What are Salary Sacrifice Pensions?
Salary sacrifice pensions are pensions where part of your payments into your pension are based on voluntarily sacrificing a portion of your salary.
Employers and employees can agree to make a salary sacrifice to pay into the salary sacrifice pension. This can have benefits for both sides.
On the employee’s side, a portion of salary can be cut and instead paid into the salary sacrifice pension. As a result, employees may pay less income tax, boost their savings in their salary sacrifice pensions, and qualify for extra tax relief from government as well. This means that their overall remuneration goes up, even though their take-home pay may have reduced due to payments into the salary sacrifice pension.
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The employer is generally agreeable to salary sacrifice pension arrangements, as he cuts his costs on National Insurance contributions that would have been due on the portion of wages that were used for the salary sacrifice.
Some large companies have actually requested their employees to take on salary sacrifice pensions arrangements, so that the National Insurance contributions saved by the employer can be used to lower any pensions deficits within the company pension schemes.
For example, employees who may have historically paid 5% of salary into pensions might be required to contribute 10% to salary sacrifice pensions. However, some companies offer to pay the entire 10% for employees, if the workers agree to reduce their salary by 10% as well. The company benefits from a lower National Insurance bill, employees benefit from lower NI and tax as well.
Salary sacrifice pensions – points to consider
There are a number of situations and considerations in relation to salary sacrifice pensions.
As employees are choosing to take a cut in salary for their salary sacrifice pensions, they must where possible ensure that any salary-related benefits are not reduced in consequence.
Employers are able, and may be prepared, to avoid this by introducing a “notional” or “reference” salary that would reflect the original employee salaries before the increased payments into salary sacrifice pensions.
Items calculated in relation to the notional salary may include overtime and shift pay. The employee’s rights are preserved by ensuring that these elements continue to be calculated as if the salary sacrifice pension arrangement had not been set up.
Employees in defined benefit pensions or final salary pension schemes must also ensure they do not lose out by opting for a salary sacrifice pension. A defined benefit pension scheme calculates the employee’s retirement income based on a combination of final salary at retirement, and number of years of service to the company. It is therefore important to agree that the notional salary be used, so that retirement income is not diminished.
The third group for whom special considerations exist in relation to salary sacrifice pensions are women anticipating maternity leave. Statutory maternity leave would be based on their official lower salary in a salary sacrifice situation. For that reason, women expecting a baby generally decline the opportunity to have salary sacrifice pensions. When British Energy gave employees the choice of opting for salary sacrifice pensions, 95% chose to accept the deal, and the remaining 5% who declined were mainly women anticipating a period of maternity leave.
Of course, having a lower salary through payments into salary sacrifice pensions can have implications when seeking a mortgage, a loan, or credit of any kind, as well.
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