If you are currently participating in a salary sacrifice scheme and are now in the new
NHS Pension Scheme 2015 you should consider whether this is still in your best overall
financial interest.
What is a salary sacrifice scheme?
Salary sacrifice arrangements are when you enter into an agreement with your
employer to exchange some of your salary for a non-cash benefit. Common examples
include childcare vouchers, car parking, car leasing, personal computers and cycle-towork
schemes.
These schemes can appear attractive given the National Insurance and tax savings that
can be made for both you and your employer. In essence, your employer covers the total
cost of the purchase and reduces your contractual salary by the amount in question over
the agreed period of the purchase. As your salary becomes less this means you pay less
tax and National Insurance.
What’s the problem?
Changes to the NHS Pension Scheme that took place on 1st April 2015 have potential
implications for anyone involved in a salary sacrifice scheme. The new NHS Pension
Scheme is now a career average revalued earnings (CARE) scheme whereas previously
your pension was calculated with regard to your final pay at retirement.
Under a CARE scheme, each year’s earnings become equally important in calculating
your pension. Therefore, for any time period where you participate in a salary sacrifice
scheme that reduces your pensionable pay, your pension earned for that year will be
calculated against your reduced pay. So your pension will be smaller than it would have
been had you not entered into such an agreement.
In a final salary pension scheme, salary sacrifice is not such a significant issue because
in the majority of cases the salary sacrifice agreement ends a while before you draw
your pension. This means your pension is not generally affected as this would be
calculated against your full contractual salary at retirement.
Example:
Lisa earns £20,000 a year and does not receive any pay increases for the next three
years. The pension she would earn after three years in the 2015 scheme would be
£1,149.
However, if Lisa were to enter into a childcare voucher salary sacrifice scheme and
reduced her pensionable salary by £2,000 (i.e. from £20,000 to £18,000) her pension
over the same three-year period would be £1,0351 – that’s nearly 10%less.
So in this example, through sacrificing £2,000 of her annual salary, Lisa would reduce
her pension by around 10%over a three-year period.
What should you do?
Consider your options and speak to your employer. If you are concerned about the
potential impact on your pension of your salary sacrifice arrangement, make your
employer aware of this and consider ending your participation in the salary sacrifice
scheme.
1 assuming a revaluation rate of 3.5% (2% CPI plus 1.5%)
