saving and spending (Photo credit: 401K)

 There’s plenty reasons to feel depressed if you run a pension scheme for your staff.

Investment returns – depressed,

annuity rates – depressed,

you and your staff – depressed!

NEWS*** GOOD PENSION NEWS***

Ah that “good pension news” oxymoron! – I hear you scoff!

Here it is!

Her Majesty’s Revenue and Customs (HMRC to their “friends”) has confirmed, following successful lobbying by the insurers, that its salary sacrifice guidance will be changed to ensure that workers opting out of auto-enrolment are not left out of pocket.

The change means auto-enrolled workers under salary sacrifice will not be held to the arrangement if they choose to opt out of the scheme. Instead, they will be entitled to a refund of the sacrificed salary – subject to tax and National Insurance (NI) – returning them to their pre-sacrifice salary level.

Under current rules, while opting out of the company pension is permitted, cancelling a salary sacrifice arrangement is not allowed (unless due to a lifetime event). This means a worker would not be entitled to a refund of the salary sacrificed, despite the cessation of contributions.

For employers meanwhile, allowing workers to cancel a salary sacrifice arrangement also threatened the validity of the company’s sacrifice arrangement from a tax and NI contribution perspective. Insurers raised these concerns directly with HMRC and through the ABI, leading to the confirmation from HMRC that the rules will be changed.

The clarification from HMRC that salary sacrifice will be changed is great news. It’s also a commonsense move that ensures people won’t be left out of pocket if they decide not to remain in the employer’s scheme.

OK- as good news stories  go , it’s pretty dry;  but dig down a little and we get to some really oily stuff.

This move means that your employer can save up to 26% of your contributions to the pensions in national insurance rebates. While the savings go to the employer they can and hopefully will be used to improve your pension.

Ok- so they could do this before but before the announcement, not everyone did- bosses were worried they’d have to change everything again when auto-enrolment came along.

Now that worry’s gone away! It really is good pension news!

All that’s needed is a little organisation from the bosses and a little co-operation from you and pensions just got a lot more affordable.

Here’s the beef.

National Insurance is a tax, it didn’t used to be, it used to go to pay for the benefits that kept you and your family out of destitution if you died too soon, got sick or lived too long. Now it just goes into the Government’s coffers to cover the national P & L.

It’s a tax that hits the low and medium earners hardest. You pay NI at 12% on your earnings between £100 and £800 per week and that’s nearly half again on your income tax. Your employer is paying nearly 14% on all your earnings. For those on less than £42,500 per year, national insurance is being paid by you and your employer at that whacking 26% of earnings. (if you want to check out the rates in splendid detail they are here http://www.hmrc.gov.uk/rates/nic.htm)

The big win about salary sacrifice is that in exchange for a minimal committment to your pension of 12 monthly payments, your employer gets a windfall saving of 14% of the earnings you sacrifice into a pension  plus a further 12% if you earn less than £42.5K or 2% if you earn more than that. 

You , the employer can chose to pass on the savings to you and uplift your pension contributions by more than a quarter or your employer; you can chose to hold on to the savings.

You the employee can tell the boss where to go if you think he’s not sharing as you think he should. He can’t make you sacrifice.

Most often there is a savings share.

This is a really massive incentive to save through a pension. If your employer offers you a contribution to your workplace pension and you have to pay a contribution to get it, your employer should offer you the opportunity to sacrifice your salary and a clear statement on how the savings to the employer are going to be allocated.

But many companies were nervous about offering salary sacrifice because they knew that sometime soon , they would have to auto-enrol staff not in the pension scheme into a scheme and there was no clarity at all about how salary sacrifice would work.

The one major barrier to salary sacrifice has now gone. All schemes not using salary sacrifice should consider switching and new schemes should regard it as the default way for employees to contribute.

In stating what they are stating HMRC are not only opening the door to salary sacrifice in the new auto-enrolled world, they are giving their blessing to an arrangement that many thought they considered “artificial” and on the cusp between tax avoidance and tax evasion.

Anyone who contributes to a  workplace pension or runs such a scheme should be beating the doors down at their local pension consultant so that they get a piece of the action.

Payroll companies should be swotting up on the procedures they need to adopt.

Lawyers should be fine tuning their member announcement letters and statements to HMRC.

Pension consultants should be making sure member communications are properly drafted, highlighting not just the upside but possible detriment in terms of entitlement to S2P and risk benefits (easily remedied).

In a world of bad news, this is good news. The world and his dog have thrown stones at HMRC about their stealth taxes. Here’s some payback. It’s not being trumpeted in a budget and it’s not being sold by Osbourne and Co on Question Time.

But it’s a real break for us all and we shouldn’t look a gift-horse in the mouth.

Related articles

• Get your June salary sacrifice amounts in order now to avoid excess contributions tax (thedunnthing.com)
• Management analysis: Pay awards (lloydsbankwholesale.com)
• “Pensions that are no more” (henrytapper.com)
• Auto-enrolment – winners and losers. (henrytapper.com)
• Money makeover: Almost 30 and no pension (confused.com)
• Don’t kid people that pensions are easy (henrytapper.com)
• Comparing Pension Products: A User Guide (moneyexpert.com)
• Pension Corporation points the way to “ambitious pensions” (henrytapper.com)
• Collective Defined Contribution Schemes – A Shameful Missed Opportunity (henrytapper.com)
• Why we shouldn’t give up on pensions. (henrytapper.com)