Colin Walker:For most of us the answer is “of course you should” and here’s why
The main reason people don’t join pension schemes, or opt out, is because they can’t afford it!
Salary exchange is a way to make pensions more affordable for your employees with the added benefit of saving you (the employer) Employer National Insurance Contributions.
With the final increase in minimum pension contributions to Automatic Enrolment pension schemes in sight – 6 April 2019 – for schemes that have a pensionable pay definition of “Basic Pay” these minimums will increase to 4% employer and 5% (gross) employee.
So in order to keep staff in your pension scheme or encourage eligible employees to join, why not introduce pension salary exchange, at no extra pension cost to you or your employees, and increase what is paid into their pension without reducing their take home pay. Interested?
“Sounds too good to be true and there must be a catch” I hear you say, and yes this is not for everyone, however to me the positives well out-weigh the potential negatives, like the possible impact on state earnings related benefits like statutory sick or maternity pay.
So how does salary exchange work in respect of pension contributions? Well it’s when an employee gives up (exchanges) gross pay for a non-cash benefit (in this case an additional employer pension contribution) whilst receiving the same amount of take home pay. “Can’t be done” I hear you say… I assure you it can!
On setting up a pension salary exchange scheme for an employer and their employees I always receive the same feedback… “we should have done this years ago”
Colin Walker
Employers make a National Insurance saving of 13.8% on the amount of salary exchanged and then decide what to do with this saving, the options being:
- keep it all;
- pass part of it on to your employees as an additional pension contribution;
- use it to pay for an additional employee benefit, like Death in Service cover. By choosing options 2 or 3 your employees will be happy in the knowledge that they work for a caring organisation, which can also help with recruitment and staff retention.
Employees benefit because they can either choose to increase their take home pay, whilst contributing the same amount towards their retirement, or increase the amount they pay into their pension and receive the same take home pay, by using salary exchange.
A reduced salary means paying less income tax and national insurance contributions. As a result of these savings, when compared with the employee making personal pension contributions, salary exchange can produce the same pension contribution at a lower net cost, or a higher pension contribution at the same net cost.
Pensions are boring, dull and never discussed around the dinner table or on a night out... believe me I know!
However, it is only a matter of time before you see salary exchange trending on Twitter! #strangerthingsmayhappen.
If you have time and want to hear more, I am doing a session on this
at The Gathering on 20 February and I look forward to seeing you then.
Finally, on setting up a pension salary exchange scheme for an employer and their employees I always receive the same feedback… which is: “we should have done this years ago”!
“Now is the winter of our discontent”… however it needn’t be with pension salary exchange!
Colin Walker is a financial advisor with Keegan & Pennykid.
Keegan & Pennykid atThe Gathering 2019:
Trustees – do you know the risks? - Thursday 21 Feb, 1.30pm, Dochart Suite
