Maximise pension savings with salary sacrifice

UK pension savers could lose out on £1.9bn a year amid the cost of living crisis and the hike in National Insurance. This is likely to be the case if they do not use ‘salary sacrifice’ according to recent research…

‘Salary sacrifice’ can be arranged by someone’s employer.  When an individual chooses this option, they agree to reduce their salary by an amount equal to their pension contributions.  Their employer will then pay their total pension contributions.  It can save both the employee and the employer money in lower National Insurance contributions.  Although it makes someone’s salary look lower, it is actually higher due to the National Insurance saving.  The money going into the pension pot remains the same.

‘Salary sacrifice’ is a simple way for people paying into workplace pension schemes to save hundreds of pounds each year just by changing the way their contributions are made.  ‘Salary sacrifice’ saves someone earning £30,000 a year around £200 in National Insurance.  Someone on a salary of £50,000 would save around £330.  Yet, 63% of people are not aware of ‘salary sacrifice’.  Of those that are, only 34% of people with a workplace Defined Contribution pension use it.

As for employers, the reduction in their employees’ pay also reduces the employer’s National Insurance contribution.  It means UK businesses may be losing out around £2.1bn.

Data suggests a few reasons why ‘salary sacrifice’ is not being used more by pension savers even when their employer offers it.  Those reasons are a lack of awareness and a misconception about what it is and how it works.  A quarter of people think ‘salary sacrifice’ sounds too complicated.  A further 30% think they will lose out on pay and 26% worry it will affect their creditworthiness. One in four think it ‘doesn’t sound positive’ and one in five would not use ‘salary sacrifice’ as it would make their income ‘go down on paper’. 

Changing how ‘salary sacrifice’ is positioned could help improve this perception.   A third said they prefer the term ‘exchange’ to ‘sacrifice’  As is so often the case in pensions, the terminology is a major problem here.  To most people sacrifice means giving something up rather than gaining anything extra.  This is another example of how confusing and complex terminology can hamper people’s ability to make the most of their pension savings.

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