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        Updated: April 15, 2024

        Does salary sacrifice affect my pension?

        How does salary sacrifice affect different pension schemes? Read this in-depth guide to find out what this could mean for your retirement.

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        ‘Salary sacrifice’ – it may sound more onerous than it is. A salary sacrifice scheme (sometimes known as a ‘salary exchange’) can actually be a very tax-efficient way to contribute to your retirement, or to reduce your tax bill – but it can also have implications for your pension.

        Does salary sacrifice affect your state pension? In this article, you’ll find out.

        You’ll also learn about salary sacrifice’s impact on pensions in the private sector, and how you can use salary sacrifice to boost your retirement.

        Here’s what you’ll learn in this article:

        Looking for answers, or some friendly, expert guidance? Get in touch – one of the fantastic pension experts that we work with can answer your questions, or show you how to use a salary exchange scheme for the best effect.

        Does salary sacrifice affect pensions?

        If you make salary sacrifice by sacrificing part of your salary as a contribution to your pension, your pension should, depending on overall circumstances, benefit from the additional contributions.

        By taking a lower salary, you could gain from paying lower National Insurance Contributions and your pension fund may benefit by getting more pension contributions from your employer, if they are giving you some of the money they will save on the employer NI contributions. It’s worth asking your employer if this is part of the salary sacrifice scheme on offer to you.

        If you’re in a Defined Benefit pension scheme, if you leave the scheme in the first couple of years you might not be able to receive a refund on your contributions. This is because any salary sacrifice contributions made won’t count as employer contributions. So it’s worth making sure you intend to stay in the scheme beyond the first two years before committing to a salary sacrifice scheme.

        By exchanging some of your salary for an equivalent monetary benefit, you reduce your gross annual pay and the amount of tax that you will pay. This could have implications for your state or private pension and could affect your entitlement to state benefits – such as tax credits.

        The specifics of how salary sacrifice can affect your pension really depends on your circumstances. For example; how much you earn, and the kind of salary sacrifice scheme you’re in.

        If you’re trying to decide if a salary sacrifice scheme is right for you, speak to one of the pension experts we work with. They will help you understand the ins and outs of the salary sacrifice scheme under consideration.

        Taking all your circumstances into consideration, they will be able to give you bespoke advice about whether the scheme is suitable for you, your income now and your future retirement needs.

        Does it affect final salary pensions?

        It can. Remember – salary sacrifice schemes work by reducing your gross earnings. Final salary schemes often calculate how much your pension is worth by looking at how much you earned while you were employed.

        So, by sacrificing pension benefits for other incentives through a salary sacrifice scheme, your final salary calculation may be lower – which could result in a smaller pension once you retire.

        However – final salary schemes often make their calculation based on the last few years of your employment. So, a way to get around this could be to simply avoid any salary sacrifice in the final years of your employment.

        If you don’t know how your final salary pension is calculated, you can ask your scheme provider, or get in touch and have one of our pension experts look into it for you.

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        Will it impact my state pension?

        It can – salary sacrifice’s impact on the state pension is something that needs to be considered.

        Reducing your taxable earnings, logically, results in a reduction in the tax you pay. As a result, you may end up paying less National Insurance contributions – which count towards your State Pension.

        At the time of writing, to be entitled to the new State Pension (which applies from 6 April 2016 onwards), you’ll need to have paid 10 years of National Insurance contributions minimum (or to have received the equivalent National Insurance credits) or 35 years to get the full entitlement. This is calculated on a yearly basis – but doesn’t need to be an unbroken 10 year period.

        As a result, salary sacrifice only effects the State Pension if your taxable income falls below the Lower Earnings Limit (LEL). So, to ensure that your year ‘counts’ towards your NI contributions, you’ll need to make sure that you don’t salary sacrifice below the LEL threshold.

        Again, consider seeking expert advice if any of this is unclear, or if you’d like a better idea about how much salary to exchange.

        Talk to a pension expert today

        If you have questions about salary sacrifice effect on pensions and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an enquiry.

        Then sit back and let us do all the hard work in finding the advisor with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation.

        Ask A Quick Question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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