‘Should I use ‘salary sacrifice’ to boost my pension just before I retire?’

Write to Kate with your pension problem: [email protected] Columns are published twice a month on Tuesday mornings

Dear Kate,

Just before lockdown I entered the workplace salary sacrifice additional voluntary contribution scheme. I will be 60 in June 2022. My plan was to sacrifice £1,500 per month from my gross salary of £3,400. Adding on my National Insurance savings this will result in a payment in of a little over £1,700 per month.

Given the short period of saving I wasn’t interested in profits so much as benefitting from the tax and NI savings. At the point of signing up, for every £1 that goes into the scheme I lose only 68p from my bottom line but as the Coronavirus crisis escalates I’m beginning to fear that in two years time I won’t even get my 68p back much less my £1.

I can reduce my payments to a minimum amount but part of me doesn’t want to be part of the scramble out of the market, that just makes things worse.

Do you have any advice?

Thanks, Maggie

Salary sacrifice is an agreement between an employer and employee to reduce an employee’s cash pay, usually in return for a non-cash benefit. It’s an extremely tax-efficient way of paying or boosting pension contributions, as the amount of salary exchanged is not liable to income tax or National Insurance contributions (both employer and employee), as it technically becomes an employer pension contribution.

Your taxable income and NI contributions are reduced and employers don’t pay NI contributions on their pension contributions.

Downsides of salary sacrifice 

However, there are some downsides to using salary sacrifice which you should be aware of. Reducing your salary, can lead to reduction in some state benefits and could impact mortgage applications. It may also impact other employee benefits such as life cover, although many employers will use a higher “reference” salary for these purposes.

It’s worth pointing out that salary sacrifice can’t be used to reduce someone’s earnings below the national minimum wage rates. I’ve run some calculations through a salary sacrifice calculator based on the information you’ve provided and summarised this in the table below. I’ve assumed your gross annual salary is £40,800 a year (£3,400 a month) and that you choose to sacrifice £1,500 per month of your salary in return for an employer contribution payable to your AVC scheme.

I’ve ignored any personal contribution you may already be making to your workplace scheme. Due to the impact of a reduced salary, you’ll pay less income tax and NI contributions. Your employer will also pay lower NI contributions, and may share this saving with you, which provides a further boost to the amount saved in your pension.

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