Salary Sacrifice: The Impact on Pensions
Salary sacrifice has long been used by a variety of companies, both public and private sectors, over the years. They are used to fund everything from cycles to childcare, some scheme has added to the options and some have been removed as HMRC have reviewed the policy. But, in addition to HMRC, you also need to be aware of how such schemes can affect pension payments. It’s amazing saving money today, but not if the pension impact outweighs the saving.
Pensions in the UK fall into two camps, and depending on what type of arrangement you are in depends on how salary sacrifice will affect it.
Defined Contribution – typically in use in the private sector
Also known as ‘money purchase’, you pay a fixed percentage of your salary into a pension pot, which your employer also contributes to. In the end you use that pot of money to buy an ‘annuity’ or an income. The more you pay, the bigger the pension pot. In 97% of our customers’ cases, salary sacrifice will not affect them as your contributions are based on a ‘reference’ salary, your usual pre-sacrifice salary. In most cases, overtime and bonuses will not be included.
Defined Benefit – typically in use in the public sector
Also known as ‘final salary’, you and your employer pay a monthly percentage; this can increase as you earn more, but upon retirement, you receive a pension based on how many years you have worked and your average lifetime earnings. Again, this will not normally include overtime etc. but with salary sacrifice, it’s a little less consistent. Older salary sacrifice schemes, cycle to work, and legacy childcare vouchers are ignored for pension services. However, for cars, such arrangements will reduce both your contributions (good news) and also your earnings for pension services (bad news).
As an example, if you are a teacher earning £36,000 a year but sacrificing £6,000 on an MG4, you would save £120 a month via salary sacrifice on the car and around £40 a month on pension payments. But, for every year you are in the TPS Teachers Pension Scheme, you could lose £125 off your final lump sum and £7 a month off your final pension.
We strongly recommend that you contribute at least the savings on your pension into additional contributions
Speak with your adviser and don’t just live for today. You also need to be very careful if you joined earlier than 2015 as you near retirement, as some of your pension benefits will be based on the best 3 years of your last ten and an expensive pre-retirement treatment can have a large impact.
Salary sacrifice cars are still great news for you, but be aware of the impacts and ensure you reinvest pension savings to reduce any longer-term impact.
Tags : pension, pension contributions, private, public, Salary Sacrifice, Salary Sacrifice Cars