Salary sacrifice pension

Hi All,

I’ve just been moved from a public sector pension scheme to a private pension scheme and they are offering me salary sacrifice as an additional/alternative way of paying into it. As I’ve never had a private pension, excuse my ignorance! I’m going to contribute 10% and my employer is going to contribute 22%.

If I reduce my personal contribution to 0%, but sacrifice 10% of my salary to go straight into the pension instead, it seems that the small benefit is a slight reduction in national insurance contributions. I will also have lower student loan repayments per month.

Downsides are I wouldn’t be able to get as high a mortgage, my paternity pay may be affected, and my death in service benefit will be lower (4x my lower salary).

Is that it or is there some other positive/negative that I haven’t considered?!

At my company, your death in service and any paternity pay (it is now 90% of FTE here for a number of weeks) is based on your salary, so it doesn’t matter that you “sacrificed” some of it.

Depends on how you prove your salary to the mortgage company, it’s not something I’ve ever had to worry about.

I salary sacrifice and had the same reservations.

Most companies will provide you with what is called a ‘reference‘ salary, or the number that would appear on your contract, or what the job is advertised as. Each employees actual salary may be different dependent on what they salary sacrifice, pensions, cars, C2W etc etc.

This ‘reference’ salary is what is used for things like death in service, annual pay rises etc. Theres 5 of us in my team all on the same ‘reference’ salary, but each one of us will receive a different amount into our bank each month as we all have different salary sacrifice arrangements.

One important thing to note I have now realised since using this arrangement for some years –

Your worried about how it will affect you applying for Mortgage, credit etc.

What usually happens is when the potential creditor will be asking what your ‘salary’ is, they are actually trying to work out what your take home in cash is, to understand your risk. So if the Mortgage company asks what your salary is, you can either give them your ‘Reference’ salary, and then give them the details of what comes out of that, such as a pension deductions etc.

Or, just give them the calculated amount after doing all the salary sacrifice stuff, and then when they ask what you pay into your pension from that, the answer is truthfully, zero.

I’m making assumptions based on the figures given, but I guess you are earning a pretty good amount, thus I would not worry too much about losing out on potential credit. Only if you are absolutely desperately trying to stretch your potential credit/mortgage application to the max, might it affect you.

This link:

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

explains why you will not be left short in terms of your NI contributions.

If I reduce my personal contribution to 0%, but sacrifice 10% of my salary to go straight into the pension instead, it seems that the small benefit is a slight reduction in national insurance contributions. I will also have lower student loan repayments per month.

Think of it more as ‘sacrificing gross salaried pay’ than ‘salary sacrifice’.

I make that clumsy construct as typically only gross salary can be ‘sacrificed’, not benefits and allowances that come in addition but are not ‘salary’ – think car allowance, clothing allowance, health insurance, those sorts of things.

Is your personal contribution currently from net pay? If so then I don’t see that you’re in any worse position mortgage application-wise. It’s a regular outgoing that I expect would be considered.

You say you’d be in a better position from an SLC payment size perspective. Sounds good.

Also, as the payments will come from your gross pay (salary) they’ll not have as big an effect on net pay as 10% might sound like. As well as the NI reduction you’ll have less income liable to income tax.

And what @hexhamstu said – DIS and other benefits are usually calculated on stated salary, not gross, taxable, or net pay. You could put it all into your pension and if you died your nominee would still get 4X salary.

+22% from your employer is a nice boost!

You should read the company’s benefit material and be sure you understand it before making a choice.

If I reduce my personal contribution to 0%, but sacrifice 10% of my salary to go straight into the pension instead, it seems that the small benefit is a slight reduction in national insurance contributions. I will also have lower student loan repayments per month.

Correct IME

Downsides are I wouldn’t be able to get as high a mortgage, my paternity pay may be affected, and my death in service benefit will be lower (4x my lower salary).

IME the employer writes you a letter saying your gross salary is £xxxxx and that this will always be the figure used in any calculations such as reviews, redundnacy, benefits etc), and even my pay slips still show “Basic” salary which is the gross amount, then the salary sacrifices are listed below that as deductions (salary sacrifice pension, private medical, dental, share scheme etc).

Mortgage co didn’t bat an eyelid at it, it’s a common setup.

.

Not sure how it works in your company but for most they only offer salary sacrifice. You pay into the pension before tax. Subject to your tax rate that could be worth circa 30% more to you. Most employers match to a certain rate so for example you pay 8% they add 12% to make a 20% pot (but if you pay 1% they might only pay 5%). So again its a no brainer to not take the max of your employer.

Also worth noting that a private pension pot is effectively your asset so if you die in service or after it can be inherited.

+22% from your employer is a nice boost!

It most certainly is. That alone is probably worth the cost of any other potential downsides that you’re maybe worried about unnecessarily

Nothing to add to your question OP, but 22% …..

**** me

I’m going to contribute 10% and my employer is going to contribute 22%.

I literally had to pick my jaw up off the floor with that. That’s outstanding. Take it. Take the money!

Wish my employer gave me 22%.
My 22 year old has a higher percentage from employer than I do…

And I’m on salary sacrifice, it’s fine.

22%, I can only dream.. 6% here, was 5% until a couple of years ago.

Yeah, now I’ve got my jaw up:

also on salary sacrifice and it’s working well for me. 10% me, 12.5% employers contribution. Built up a pretty good pot already (at age 39). Eyeing up retirement at 57 – the earliest age you can start drawing your pension without incurring big taxes.

I salary sacrifice 15% employer 5% – 22%! wow. Can also get a letter stating my salary is lower due to this.

Be grateful anyone who gets more than the measly minimum 5 + 3% that my very large employer gives.

I thought that pension contributions always came out before tax anyway?

No – tax relief is usually added. If you salary sacrifice then the tax effect is the same – just you and the employer both save a tiny amount of National Insurance.

Thanks for the replies, all – I knew STW would know!

I also appreciate the poster above who offered to take my job because of the generous employer contributions! They’ve moved us from a public sector pension where they were contributing 29%, to a private sector pension where they are contributing 22% so the private pension thing is new to me.

with labour discusing new taxes next month, the 25% tax free lump sum at 57 (upto £268k), may no longer be a thing, hopefully it will still exist or be tapered downwards, as i cant imagine many regular folk hit the £1.08m pension pot..

I would double check the 22% – I suspect they may only do that if you contribute x amount. most companies are xx% plus xx% matched – so it might be 12% plus 10% matched in your case.

22 flipping percent, where do I sign?

A few folks have mentioned taking their pension starting at age 57 – there are some pensions which allow it to be taken at 55 – see https://www.aviva.co.uk/retirement/pension-basics/changes-to-pension-age/ for example.

Yeah, as above, I suspect you won’t get 22% if you don’t pay in your share.

Our company pension allow you to contribute 0% (basically withdrawing from the pension scheme) and IIRC they give you a 4% contribution instead.

Thanks for the further replies. I did check and they pay 22% contribution regardless of what I put in, calculated before the salary is sacrificed.

just you and the employer both save a tiny amount of National Insurance.

My employer adds it into the pension, which is nice.

Have to contribute (I think) 3% to get 10%. I’m well over that as I’m getting on a bit and need to ramp up my contributions.

22 flipping percent, where do I sign?

+1

But as he said,  he used to get 29%  which would be the local government pension scheme,  or the civil service alpha scheme I would guess.

That’s an amazing deal for a private sector employer, and better than anything I’ve been offered since I started working at places that offered pensions in my 20s.

From a lender’s point of view the fact that you’re plugging 10% before tax into a pension is a sign that you’re probably going to be a good bet for a big loan; it’s likely that your monthly mortgage payment will be a bit less than any rental unless you’ve got a good deal there, and it’s done on affordability anyway – a big old food or ents bill each month is mote of a concern than pension payment.

Also – where are you working, and do they need more employees?