Are there any limits to how much I can sacrifice?
There isn’t a maximum or minimum to how much you can alter your income. However, you are unable to reduce your gross intake below the national minimum wage.
Furthermore, there is an annual limit to how much you and your employer combined can contribute to your pension savings – this works out at £40,000.
What are the overall advantages and disadvantages?
There are many advantages to Salary Sacrifice. The most obvious being that it will grow your pension pot faster, perhaps allowing you to retire earlier. As stated, it increases your net earnings as you will be paying less tax.
It is equally important to consider that there can be some short-term disadvantages. Any employee benefit dependent on pay, such as sick pay or holiday pay could be reduced. Reducing your salary below the level required to pay NI contributions could affect your ability to claim a state pension, so may sure you weigh the pros and cons before making a decision.
Would this affect my state pension?
A person’s state pension is directly related to how much tax they pay, specifically their NIC (National Insurance Contributions).
Due to Salary Sacrifice lowering the amount of tax you pay, it’s theoretically possible that it would reduce your state pension. This is highly unlikely however, as you would need to lower your pay enough to significantly reduce your NI contributions.
Will this scheme require a change in contract?
Yes. By law, an employee’s contract must acknowledge their cash and non-cash entitlements at any time, meaning any change in this must be reflected in their contract. However, there shouldn’t be any reason you couldn’t end the scheme at any time.
Is there any risk to using a salary sacrifice scheme?
Most pensions are invested in the safest forms possible, usually a varied mix of stable stocks and bonds. So, while there is little risk in losing money by increasing pension contributions, there is a possibility in the market growing slower than predicted.
Even so, growing your pension quickly helps guarantee a stable future, and after the long course of employment, there is far more risk in having a pension that is too small.
For personalised, independent advice on pensions, investments and more, get in touch with Prosperity Wealth today. We’ll be happy to help!