Is pension salary sacrifice a trick or treat?
Guest Blog from Steve Butler, CEO, Punter Southall Aspire
Halloween is just around the corner and many families will be planning to go ‘trick or treating’ in recognition of this ancient celebration.
But some employees may be forgiven for thinking pension salary sacrifice is a trick their employer is about to play on them.
In our experience it seems that both employers and employees tend to be suspicious of salary sacrifice. It could be something to do with the slightly off putting name. After all, who willingly sacrifices anything, other than witches in folklore who made sacrifices of various kinds?
Sacrificing part of your pay packet to invest in your pension instead sounds almost as nasty as cutting off your own toe, however, research tells us that employees need to be encouraged to save more for their retirement.
According to a survey from Aon Hewitt published last year workers in the UK are under saving for retirement by up to £11bn a year, and only 16% are saving enough to maintain their standard of living when they retire.
But beyond its name, we think pension salary sacrifice is a really good idea and something more companies should be doing. Why is this I hear you ask?
Well, the principle is quite simple. It’s very similar to childcare voucher schemes that many companies run quite happily. Basically, employers reduce their employees’ pre-tax salary (that’s the “sacrifice” bit), and put the difference straight into the employees’ pension pots.
In doing so employees skip paying income tax on the amount they’ve diverted at their marginal rate of income tax (so immediate tax relief).
However, the real benefit to employees and the company is that they bypass the National Insurance contribution on that amount too.
Employers can make a National Insurance saving of 13.8% on the amount of salary sacrificed. For example, an employer with total employee pension contributions of £440,000 per year could potentially make National Insurance savings of £60,720.
An employer chooses how to use this saving, perhaps keeping it all to offset pension costs, or passing part of it on to members as an additional pension contribution.Employees benefit because they can increase their take home pay using salary sacrifice as they are paying less National Insurance, whilst also saving towards their retirement.
It’s a win-win, because almost everyone saves money (for some companies, this is, at worst, cost-neutral).
So why are employers fearful?
Some employers think it’s a grey area legally and prefer to avoid it. That perception wasn’t helped by some of the headlines following the government announcement last Autumn that it was cutting back on the range of benefits that can be provided via salary sacrifice.
For example, salary sacrifice can no longer be used for iPhones, school fees and accommodation. However, the government also specifically said it is keeping salary sacrifice for childcare vouchers, pensions and cycle-to-work schemes.
So, in fact, it’s rather the opposite. For pensions, it seems the government is very publicly giving the practice its blessing for now.
Other employers think that it’s costly to set up, but in our experience, many employers can recoup any investment almost immediately because the savings made are often significant.
Another concern can be that it seems complicated, a pain-in-the-neck for payroll, and a benefit that not many understand. And yet, they’re perfectly happy to administer salary sacrifice for childcare vouchers.
To conclude, while salary sacrifice arrangements can still be used with several employee benefits, the major benefit for employers and employees is obtained by using salary sacrifice for pension contributions. The arrangement can generate employer savings, control costs and help their employees to boost their retirement savings.
Employers also have a chance to engage employees in financial education and encourage them to think about pensions – something that is of real benefit to employees of all ages.
Employees will be happy that they work for such a caring company, which can also help with recruitment and retention.
Pension salary sacrifice is therefore a no-brainer for almost every company and employee, and should be viewed as a welcome treat rather than a trick!