Company Switching to Money Purchase Scheme

Dick_here

kidmugsy wrote: »

Your income tax and own NIC benefits show up as decreased deductions from your pay: in that sense your 5% costs you far less than a 5% pay reduction, namely 3.4% (if your income tax rate is 20%). It sounds as if the 0.25% is your share of the employer's saving which, I take it, goes straight into your pension. Some employers hand over more; not only does it help keep the staff sweet, it may encourage more of them to save in this way and therefore end up saving the employer more NICs in total.

Thanks again. I take the point about the income tax saving, but that applies to the pension contribution, with or without salary sacrifice, right ?

The .25% reduction in our contributions does go into the pension, yes.

I thought the benefit to using SS was the reduction in NI payments, and if the new MP scheme isn't allowed to be contracted out - and we're going to be paying significantly more in NI as a result - then is there still a benefit to using SS at all ?

Dick_here

mania112 wrote: »

If you are sacrificing 5% of your salary to put 5% (of what salary would have been) into a pension - the savings are fixed, there shouldn't be any confusion, should there?

You're getting paid 5% less, so you're saving 20% of 5% in Income Tax (or 40%/50%) and 11% NIC (or whatever the level is).

Your company are also saving on NIC

Am I wrong then in thinking that pension contributions are taken into account prior to income tax being applied ? That's why I can't see there's an income tax saving in using salary sacrifice.

Now we're going to have to pay more NI too, so where is the SS benefit ? Surely the company aren't going to be maintaining their NI savings, but we're not, and therefore are able to pass on .25% as our share of 11(?)% ?

Dick_here

Thanks James for the detailed reply.

It's good to know you see it as a decent scheme still, though there's no guarantee I can see as to how long they're going to be carrying on the '10% if you contribute 5%' contribution for. That could change at any time too, presumably.

We're getting .25% of NI savings passed onto us as a pension contribution reduction. How do I find out how much the company is actually saving though ?

As you can see from my other answers, the bit I'm still unclear on is the salary sacrifice element - a) does it reduce my income tax at all as against not using it for pension contributions ?, and b) how can the employer still make an NI saving and pass a small(?) .25% part of it onto us whilst we're now having to lose our contracted out saving ?

jamesd

Employees pay 12% on income up to 797 a week in 2013/14 tax year, then 2% on income above that. Employers pay 13.8% NI. None of this NI is charged on the pension contributions in a salary sacrifice scheme because they are deducted before the money is paid to the employee. So potentially 25.8% of a £100 contribution is saved in NI, which means that the pension could end up with £125.80 in it for a before income tax cost to the employee of £100, or an after tax cost of £80.

Or, if the employee wanted just £100 in the pension, the after tax cost would fall to £100 * 80 / 125.80 = £63.59 instead of £80.

Those calculations are for a basic rate tax payer and with the employer paying in all of their saved NI, which is what a 25% (really 25.8%) portion would imply.

With salary sacrifice you can actually save more NI than the old contracted out deduction because you save the whole NI on the pension contribution, not just the contracted out deduction portion.

Yes, your employer could change the amount they pay in but they seem to be trying to be fair so I doubt that they will unless the firm has significant financial difficulties.

One advantage for you in a defined contributions scheme is that the money is yours and not subject to any risk if the company goes bust. It's an expense for the company each month as it pays the money over but there's no possibility of shortfall, because now it's down to how much you pay in and how the investments do.

bigadaj

So presumably the saving on NI is actually 25% rather than 0.25, so employer is giving all the NI back which is good, our scheme gives half. On that basis for everything sacrificed you will either get 55% or at least 45% paid by your employer and / or te government, so cracking deal really.

quotememiserable

!!!!!!_here wrote: »

4) could the Trustees simply refuse to accept this switch of scheme ?

No, and this is why not. The job of the trustee is to ensure that benefits you have earned are actually paid out. That enough money is put aside to do this, that it is looked after sensibly and without undue risk. That the money does not get stolen or diverted for other purposes. Pretty much, to ensure another Maxwell type situation is avoided.
Any future pension earnings is entirely a matter of contract between the company and the employee.

jamesd

For a defined benefit - final salary or average salary - scheme the trustees are also required to ensure that the company pays in sufficient money to meet the future obligations of the scheme, including measures such as making the company bankrupt and seizing all of its assets if that is what it takes to do it. Such extreme measures will be rare, of course. Usually it'd just be a question of discussing how much the company needs to pay into the scheme.

Dick_here

jamesd wrote: »

Employees pay 12% on income up to 797 a week in 2013/14 tax year, then 2% on income above that. Employers pay 13.8% NI. None of this NI is charged on the pension contributions in a salary sacrifice scheme because they are deducted before the money is paid to the employee.

So I'm saving my 12%, but am only getting an extra .25% 'share' out of the company saving 13.8%. Is that right ? It doesn't sound generous in those terms !

Dick_here

bigadaj wrote: »

So presumably the saving on NI is actually 25% rather than 0.25, so employer is giving all the NI back which is good, our scheme gives half.

Erm, I don't think so.

bigadaj

!!!!!!_here wrote: »

Erm, I don't think so.

You probably need to check, the company giving you 0.25% doesn't sound right, but 25% being the sum of the emploers and employees NI contributions sounds sensible.