Is salary sacrifice worth it for pension scheme?

kissinger

I'm about to sign up to my employer's pension scheme (it's the USS scheme for UK HE) and I've been given the option to use salary sacrifice to lower my pensions contributions. As I'm just getting started in the job and have quite a few outgoings, I was thinking about taking this up, but I wondered what the downsides might be.

From what I can tell the only downsides relate to the potential effect on contributory benefits (i.e., if you lose your job you would get slightly less unemployment benefits because you paid less NI) and things like mortgage applications, because salary sacrifice makes your income seem lower on paper.

I won't be applying for a mortgage for a few years yet and I'm currently earning around £27,000, so would you advise someone in my position to go with salary sacrifice for pensions?

Lokolo

The NI contributions is wrong, it doesn't matter how much you contribute, just as long as you do. A NI contribution counts if its £1000 or just £1.

Mortgage application is correct.

Salary sacrifice is very useful as you save on tax and NI for each £1 in cash.

kissinger

Wow! So it's more or less a no brainer to go for salary sacrifice unless you're about to apply for a mortgage and are worried about being turned down based on income?

kangoora

Even that may not be an issue depending on how your employer handles any salary check requests.

My employer retains a 'notional' salary record which is my salary before any salary sacrifice. This is the figure they use to respond when things like mortgage salary checks come in.

You'd have to speak to your employer to see how they handle those sort of requests.

arbster

Lokolo wrote: »

The NI contributions is wrong, it doesn't matter how much you contribute, just as long as you do. A NI contribution counts if its £1000 or just £1.

Mortgage application is correct.

Salary sacrifice is very useful as you save on tax and NI for each £1 in cash.

As others have observed, many employers will provide "preserved salary" figure when asked, which is unaffected by the various forms of salary sacrifice which exist.

On the subject of tax saved, you should note that even if you don't use salary sacrifice you are entitled to tax relief on your pension contributions. The employee and employer NI savings are real, and in some cases your employer may offer to share some of the latter with you in the form of higher employer pension contributions. It's worth asking.

kidmugsy

Use salary sacrifice while it's still available. It's an absurd charge on the taxpayer which surely ought to be abolished on public interest grounds.

Lokolo

kidmugsy wrote: »

Use salary sacrifice while it's still available. It's an absurd charge on the taxpayer which surely ought to be abolished on public interest grounds.

Same can be said for DB pensions in the public sector, but I can't see them going anytime soon.

kidmugsy

Lokolo wrote: »

Same can be said for DB pensions in the public sector, but I can't see them going anytime soon.

You can't see the government ending a government-employee rip-off from the taxpayer? You cynic, you.

EdSwippet

kidmugsy wrote: »

It's an absurd charge on the taxpayer which surely ought to be abolished on public interest grounds.

Nope. It's one of the few ways in which a taxpayer can recover a portion of their NI "contributions" which must be paid and which are far in excess of anything they get back.

http://www.ft.com/intl/cms/s/0/810d4dae-0297-11e4-a68d-00144feab7de.html#axzz3dKNWYqPm

"So we pay in to the fund and then we can draw down on it when times are tough or when we retire?
That would be how a genuine social insurance model would work. But, as we earn more, we pay more in NI to the NIF and we don’t get any more out. Most benefits are either universal or means-tested."

Spidernick

Agreed, Ed - I'm always amazed at the amount of people who look on salary sacrifice schemes as some form of 'abuse' when most people aren't saving enough towards their retirement as it is and anything that encourages people to do so should really be lauded.

bigadaj

Salary sacrifice also goes some way to resolving the imbalance between higher and standard rate tax relief on pension contributions.

From an objective point of view the priority should be to encourage pension contributions amongst low to middle earners, there are plenty of incentives for high earners to save in a pension, and ultimately reducing potential future benefits costs by encouraging people to make their own provision at the lower end of the income spectrum so reducing liabilities on future tax payers.

This is partly being covered by the flat rate pension but this will take time, and as many have pointed out won't provide a flat rate for everyone by any means.