Change in Pension

ste_coxy

Hi I have been informed that we have a new offer to my pension at work.

They have explained the changes below:

1). You will have a contract change that reduces your salary by the amount of gross pension contribution you are currently paying. The contribution details with the deduction from your salary will be shown in the form of a letter sent out by HR which needs to be signed and returned before enrolment can be completed.
2). The advantage of salary sacrifice for pension is that you will make N.I. savings as Tax and N.I. is calculated after the pension contribution has been deducted from your original salary amount(notional salary).
3). Your pension contribution will be at source as under salary sacrifice there is no tax relief i.e. there is no longer the 20% relief put in by the government which is the element of tax you would have paid on your salary so that your own contribution element equals the gross amount paid into the current scheme.

Could anyone explain this for me - I am struggling to understand it?

The only real main "benefit" I can make out is a reducation in NI contributions - will this be a big difference though?

bilbo51

You're correct. But the employer saves NI too. My company shares this saving with me. Sounds like yours is keeping the employer's NI saving to itself...

Zelazny

Suppose you're on £20k and pay 10% of that into your pension, and that you have no other income.

Currently, you'd be paying £1,532.64 a year in NI, and £2,105.00 in tax - and each year your pension fund increases by £2,000 plus whatever the employer puts in and whatever returns there are.

If you took salary sacrifice down to £18k, you'd still pay £2,105.00 in tax, but your NI would be £1,292.64. Your pension fund will increase by the same £2,000 plus employer contributions plus returns. In essence, you save £240 a year. In addition, your employer will also save money as the Employer's NI will decrease. With some schemes, they will share this saving with you, but not all (my employer doesn't share the benefits, but salary sacrifice still means more money for me).

(figures from http://listentotaxman.com/index.php)

Samdy_Gray

As others have said, it is a good way to add extra contributions to your pension. It's also a cost saver for your employer if they don't pass on their NI savings to you.

Bear in mind though that reducing your basic salary can affect things like tax credits (if you receive them) and could also be detrimental if you intend on taking out a mortgage (i.e. it will have to be based on a lower salary).

StephenM_2

Samdy_Gray wrote: »

could also be detrimental if you intend on taking out a mortgage (i.e. it will have to be based on a lower salary).

Not necessarily. My employer has something called a Reference Salary which is the salary before the sacrifice. This figure appears on my payslip and I think this is the figure they tell mortgage lenders when asked (though its a long time since I moved house so its never affected me). They also use the Reference Salary for pay rise calculations, overtime, life cover etc.

The disadvantage in my scheme (a final salary scheme by the way) is that if you leave the pension in the first 2 years you are not entitled to a refund of contributions because technically the contributions have been made by the company, not the employee.

ste_coxy

I'm currently on about 19k and I pay in 4.5% salary (works out about £58) and my employer pays in 6.5% (about £105). Does this mean that these amounts will stay the same even though I'm on a smaller salary? Are these changes mandatory normally or are they optional?

vbm

StephenM wrote: »

The disadvantage in my scheme (a final salary scheme by the way) is that if you leave the pension in the first 2 years you are not entitled to a refund of contributions because technically the contributions have been made by the company, not the employee.

Yeah but you would entitled to a transfer value...

StephenM_2

ste_coxy wrote: »

Are these changes mandatory normally or are they optional?

It is optional where I work though I think nearly everyone does it.

They are currently in the process of changing our pension scheme (FS scheme closed for new members 2 days ago), and they originally proposed to make salary sacrifice mandatory for all except very low earners. But they backed down on this during the consultations on the changes.

So I think whether its mandatory or optional varies.

StephenM_2

vbm wrote: »

Yeah but you would entitled to a transfer value...

Possibly. I've got about 30 years so I'm not really bothered.

ste_coxy

vbm wrote: »

Yeah but you would entitled to a transfer value...

I'm not too hot with all these terms. Would you mind explaining what this is sorry?

ste_coxy

StephenM wrote: »

It is optional where I work though I think nearly everyone does it.

They are currently in the process of changing our pension scheme (FS scheme closed for new members 2 days ago), and they originally proposed to make salary sacrifice mandatory for all except very low earners. But they backed down on this during the consultations on the changes.

So I think whether its mandatory or optional varies.

I take it that the amount they reduce your salary also varies too?

I think I need to get my head around this as being a "benefit" as all I can think of at the moment is my salary may be reduced and every penny is counting at the moment