Pension advice?

"Craven Moorhead" wrote

Will there be an adjustment to the 'final salary' or accrual rate used to calculate benefits on retirement? If it was a 60ths scheme and you worked 40 years, you'd get a pension of 2/3 of final salary. But if that salary has been reduced (in lieu of not paying pension contributions), then the pension you end up with will be less...

Why not put the money you are saving into a second pension Derek.

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The take home money at the end of the month is likely to be the same in or out of the new scheme. The employee will have no 'extra' money to save.

The scheme is a legal tax fiddle where the only one losing on the deal is the tax man.

Possibly one thing to watch out for in a final salary scheme is which salary is being used to calculate the final pension? The existing salary or new reduced salary?

There may not be one correct answer. I believe NI contributions (or part of them) are capped and if the employee earns more than the threshold the deal may not be as good as that for a lower paid employee.

If the pension scheme is anything like my employer uses[1], the rules seem to change every couple of years usually to the detriment of employees. Pensions in private industries are much more of a gamble than they once were and nothing can be guaranteed long term.

Should do - he's saving on NI. In one way of looking at it, his salary is still the same but his pension contributions are coming out "above the line", ie before tax. The "in" at the top of the payslip is the same (notional salary before playing silly buggers), the "out" of the pension contribution is the same (whoever's supposedly paying for it), but the "out" of National Insurance is smaller.

In the scheme I'm part of (I use it for canteen food rather than pension contributions) I save the tax as well as NI, but I understand that's a special arrangement for only certain benefits; food qualifies but I don't know if pensions do.

If the tax man is losing then surely someone must be winning? (Doesn't apply everywhere in life, but should do in this kind of arrangement.) If neither the company nor the employee is winning then what's the point? I think the employee wins (as does the company), so he gets extra money which he could put into a second pension. I'm not sure the amount will actually be worth doing anything with though.

Clearly it should be the original one, but something to check just in case, I guess. My employer calls the original, before-tax-fiddles, one the "reference salary", and all the many things that depend on salary figure (overtime, sales commission, etc) are keyed off that.

One thing to possibly watch out for is salary calculations for mortgages; I know some people where I work were worried that the lower salary value would be used by lenders in calculating whether they could afford the formerly-fashionable massive mortgages. I'm not aware of anyone actually having a problem, though - this kind of scheme is common enough that lenders seem to be aware of it and happy to use one's "reference salary" for the purpose.

Pete

This sounds like a "Salary Sacrifice" arrangement, which is common on money purchase schemes. With a final salary scheme then there is probably no benefit to the employee, just to the company unless they improve the defined benefits.

You could also lose out if they use your "new" gross pay as the basis for the defined benefit. You may also lose out when applying for a mortgage if your new gross pay is used to calculate income multiples.

Most private pension providers wouldn't touch him as they would be afraid of being accused of mis-selling, given that he has the option of contributing to a company scheme, whose tax advantages will normally make it more attractive.

"David Woolley" wrote

What tax advantages do company schemes have over private pensions?

For a pension, you get tax relief whichever way you do it. It is only NI where the rules differ for employee/employer contributions.

The company wins in respect of employer contributions and the employee wins in respect of employee contributions.

There is an NI as well as a tax advantage.

"David Woolley" wrote

Would you care to elaborate?

Isn't NI only affected if you "contract-out", which is possible either in a company scheme *or* a private pension, so there's no difference there?

And aren't tax considerations also similar between the two?

Contracting out doesn't change the NI, it just diverts it from stat to private schemes. Reducing salary does change the NI, both employee and employer components, at least for a large range of normal salaries.

You only get the tax advantage, not the NI one, from a private scheme.

(It might also be the case that administration and sales costs for the company schemes tend to be lower, resulting in lower charges, but that is pure speculation and may not be the case.)

"David Woolley" wrote

How is that an advantage for a company scheme?

"David Woolley" wrote

That's the same with both company schemes or private pensions.

"David Woolley" wrote

"David Woolley" wrote

Those wouldn't be "tax advantages" anyway...! You said that company schemes have tax advantages over private pensions. You don't appear to have pointed any out yet...

In a private scheme, you pay your pension contributions on income that has already suffered NI, and you can't claim it back.

Employer's contributions in a company scheme are paid before NI is deducted from your income.

With the private scheme, you don't reduce the salary, but you have less of it available to you. With the the company scheme, your salary is reduced by the amount of the pension contribution. In the first case, the employer NI is based on usable salary plus pension contribution. In the second case, it is only based on usable salary. That's the salary sacrifice model, but there is similar logic if you keep the salary constant.

If there weren't a tax advantage, HMRC would not need special rules for salary sacrifice.

"Jonathan Bryce" wrote

Yep, that's the *employee* paying the contribution.

Equally, when an *employee* pays company scheme contributions, it is from income that has already suffered NI...

"Jonathan Bryce" wrote

Yep, that's the *employer* paying the contribution.

Equally, an *employer* can make contributions to a private pension, and then the NI treatment is the same...

"David Woolley" wrote

Why aren't you considering the possibility of the *employer* paying contributions directly to the private pension, possibly after the employee has made a salary sacrifice?

Because that would be a company scheme and, in fact, how most company money purchase schemes work.

"David Woolley" wrote

Nope - it would be a **private pension** (the clue was in my use of the words "private pension"!), with some contributions paid directly from the employer.

It *is* allowed. Didn't you know that?