Salary Sacrifice into Your Personal Pension – A Quick Guide

Salary sacrifice is an arrangement in which you exchange part of your salary for extra benefits from your employer such as pension contributions, or childcare vouchers. It reduces your immediate overall monthly income, but are the long-term benefits worth the short-term sacrifice?

If you have the option of signing up to salary sacrifice into your personal pension, you’ll need to take time to investigate the repercussions and see whether it will really leave you better off over the long-term.

In this article, we cover…

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How does salary sacrifice into a personal pension work?

You can use salary sacrifice to increase contributions to your personal pension. You give up some of your wages in exchange for extra contributions into your pension or other employer benefits. Once you accept a salary sacrifice, your immediate pay is lower, and while this is a short-term sacrifice, it can have multiple knock-on effect benefits.

A personal pension scheme is a defined contribution pension in which both you and your employer will make a set contribution. With a personal pension arrangement, you are self-managing your pension independent of your employer. You have to select your own provider and arrange your pension contributions.

If you are managing a personal pension, it’s important you look into all options to ensure you are maximising the management of your investments. It’s important you take the time to calculate how much you need to be paying into your pension to achieve your financial goals and the lifestyle you want in later years.

How a salary sacrifice could increase your long-term pension income…

  • You could pay less tax and National Insurance since your overall pay is lower, this means you may not be sacrificing as much immediate income as originally thought.
  • Your employer will also not have to pay Employers’ National Insurance contributions on the part of the salary you sacrifice – in some cases, the employer could pass these extra savings onto your pension contribution.

What are the pros and cons of salary sacrifice into a personal pension?

Some advantages of a salary sacrifice into a personal pension include:

  • More money invested into your pension and retirement
  • An increase to your post-sacrifice take-home pay due to paying lower National Insurance Contributions
  • Receiving additional pension contributions from your employer if they choose to place some of the savings made on paying into National Insurance Contributions into your pension

Disadvantages of getting a salary sacrifice scheme as part of your personal pension:

  • Lower borrowing potential for mortgages – the amount you can borrow will be determined by your lower monthly take-home salary
  • If you change your mind and decide to opt back out of salary sacrifice or take your money out of your pension, any National Insurance contributions that you didn’t pay as a result of receiving a lower wage will be deducted from the total sum
  • If your salary falls below the level of National Insurance contributions payments, it could affect your entitlement to Statutory Maternity Pay and the State Pension

Should I take salary sacrifice on my personal pension?

An offer for a salary sacrifice arrangement is an attractive option for stashing away additional cash for later years. It could also increase your post-sacrifice salary if getting a lower salary results in both you and your employer are paying less National Insurance tax.

But before you choose to put more money aside for later years, it’s important to take the time to consider your financial plans and situation.

Questions you should be asking yourself include:

  • Will you be looking into getting a mortgage soon?
  • Is there a chance that your immediate monthly costs could increase over the next couple of years?
  • How would a lower monthly salary impact on being able to put aside an immediate financial savings buffer?

Even if you receive some additional income through savings on National Insurance, if you change your mind and try to take the money back out of your pension, you’ll have to pay back National Insurance on the full amount.


Group personal pension salary sacrifice

If you are a member of a group personal pension, group stakeholder pension scheme or group self-invested personal pension (SIPP), your employer will likely deduct funds from your net pay and pay this into your pension provider for you.

They can then claim back the basic 20% rate tax from HMRC and add this together with the funds deducted from your salary into your personal pension.

If you’re a member of a group personal pension and want to know if salary sacrifice is a good idea for you, or how you go about setting it up, speak to one of the pension experts we work with.

All the advisors we work with are independent financial advisors with access to pension providers across the market. Make an enquiry and we’ll match you to a specialist who will be happy to answer your questions and discuss whether salary sacrifice would be appropriate for your particular circumstances.


Pensions advice for salary sacrifice

So how can you know whether salary sacrifice on your personal pension is the right decision for your financial future?

Managing your personal pension in such a way as to maximise both your current and future finances can be a complex matter. You can ask your employer to provide you with an overview of how a salary sacrifice would affect you. It’s also worth finding out if they would be willing to add the money they would save on National Insurance Contributions into your pension pot.

If you’re unsure of whether you’ll benefit enough from a salary sacrifice, speak to one of the experts we work with.


Speak to a personal pensions advisor today

Getting a salary sacrifice into your personal pension scheme has serious current and future financial implications. It’s a decision that shouldn’t be taken without first carefully considering all the facts.

A pensions advisor can help you quickly assess whether a salary sacrifice scheme would be best for your personal pension. We work with highly qualified independent pension experts who can help you optimise all decisions related to your personal pension.

Give us a call on 0808 189 0463 or make an online enquiry, and we’ll connect you to an expert advisor. The pensions advisors we work with have years of experience in helping people optimise their pension – they’ll be able to quickly grasp your situation and point you in the right direction.

The service we offer is free and there’s absolutely no obligation to act on the advice you receive.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Author:
Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. 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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