My company have today announced that they are changing the way our final salary pension scheme is funded.
Basically, what they're proposing (and individuals can opt-out if they want) is the following:
(i) workers will no longer have to contribute to the scheme (ii) the company will make the worker's contribution for them (iii) the worker's salary will be reduced by the amount of the missing contribution
The carrot is that we'll all be slightly better off each month (reduced NI contributions) and if everyone in the scheme goes along with the idea then the company saves £800k because their NI contributions are consequently lower.
Words of wisdom/questions I need to ask/concerns I should have are gratefully received.
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...
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.
[1] New employees cannot join the older final salary schemes which also means the older schemes are getting fewer contributions as workers retire
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.
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.
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.)
That's the same with both company schemes or private pensions.
"David Woolley" wrote
*What* "NI advantage"?
"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...
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.
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?
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.
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