Is pension salary sacrifice an answer?

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After the ruck created by articles in the FT and the Daily Express, I’ve heard several pension experts tell me that if we did not have employer contributions, all the issues around net-pay and relief at source would go away.

This is of course what happens in Australia where pension contributions are part of a blessed social contract between providers, Government, employers and employee representatives.

And many large occupational schemes have adopted salary sacrifice as part of a flex-program that enables employees to exchange salary for rights to pension in future years. These arrangements are not just efficient, they reduce the salary on which national insurance is levied – so they are most efficient to employers.

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I don’t want to get into moral arguments about the legitimacy of salary sacrifice, not least because I make my contributions by requesting lower salary in return for higher pension contributions from my employer. It would be hypocritical of me to condemn what I personally benefit from.

But I don’t think that salary sacrifice is a panacea for the mass market and for three reasons;

  1. It is much harder and more perilous to administer than people think. You are altering people’s contracts of employment and could be sacrificing people below the minimum wage, any change of contract involving less notional salary is going to set alarm bells ringing with some staff and this stuff needs good communications. The Government write well about this  here
  2. The political future of salary sacrifice is open to question. We are about to conclude a consultation on how pensions are taxed. One of the key considerations is that pensions are taxed simply and fairly, I see salary sacrifice as a sophistication in the pension system that may not survive this process.
  3. Salary sacrifice under auto-enrolment may be a complexity too far for payroll. We are looking to standardise and simplify the operation of auto-enrolment for 1.8m employers. The options to choose contribution tiers,defer and phase create enough complexity as it is, for many payrolls, salary sacrifice elicits the response “don’t even think about it!”

For organisations that have introduced salary sacrifice, there are immediate benefits and these should be enjoyed by the employer. Hopefully, those who voluntarily agree to contribute by exchanging salary for pension, can share in the savings they create for the employer, as well as for themselves. There is a marginal reduction in state pension rights for those on certain pay bands but for the moment, salary sacrifice is a perfectly acceptable way of organising pensions as part of deferred pay.

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But please let’s not pretend that salary sacrifice is anything other than what it is – an arbitrage against the national insurance fund with a very limited shelf-life and limited application.

The fundamental problems of our pension taxation system are being exposed as the tide of auto-enrolment rolls out. The issues for low paid part-timers highlighted in previous blogs cannot be solved by salary sacrifice. They are real issues in themselves and the reaction of the press is a reflection of the reaction of everyday people to the pension system.

I described the super-subtle solutions being put forward by some of my fellow consultants as pension sophistry.

A sophism is a specious argument for displaying ingenuity in reasoning or for deceiving someone

I think most people are worried by complicated arrangements which is why the certainty and simplicity of ISA taxation.

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I don’t think that salary sacrifice is the answer, in fact I think it another part of the problem. We need radically simple solutions to pension taxation which do not give space to the pension sophists , nor create gaps through which rights to tax-relief can fall.

Though I , as a consultant, might benefit in the short-term from the complexity of the current system, I cannot see that complexity strangle the confidence in pensions that I see emerging. It is not in my – or anybody else’s – long-term interest, for pension taxation to be this complicated. It is certainly not in the nation’s interest for so much time and money to be wasted with sticking-plaster solutions to intractable problems.

The debate over net-pay and relief at source demonstrates once more that we need a radical change in the way pension taxation works.

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Is pension salary sacrifice an answer?

  1. Dion Prideaux-Reynolds says:

    Henry, well said I couldn’t agree more.

  2. Darren Amos says:

    As you say, it is difficult to criticise something that we would all use ourselves!
    I agree with a lot of what you say, but only in as much as that Salary Exchange certainly complicates a process that is already too complex. That isn’t helped by the fact that many advisers (and in that I do include Accountants, Solicitors & HR advisers) don’t fully understand the numbers themselves, so can’t really explain them.
    However, if you approach Auto Enrolment NOT from the side of compliance, but rather as an employee benefit then the process becomes somewhat simpler.
    You would then recommend doing away with phasing, tiering, Qualifying Earnings, and wherever practical, postponement, as these do not benefit the members long term retirement provision
    This leaves you recommending exactly the sort of scheme you recommended before AE reared its ugly head. In essence a simple GPP, that most payroll operators can easily deal with.
    Adding Salary Exchange is then a relatively simple process!
    Of course as it is now seen as a benefit you can recommend that employers NIC savings are added to the pension, and I have yet to meet an employer who says no to this if pitched in the right way. I also find that by taking this approach the employers more fully engage, and are keen to implement a “benefit” rather than something they are being forced to do.
    I sell the idea of a pension as an employee benefit, oh and by the way, it will be AE compliant too.
    So I say “make hay for the members, whilst the Sun still shines”.
    No doubt the concession will disappear soon, but I can envisage a future where proactive advisers encourage their clients to go back to the old “Salary + non-contributory pension” package for new staff to get around any changes. After all that’s all Salary Exchange is!

  3. Mike Lacey says:

    We urge our clients to regard AE and salary exchange as two separate workstreams. I’m not a fan of mass salary exchange, to be honest. Too much of a risk for the lower paid.

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