Salary sacrifice scheme

zygurat789

Are there any drawbacks or disadvantages for employees where a company introduces a salary sacrifice scheme where the reference salary, salary before the sacrifice, is used for pension contributions, pay awards etc?

greenglide

Two "disadvantages" spring to mind.

All pension contributions are employers contributions so if you leave or die in service the refund of employees contributions will be less.

Entitlement to state benefits may be impacted as the earnings is less.

Generally salary sacrifice is good though. The extra 13% for pension AVCs is good. In my case the employer retains the NI savings which is unfortunate but hey.

zygurat789

greenglide wrote: »

Two "disadvantages" spring to mind.

All pension contributions are employers contributions so if you leave or die in service the refund of employees contributions will be less.

Entitlement to state benefits may be impacted as the earnings is less.

Generally salary sacrifice is good though. The extra 13% for pension AVCs is good. In my case the employer retains the NI savings which is unfortunate but hey.

Sorry, what is the 13%?

greenglide

That should have been 12%. This is the employees National Insurance that you avoid by the salary sacrifice for the payments if you are not contracted out. If you are contracted out (which can only be if you are in a defined benefit pension scheme) the rate is [STRIKE]5.85% [/STRIKE] from 10.6% to 12%

There should be a list of the "benefits" available for "purchase" which should give details of which ones save tax, NI, both or neither.

Pension payments are generally the big one as they avoid tax and NI. The 12% assumes that you do not earn over the UEL if £41000. See http://www.hmrc.gov.uk/payerti/forms-updates/rates-thresholds.htm

zygurat789

greenglide wrote: »

That should have been 12%. This is the employees National Insurance that you avoid by the salary sacrifice for the payments if you are not contracted out. If you are contracted out (which can only be if you are in a defined benefit pension scheme) the rate is [STRIKE]5.85% [/STRIKE] from 10.6% to 12%

There should be a list of the "benefits" available for "purchase" which should give details of which ones save tax, NI, both or neither.

Pension payments are generally the big one as they avoid tax and NI. The 12% assumes that you do not earn over the UEL if £41000. See http://www.hmrc.gov.uk/payerti/forms-updates/rates-thresholds.htm

Yes 12% I understand

zagfles

greenglide wrote: »

Two "disadvantages" spring to mind.

All pension contributions are employers contributions so if you leave or die in service the refund of employees contributions will be less.

Entitlement to state benefits may be impacted as the earnings is less.

Generally salary sacrifice is good though. The extra 13% for pension AVCs is good. In my case the employer retains the NI savings which is unfortunate but hey.

If you die in service any decent scheme will pay the full value of the pot to your dependants or your estate (or perhaps provide a pension instead), regardless of whether it consists of employee or employer contributions. I think most occupation pensions use the discretionary thing (ie they choose but you can register a "wish") to avoid IHT. You need to check the scheme rules but I can't believe any occupational scheme would keep the employer contributions.

gadgetmind

http://www.hl.co.uk/news/articles/what-happens-to-my-pension-when-i-die

greenglide

zagfles wrote: »

If you die in service any decent scheme will pay the full value of the pot to your dependants or your estate (or perhaps provide a pension instead), regardless of whether it consists of employee or employer contributions. I think most occupation pensions use the discretionary thing (ie they choose but you can register a "wish") to avoid IHT. You need to check the scheme rules but I can't believe any occupational scheme would keep the employer contributions.

The comment was based on a final pension scheme where there are cases where there is a refund on contributions. In my case death in service includes a refund of employees contributions, a survivors pension and a variable lump sum up to 8 times annual salary. The contributions are only those up to the start of salary sacrifice starting in 2007. I don't think that was too harsh as we kept the final salary scheme at that point.

zagfles

greenglide wrote: »

The comment was based on a final pension scheme where there are cases where there is a refund on contributions. In my case death in service includes a refund of employees contributions, a survivors pension and a variable lump sum up to 8 times annual salary. The contributions are only those up to the start of salary sacrifice starting in 2007. I don't think that was too harsh as we kept the final salary scheme at that point.

That is generous - refund of contribution plus dependants pension plus lump sum!

greenglide

zagfles wrote: »

That is generous - refund of contribution plus dependants pension plus lump sum!

When the salary sacrifice scheme started the lump sum became a purchased item under "flexible benefits" but we could choose the level. The employee contributions have always been returned - because the death benefits are insurance based rather than the pension scheme?

Of course I can never benefit from it can I? I am now worth more dead than I will get in the rest of my working life:(