10 Oct 2012

Salary Sacrifice makes company pensions even more attractive

Salary Sacrifice makes company pensions even more attractive

A change needed for auto-enrolment means salary sacrifice for pensions is now an even more attractive way for employees to fund for retirement. This is because there's no longer a minimum period a sacrifice has to run for it to be tax efficient. Peter Mutch Corporate Benefits Director explains why…

A change needed for auto-enrolment means salary sacrifice for pensions is now an even more attractive way for employees to fund for retirement. This is because there's no longer a minimum period a sacrifice has to run for it to be tax efficient. Peter Mutch Corporate Benefits Director explains why.

With the launch of pension auto-enrolment for employers it is highly likely the option of 'salary sacrifice' will become very attractive for both employers and employees. 

'Salary sacrifice' has dual benefits in that it offers employees a way of having more money invested into their workplace pensions by changing the method of payment whilst having all contributions paid by the employer in lieu of a reduced salary. This can also save the employer on National Insurance contributions if the scheme is set up  correctly.

Until recently a valid salary sacrifice arrangement had to run for at least twelve months. Under the new rules any time limit on an agreement (and the potential to reverse the 'salary sacrifice') can now be agreed between the employer and the employee.

The two main benefits of this change are: 

  • The employer can use a salary sacrifice option to meet their statutory obligations under auto-enrolment but still have the Taxman contributing to the costs of running the pension plan without having to worry about disadvantaging staff who decide to opt out. Under the old rules anyone who chose to opt out from the employers pension scheme may not have been able to revert to their previous salary for at least a year; and 
  • Employees may have more incentive to remain in their employer's scheme and continue to have the benefit of lower National Insurance costs without the fear of being tied into a contract with a lower salary that cannot be altered if their circumstances change.

Salary sacrifice is already very popular but with these changes it will only become even more attractive for both employees and employers. The major stumbling block for employees has historically been the lack of flexibility around the "What if my situation changes?" question. However this potential obstacle has now been removed under the new regulations, thus opening the door for substantial increased contributions for employees funded by National Insurance contributions from employers - is real 'everyone wins' situation. 

If as an employer you want to find out more then contact our Corporate Services Department, as an employee you should be asking your employer what they offer (or plan to offer).

Peter Mutch, Corporate Benefits Director


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