Losing access to salary sacrifice

Zero_Sum

FatherAbraham wrote: »

Because it mimics the astonishingly-good National-Insurance avoidance which members of defined-benefit scheme enjoy. They don't pay NI on their employers' enormous, putative contributions.

No it doesnt & contracting out was scrapped a few years ago.

bowlhead99

FatherAbraham wrote: »

Because it mimics the astonishingly-good National-Insurance avoidance which members of defined-benefit scheme enjoy. They don't pay NI on their employers' enormous, putative contributions.

Dox wrote: »

Members of DC schemes don't pay NI on employer contributions either, which rather undermines your reasoning.

Zero_Sum wrote: »

No it doesnt & contracting out was scrapped a few years ago.

I think you are both missing Father's point, which is not about contracting-out.

If an employer is offering DB pension at a rate even approaching that of some of the glorious DB schemes we've heard about, they are typically fundiing the 'pot' necessary to provide those benefits with a heck of a lot more cash than the average private sector employee will see added to his personal pot by his DC-contributing employer.

In the historically more prevalent DB arrangement, you get a lot of money into your pension. In a modern DC arrangement (on average, we're generalising here) you get less money into your pension and have to bear the investment risk yourself. Unfortunately the only way for you to get the sort of money into your pension to buy yourself a big 'defined benefit-like' annual payout in retirement, is to make superhuman contributions out of your salary to make up for the fact that the employer funding is so much lower in average DC schemes than it is in the DB scheme with an employer providing guaranteed benefits in retirement.

As the onus is on the employee to pad out his DC pension himself, it is frustrating that he must do it out of his salary, which has had NI charged on it. Because by contrast, in the DB world, a large part of the scheme funding - including responsibility for poor investment performance - was paid by the employer, whose money being put into the fund has not first been ravaged by NI contributions.

What this leads to is an understanding that if the employee would prefer to have less money to enjoy now in his pay packet, and have the employer put a lot of money into a DC pension for him instead, perhaps it's reasonable that the employee shouldn't have to still pay NI on his old gross salary level. After all, in the DB world, the employee simply has a relatively lower salary and low NI contributions and gets a nice safe pension. The DC employee trying to get himself the same pension level would -without a sacrifice arrangement being allowed - need to take an effective pay cut down to the level of the lower paid DB worker, while still paying NI on the higher salary which he is not actually taking as salary because he needs to fund his pension.

So, allowing him to officially sacrifice salary down to some lower level to fund a better level of pension - and not still be charged NI as if he was actually getting cash in hand to enjoy right now -does seem fair and reasonable.

Zero_Sum

bowlhead99 wrote: »

I think you are both missing Father's point, which is not about contracting-out.

If an employer is offering DB pension at a rate even approaching that of some of the glorious DB schemes we've heard about, they are typically fundiing the 'pot' necessary to provide those benefits with a heck of a lot more cash than the average private sector employee will see added to his personal pot by his DC-contributing employer.

In the historically more prevalent DB arrangement, you get a lot of money into your pension. In a modern DC arrangement (on average, we're generalising here) you get less money into your pension and have to bear the investment risk yourself. Unfortunately the only way for you to get the sort of money into your pension to buy yourself a big 'defined benefit-like' annual payout in retirement, is to make superhuman contributions out of your salary to make up for the fact that the employer funding is so much lower in average DC schemes than it is in the DB scheme with an employer providing guaranteed benefits in retirement.

As the onus is on the employee to pad out his DC pension himself, it is frustrating that he must do it out of his salary, which has had NI charged on it. Because by contrast, in the DB world, a large part of the scheme funding - including responsibility for poor investment performance - was paid by the employer, whose money being put into the fund has not first been ravaged by NI contributions.

What this leads to is an understanding that if the employee would prefer to have less money to enjoy now in his pay packet, and have the employer put a lot of money into a DC pension for him instead, perhaps it's reasonable that the employee shouldn't have to still pay NI on his old gross salary level. After all, in the DB world, the employee simply has a relatively lower salary and low NI contributions and gets a nice safe pension. The DC employee trying to get himself the same pension level would -without a sacrifice arrangement being allowed - need to take an effective pay cut down to the level of the lower paid DB worker, while still paying NI on the higher salary which he is not actually taking as salary because he needs to fund his pension.

So, allowing him to officially sacrifice salary down to some lower level to fund a better level of pension - and not still be charged NI as if he was actually getting cash in hand to enjoy right now -does seem fair and reasonable.

Im well aware that DB pension are more generous. But the NI thing has nothing to do with it. In a like for like job private sector generally earn more & receive bonuses on top. Pensions were a way of making up the difference.

Dox

FatherAbraham wrote: »

However, members of defined-benefit schemes implicitly have given up higher salaries in exchange for giant employer contributions.

Many DB schemes (the majority, in the case of private sector DB schemes) date from the days when schemes were in surplus and employers were taking contribution holidays! Although there were notional contribution rates for accounting purposes, salaries were generally not impacted because there were no 'giant' employer contributions. You can't compare apples and oranges on the basis of pure envy...

Paul_Herring

Zero_Sum wrote: »

No it doesnt & contracting out was scrapped a few years ago.

I'm fairly certain contracting out didn't reimburse the NI on pension contributions. In fact it was unrelated to pension contributions.

bowlhead99

Zero_Sum wrote: »

Im well aware that DB pension are more generous. But the NI thing has nothing to do with it. In a like for like job private sector generally earn more & receive bonuses on top. Pensions were a way of making up the difference.

So in the two groups of 'earn more' vs 'get better pension', one group gets high salary (high tax to pay, high NI to pay) and the other group gets high pension (low tax to pay, low NI to pay).

However if the group with the high salary wants to give up the salary to get the high pension, and salary sacrifice concept does not exist, they will move from 'high tax high NI' to 'low tax high NI', and that extra NI cost - vs joining an employer with better pension in the first place - is a drag on their ability to buy a comparable pension.

The original contention was 'i don't understand why the government allows salary sacrifice to exist, it is just a loophole to avoid NI'. However, it's clear that if we see the action of 'the employee and employer together creating a pension income for the employee' as a good thing for the employee and employer to do together, then NI leakage from the employee to HMRC is a frustration - because in a model where the employer shoulders the burden there is no employers or employees NI payable, whereas when the employee shoulders it, there is.

Ultimately the employer only has X amount of pounds available as a total compensation package for the employees. Some of those employees will not value a high retirement income and will just want the cash in hand, so the employer will offer higher salaries and lower pensions to ensure that sort of employee ('A') is still happy to take the job, knowing that the person who wants the better pension ('B') can divert their income to extra pension funding themselves. But where that diversion does happen, and salary sacrifice isn't allowed, the employer and employee B pair will together be funding as much NI as the employer and employee A pair, i.e. the amount of NI payable on a high cash salary.

This means that the action of granting high salaries to the A workers, when the B workers would have been happy with a better pension in the first place, has caused the business and its employees to pay as much NI as if everyone was getting high salaries. When it would have been way more efficient for the business to pay high salaries to the A guys and low salaries with big pensions to the B guys. This leakage of NI from attracting a diverse workforce (both A and B characters) increases business costs and reduces employee take-home, compared to if they had split the business into two units offering two compensation structures and forced employees and hiring managers to decide up front who would join which side of the business.

So what happens is, the government allows companies to say to employees: come and join my firm for a total package of £x, and you can decide whether you would like pension to be a large or small component of that package depending on what suits you. Simply sacrifice potential salary for pension. The government then gets paid its high NI where people chose high salaries and low pensions, and gets low NI where people choose low salaries and good pensions, without the inefficiency of having to split the company into two smaller mini-companies with separate employee compensation structures.

On balance, the government thought it was ok to bless this arrangement, because the people who are voluntarily choosing to sacrifice for a better pension in retirement are putting money away for a purpose that is generally considered worthy. By contrast, it no longer allows certain other 'sacrifice' arrangements for more exotic flexible benefits like getting paid in shopping vouchers rather than in cash.

MK62

Whether you see it as a loophole or not, the point is that salary sacrifice (and the resultant NI avoidance) is, in practice, not available to everyone, so those without access are left at a disadvantage...

bowlhead99

MK62 wrote: »

Whether you see it as a loophole or not, the point is that salary sacrifice (and the resultant NI avoidance) is, in practice, not available to everyone, so those without access are left at a disadvantage...

Yes, unfortunately that's the case. There is a non-zero cost to operating a flexible benefits or sal-sac structure, so not all employers are going to offer it.

Anonymous101

Good points... I tend to agree with bowlheads comments on the merits of salsac.


It is certainly a benefit, one which I personally enjoy. If I was in the OP's position - which as mentioned is one where he has effectively seen a pay cut - I would be looking at other options. Whether that would be investing in an ISA rather than a pension because that now represents better value or whether that means looking for a new job is for the OP to decide. Personally, possibly due to the level of contributions I make, I'd be looking for a new job.

Albermarle

Perhaps by saying it was a loophole , I was not fully considering the bigger picture , that is well explained above .
However if we look at the employer rather than the employee. Then to use a personal example , I work for a very large company , with a mega rich owner(s), living as tax exiles. . When we moved to salsac, they kept all the employer savings on NI to themselves . So immediately HMRC was deprived of revenue which went straight to help buy the next luxury yacht . That sounds like a loophole to me.