Smart Pay works pension

[dothawkes31]

Hi, i have had the letter from work asking if i want to join their pension scheme and the blurb says i could end up with a higher takehome cos of the way this smart pay works, does anyone understand what it is all about and would anyone be able to say whether it is worth me joining?

[buildersmate]

Hi Dot. I'd never heard of 'smart pay pension' but a websearch reveals that it is salary sacrifice, so I can explain that for you.
With salary sacrifice schemes, you agree with your employer not to take part of your pay. The proportion that you do not take gets paid directly into your pension (this is going to be a defined contributions scheme I assume, not a defined benefit (final salary) scheme).
You don't pay either tax or employees NI on the sacrificed part, but your employer doesn't have to pay employer's NI on the value of your sacrificed salary either - so it should be paying the amount of NI that it saves into your pension pot in addition.
It works best for 40% taxpayers.

I don't see how one can end up with a higher take-home, unless the impact of putting the sacrificial pension contributions can be shown to produce the same additional pension as the State Second Pension, for a smaller level of pension contribution (net effect of the salary sacrifice on your take-home) than compared to your take-home when paying the full whack of employee's NI that buys you into the State scheme. Your company needs to provide you with illustrations to show this, but I don't see how it can be guaranteed.

[dothawkes31]

Yes that sounds like what the letter said, I;ve left it in work but i;ll fetch it home tomorrow and add some more detail then, thanks.

[factor-fiction]

I'm not sure if I've understood Buildersmate fully on this occasion. The employee does have a higher take home pay.

A normal pension contribution system gives tax relief at source on contributions but gives no NI relief on contributions asNI is based on gross salary.
So Dot gets £500 a week gross, pays NI based on the full amount, pays £50 a week pension contributions and tax is based on her salary of £450 (ie after pension contributions)

Under a salary sacrifice Dot's wage is reduced by £50 a week. Her tax is unchnaged, but her NI is reduced as she doesn't pay NI on the last £50. So assuming a 10% marginal NI rate Dot will be better off by £5 a week.
Her pension is unaffected.

In addition the employer saves some NI and may choose to add this to teh pension fund, so Dot may benefit again ultimately.

There are some things to be careful about though- eg it may affect future pay rises or your ability to get a mortgage if your gross salary falls. And those higher earners above the NI threshold save only 1% on NI as that is their marginal NI rate. So I disagree that salary sacrifice works best for higher rate tax payers (who get 40% taxelief under either arrangement)

[dothawkes31]

yes factor that was the phrase the blurb used 'salary sacrifice' and work will pay the NI they save to the fund. I already have 2 previous pensions, one with House of Fraser I started in 1980 and one with Scottish Life I started in 2001. Both I have left to build seperately and the House of Fraser one will be very good eventually I think. I know thay I could transfer funds over to the new one but the costs and charges involved would probably negate any future financial gain i suppose. I have also of course already paid the 30 years NI contributions I needed to secure the state pension and of course all three of these works pensions will be liable for tax (probably), I wonder if there is any gain to be made there by combining the 3, if I have to pay tax on them individually in the future, is there any way of predicting what that might be against tax on a combined fund?

[factor-fiction]

You can get transfer values to help decide on a merger but it's difficult to work out whether it's a good deal.
The main issue for me was risk- did I want all my eggs in one basket if the fund went bust.
I can't see an advantage unless one of your older schemes is in danger of collapse or is doing badly-I suspect with a transfer someone would take a small cut (commission/charges) somewhere.

You may need proper pensions advice from an expert rather than from me!

[buildersmate]

Yes, factor, agreed that the employee pays less NI. And also agreed that NI is paid on gross earnings, whereas tax is paid on net earnings (which are gross less any conventional contributions into employers pension scheme).
I think I was (wrongly) trying to compare the potential impact of a salary sacrifice scheme against the State additional pension scheme. Not a salary sacrifice scheme method of funding into an employer's pension scheme versus conventional superannuation contributions method of funding. Thanks for pointing this out.

[36TEAK36]

My Employers introduced this back in April, and although it is not much, my take home pay is about an extra £10 per month.

Lots of big companies use smart pensions, and they can save a considerable amount of money if they have a lot of employees who join.

Make sure your employers agree to a 'reference salary' which is just a term for your salary if you were not in the smart pension scheme.This means that any future salary increases are based on your 'reference salary' rather than the one shown on your payslip. My company also use this 'reference salary' if they need to supply an employees financial details for things like Mortgage applications, Loans,etc.