Salary sacrifice impact on pensions

[ChocolateWombat]

My husband is a teacher in an independent school. He gets fee remission already for our children at the school. We have 2 children and would be looking at paying fees for another 9 years.
However, they are now offering a salary sacrifice scheme too. This means you can pay for the remainder of the fees out of gross salary, before tax and national insurance and pension contributions have gone out.
I understand this means that the salary he pays tax and national insurance on is the new, smaller salary, which is good.

I realise too he will pay pensions contributions based on the new lower, post salary sacrifice salary. This means less contributions, which whilst good on a month by month basis, means less has been paid in over time. It also means the employer is only contributing their share on the smaller post salary sacrifice salary, so if you like, there are 2 different reductions in pension contributions.

So....is it worth it? Are the tax and national insurance savings greater than the long term negative impact on pensions?

Realise for many people, they would rather have the money today and go without it in old age. I am keen to only enter the scheme though, if overall over the short and long term combined, we would be better off. Not really interested in it if we gain now only to lose out big time in our retirement.

Wondered if anyone has any thoughts or experience of this. Thanks.

PS. This is not childcare vouchers, but an entirely different thing. The employer can offer salary sacrifice on the full amount of fees, because they themselves provide education.

Depends - is he in the Teachers' Pension scheme, and of so how long (not an expert but I believe later entrants to that scheme have pensions based on career average, where SS wouold have an impact, but earlier entrants' pensions are paid on bets of final 3 years' salary - in which case SS will not have an effect. Can he pay AVCs to top up his pension scheme if necessary? For how long are you likely to be paying school fees?

Lots of variables, and it may be worth you paying for some more knowledgeable advice!

Yes, he is is in Teachers Pension scheme.
Is not a new entrant, but he tells me that from 2015 with the pension reforms, pensions accrued beyond that year will be based on salary average. It is the post salary sacrifice salary which counts in the years you are in the salary sacrifice scheme. All his previous years of service will be judged on the final salary basis you mention, but of course, the years we would be in the salary sacrifice scheme will come under the new pension arrangements.

9 years of fees to go. They are already discounted.

Thanks for your thoughts and those of anyone else.

Realise that your husband will still be taxed on PART of the fees as a benefit in kind. HMRC usually accept that the marginal cost to the school of providing a place to teachers' children is about 15 - 20% of the full fees. This amount is the taxable benefit in kind (the defining case is Pepper v Hart, if interested).

So you need to decide whether paying your (already) reduced fees via a salary sacrifice arrangement is worth your while. Not only will it impact your husband's pension entitlement, it won't be as great a tax saving as it first appears.

You should also know that employers love salary sacrifice arrangements. That's because they pay less employer's NI if employees' salaries are artificially lowered by arrangements like this, plus the cost of pension provision is also lowered. It makes it more important for you to work out whether it suits you.

Thanks. Yes do realise that if full salary sacrifice is taken, there are tax implications for 15% of it.
Thought if we go for it, would be worth goi g beyond the fee remission husband already has to 85% of fees covered by ree remission and salary sacrifice. They would also reduce the negative effects on pension and pension contributions from him and the employer.

Yes, can see the employer benefits. They wouldn't be doing it otherwise.

The big question, is if you gain fof say 7 years of secondary fees, what is the loss of pension over perhaps 25 years (hopeful??) of retirement. Is there a net gain overall? Or is it a short term gain which delivers a long term loss?

I don't understand your second paragraph, I'm afraid.

Without understanding your husband's precise pension arrangements and the amount he'd be sacrificing it's difficult to advise you, but if it's a defined benefit scheme then yes, the proposed arrangement MAY represent short term gain in exchange for long term pain.

Let's say he earns £50k and sacrifices £10k per year for both children's school fees. You'd save 40%, or £4k, representing the income tax, at his marginal rate, that he would have paid. However, he'd be assessed on a benefit in kind of £1,500 (15% of £10k), representing the marginal cost of provision. He'll pay 40% tax on that, i.e. £600. Total tax saving per year is £4k - £600, i.e. £3,400.

Now think about the pension. Let's say it's a career average scheme based on 1/60. By reducing his pensionable salary by £10k, he reduces the amount payable to him, post retirement, every year until he dies (morbid, sorry) by £167 for every year he does the salary sacrifice (£10k/60).

Over 7 years, that's £1,167 of annual pension income, every year, foregone. If he lives for 25 years post retirement, as many people do, that's more than £29k, at today's prices (the comparison isn't skewed by future inflation; public sector pensions are index linked).

His pension income will be taxed. Let's assume that he'll be paying basic rate on it, 20%, since most people's retirement income is lower than their income when they were working. He'd get his personal allowance of £10k in today's money, so he may not pay tax on all of it.

So you could save £3,400 over 7 years now - £24k - in exchange for sacrificing £29k, pre-tax, in the future, presuming that he lives 25 years. So in this example it might be worth doing.

Obviously, the numbers will be different in your case. I suggest you run the same calculation against your husband's actual salary, pension accrual rate and amount sacrificed. If the pensions accrual rate is better than 1/60, the salary sacrifice becomes worse value. The civil service's NUVOS scheme has a 1/42.5 accrual rate, for example; anybody in that would need to think carefully about entering into a significant salary sacrifice arrangement.

Finance, that is very helpful Thankyou.
He is in the teachers pension scheme. Currently the accrual rate is 1/60 but changing to 1/57 in 2015.

What I was meaning is that he says he would simply pay 15% of the fees in full. This would mean there would be no tax implications for the amount he pays through salary sacrifice. People are free to choose how much salary sacrifice they wish to do and don't have to pay all of the fees through it.

He would be looking to cover about £6,500 of fees through salary sacrifice. The rest would be covered by the 15% full fees paid and the fee remission he gets for being an employee. He is not a higher rate tax payer at the moment.

Check your husband's terms and conditions. My employer bases pension contributions on the pre-sacrificed salary. Employers are not at all obliged to use the post-sacrifice salary. Are you sure your husband's employer is going to use the lower one?

Yes,n pension contributions will be based on lower post salary sacrifice scheme. This is the schools choice,but is actually also a condition within the TPS teachers pension scheme.

The school as employer aims to benefit from both making lower NI payments, but also lower pension contributions. I can see why they are offering it. There seems to be lots of take up, according to my husband. Most people are just keen to save on the school fees bill today and are not so interested in the longer term impact. Personally, I am very interested in that, as the impact on pensions could be felt through 25 years of retirement.

It sounds as though you could do with some proper financial advice about which step to take. Good luck.