, but more than enough to live on if you're good at budgeting. And you could be sticking a huge amount away in pension, so much so that after 10 or so years, if you're reasonably young when you start, and even moderately able at investing, you'll easily hit the lifetime allowance for pensions anyway.

Now, I appreciate the ethical and moral dilemmas this present...would anyone actually do it? It seems HMRC know about it, and are alright with it from reading the thread! Considering how prudent people are stuffed, is this a justifiable use a perverse system to get it working for us too?

(* Note if you have any savings, that will be means tested, so you need to get that too into your pension too - you are allowed 3 years of back payments, which could be useful for whacking quite a chunk in there).

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I would have thought the deprivation of capital rules would prevent this?

Nope, pension contributions perfectly acceptable... Deprivation of capital would apply to say purchase of a Porsche, or 'giving' the money to a family member. Pension contributions are seemingly sacrosanct.

It's quite an interesting idea. I wouldn't be able do it - stupidly have too much in cash savings to actually manage it!

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Nope, pension contributions perfectly acceptable... Deprivation of capital would apply to say purchase of a Porsche, or 'giving' the money to a family member. Pension contributions are seemingly sacrosanct.

It's quite an interesting idea. I wouldn't be able do it - stupidly have too much in cash savings to actually manage it!

Aren't there % limits on how much of your income you can put into a pension fund?

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Aren't there % limits on how much of your income you can put into a pension fund?

Yes - they've recently cut it to 40k per annum (though you can contribute for the last 3 years up to that limit per year too). So if you earn more than around 60k, this becomes less and less effective - though you'll still benefit from all the higher rate tax relief up to a point.

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Well I'm surprised.

If this is true it's just another example of how badly thought out UC is.

Is it though - or is it *extremely* well thought out for those in the know? Originally, they were discrediting only 50% of pension contributions. There was lobbying to change it to 100%. Read this.

http://www.labourlords.org.uk/credit-where-its-due

to me, this looks like policy!

Edited by Frugal Git

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Aren't there % limits on how much of your income you can put into a pension fund?

Under the old system there was.

From 2014/15 maximum annual pension contributions is £40k per year and a maximum £1.25 million pension fund size

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Is it though - or is it *extremely* well thought out for those in the know? Originally, they were discrediting only 50% of pension contributions. There was lobbying to change it to 100%. Read this.

http://www.labourlords.org.uk/credit-where-its-due

to me, this looks like policy!

You're probably right, but I can't see the situation lasting for long.

As soon as it hits the newspapers that MPs etc. are claiming UC while dumping most of their salary into a pension, the rules will get changed.

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You're probably right, but I can't see the situation lasting for long.

As soon as it hits the newspapers that MPs etc. are claiming UC while dumping most of their salary into a pension, the rules will get changed.

I don't think so (about it getting changed). It requires a peculiar type of person to do this. In pretty much every situation (though I'm sure there's a specific salary where you break even, would be quite easy to calculate), you will be 'worse off' in the present by doing so.

Most people wouldn't do it. And most MP's wouldn't do it either - it really would be too obvious.

Their families/children however....

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All well and good till your pension gets stolen/inflated away.

I calculated about 30% is stolen and another 20% is taxed away, and by the time you get to retirement you will have means tested pensions.

I still reckon you are better off buying a gold sovereign each year then claiming as much as you can get - you might as well every other f**ker does. It will also be beneficial to be renting too.

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That's brilliant! Do you hae to pay the money into the state pension? Or can you pay it into your own private pension?

I suppose you don't get hassled by the job centre to find work? As your already working?

Would you have to sign on / attend interviews at JC etc?

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I dump around a third of salary into pension to keep the child benefit because my effective marginal rate is 63%. Assuming the 25% tax-free sum stays around, I worked out that I get all my contributions back in 5 years of retirement and the rest if a bonus (even with 0% real fund growth). I looked at going even further to get tax credits but the marginal rate dropped much lower so it was less worth it.

By the time the kids go to University though, it may be worth dropping income to £25K to get the free grants (rather than loans) as well as the credits.

If you have savings to live off, it becomes even more worthwhile to use pensions to lower your official income and then claim the credits.

This is all due to the extreme levels of marginal taxation (income/NI/benefits/credits) which is encouraging us all to be low paid.

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You're probably right, but I can't see the situation lasting for long.

As soon as it hits the newspapers that MPs etc. are claiming UC while dumping most of their salary into a pension, the rules will get changed.

The maximum annual contribution is £50K so MP's could do this now if they want. However, since their pension scheme is so good, I doubt they would.

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and you talk about 'greedy boomers' - I find this -fleece the state (aka the taxpayers) even though I have the money by exploiting some loophole and then justify it by saying - well everyone could do it. truly depressing]

This site gets more like MSE 'I'm entitled' every day.

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and you talk about 'greedy boomers' - I find this -fleece the state (aka the taxpayers) even though I have the money by exploiting some loophole and then justify it by saying - well everyone could do it. truly depressing]

This site gets more like MSE 'I'm entitled' every day.

I (as thread starter) utterly agree with you. The system is perverse. However, people who try to live in a sustainable manner - not taking on excessive debt, saving for the future are arguably the *most fleeced* people in sociey.

Plus, in many ways this is you saying to the government - 'I'm taking charge of my future, and making sure in retirement, that I will be able to live without further state help'. It's effectively saying that I can make far better use of the money than they ever could. You would still be paying full national insurance, and everything you buy (petrol, energy etc) would still be taxed heavily.

Just playing devils advocate.

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and you talk about 'greedy boomers' - I find this -fleece the state (aka the taxpayers) even though I have the money by exploiting some loophole and then justify it by saying - well everyone could do it. truly depressing]

This site gets more like MSE 'I'm entitled' every day.

Plus, read the link from the Labour Peer that I had posted further up the thread. They (the state) are seemingly *encouraging* this.

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It has always been the case with benefits.

When I was advising someone who had the CSA on his case I noticed his employer had a pensions scheme where he could put in anything he wanted.So 3 months before his CSA was worked out I got him to pay 80% into his pension and keep £80 a week.His CSA worked out at £1.20 a week then.Once he got his CSA letter he stopped the pension contributions.Two years later repeat.

UC is just the same.As its means tested away from net income not gross pensions wont count so the more in the better if your getting UC.

As its net salary I would think share saves will help lower salary as well.

So UC will give you more if you save into a company sharesave scheme.

The people who designed our welfare system over the last 20 years didn't bother to look at the world of work and wages.There is very litte point in anyone working PAYE up to around £40k if you have kids.

IDS says longer term UC saves money.Wrong again.

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It has always been the case with benefits.

When I was advising someone who had the CSA on his case I noticed his employer had a pensions scheme where he could put in anything he wanted.So 3 months before his CSA was worked out I got him to pay 80% into his pension and keep £80 a week.His CSA worked out at £1.20 a week then.Once he got his CSA letter he stopped the pension contributions.Two years later repeat.

I bet his kids are really proud of him.

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I bet his kids are really proud of him.

Funny you should say that not knowing the case,his kids are very proud of him.His ex was an alcoholic drug user (hed had 2 children with her when he was 19 and 21).

Every penny the "mother" got went in the pub or in her arm,and on any "boyfriend" she had at the time.If the man in question hadn't done what he did he would of lost his small home,the small home where his children came to stay for 3 days a week and where they ended up full time once he ended up getting custody.

If he hadn't done what he did the kids would of suffered much much more than they did in the end.

However like yourself the CSA didn't really care about the children etc only that the man must be so terrible.

The local dealers lost out of course.

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