Salary Sacrifice for Pensions

The University operates a salary sacrifice arrangement for pension contributions for both monthly and weekly paid staff. This enables savings on national insurance to be achieved by the University and by you the employee. This is sometimes referred to in the University as SMART Pensions.

What is salary sacrifice?

Salary sacrifice is an arrangement, permissible under HMRC rules, which allows an employee and the employer to reduce their respective NI contributions.

Under salary sacrifice, you exchange a proportion of your monthly/weekly salary equivalent to the amount of employee pension contributions that you would make into your pension scheme. In return, the University will increase its employer contributions by an amount equivalent to your regular pension contributions. The benefit of this arrangement is that the level of pension contributions into the pension scheme remain the same but both you and the University will pay reduced National Insurance contributions, resulting in higher take home pay for you, and savings for the University.

When you join the University’s salary sacrifice arrangement, you are accepting a change to the terms and conditions of your contract of employment with the University. Although you will receive a lower gross salary, and this will be reflected on you monthly/weekly salary statement, for the purposes of salary for pension calculations, salary for mortgage references, salary for any other benefits etc. the University will retain and use your pre-exchange salary figure as per the nationally agreed salary scales. If at any point you choose to withdraw from the salary sacrifice arrangement, your actual salary would revert back to its pre-exchange level.

Minimum level of pay for entry into salary sacrifice arrangements

Staff whose post-salary sacrifice pay would be less than £11,000 per year will not be automatically entered into salary sacrifice as in some cases it may not result in a beneficial financial change to take home pay and there may also be other disadvantages to state benefits. Staff in this category can still opt-in to salary sacrifice if they feel that they could benefit.

How much will I save?

The level of saving will depend on your salary, your pension scheme and the level of pension contributions that you pay. Below are two worked examples, one for an employee earning £15,000 per annum in the FriendsLife stakeholder pension scheme and another for an employee earning £45,000 per annum in USS.

Salary Sacrifice Example 

As can be seen above take home pay for the employee on a salary of £15,000 increases from £1,053.93 to £1,062.93 and take home pay for the employee on a £40,000 salary increases from £2,590.60 to £2,609.93.

Do I need to do anything to participate in Salary Sacrifice for Pensions?

USS

USS members are automatically enrolled into salary sacrifice when you join USS.

For USS members the adjustment to salary is 8% of notional pay (i.e. the employee contribution payable to USS).

When USS introduces the Investment Builder element of the pension scheme on 1st October 2016, for employees who opt to pay the additional matched 1% contribution this will be automatically adjusted for salary sacrifice. However, under USS rules, any further contributions you make into the Investment Builder above the initial 1% match will only be subject to salary sacrifice if you request this.

Any member who wishes to opt-out of the Salary Sacrifice arrangement should complete the USS Salary Sacrifice Opt-Out Form and return it to the Pensions Office

FriendsLife

FriendsLife members who are not currently in the salary sacrifice arrangement will be automatically enrolled into it from 1st November 2016. For staff paid weekly, the payroll paid on 8th November will reflect the salary sacrifice adjustment.

Any member who wishes to opt-out of the Salary Sacrifice arrangement should complete the FriendsLife Salary Sacrifice Opt-Out Form and return it to the Pensions Office

(this form also allows you to vary your contributions)

Will participation in salary sacrifice arrangements affect the amount of University pension that I will receive?

No. Under the salary sacrifice arrangements, the total level of contributions paid into the pension scheme on your behalf remains exactly the same, the only difference is that the University will increase its employer contributions by an amount equivalent to your regular pension contributions.

The information provided to the pension administrators and providers will be your pre-salary sacrifice pensionable salary. Death in service and dependants benefits will also be based on your pre-salary sacrifice pensionable salary.

What about University allowances and benefits

When you participate in salary sacrifice arrangements, whilst your contractual salary is reduced, all University allowances and benefits will continue to be calculated using the appropriate scale point of the national salary scales (i.e. your salary before the reduction). These include:

  • Shift allowances
  •  On-call payments
  • Responsibility pay
  • Permanent health insurance and death in service benefits associated with membership of the University’s Stakeholder Pension Scheme offered through FriendsLife

Pay awards and incremental changes will also continue to be based on the appropriate scale point of the national salary scales.

What about maternity, paternity, shared parental and adoption leave pay (family leave)

Salary sacrifice can impact on these benefits and therefore, when staff enter a period of family leave, the salary sacrifice arrangements will be suspended for the period of leave. Salary sacrifice arrangements will be automatically reinstated on return to work, provided that salary on return is greater than £11,000.

Will my participation in the salary sacrifice arrangements cease automatically if my salary reduces below £11,000?

Yes. If your post-salary sacrifice salary falls below the £11,000 threshold, your participation in the arrangement would cease as it may no longer be financially beneficial for you to remain in the arrangement. In such circumstances the Payroll Office would write to inform you. Staff in this category can still opt-in to salary sacrifice if they feel that they could benefit.

Additionally, if your salary, after allowing for all benefits paid through salary sacrifice (Childcare vouchers, Cycle to work etc.) falls below the National Living Wage it is not lawful for you to remain in salary sacrifice ( or national minimum wage if you are under age 25).

Will my state pension be affected by participation in salary sacrifice?

No. The State pension that you are building up an entitlement to is no longer based on the amount of national insurance contributions you pay but on the number of years you have paid national insurance contributions.

Will participation in salary sacrifice affect my mortgage reference?

No. The University will provide your pre-salary sacrifice salary information to the mortgage provider, if required, although most mortgage providers now look at your net take home pay to assess your ability to meet mortgage payment which will increase under the salary sacrifice arrangement as shown in the examples above. Lenders are also familiar with the concept of salary sacrifice as most operate salary sacrifice arrangements for their own employees.

What happens if my pay drops below £11,000?

If this happens you will be removed from salary sacrifice arrangements and notified. You will not be automatically re-entered into salary sacrifice but you are able to request entry. If your salary falls below £11,000 you will be removed from pensions salary sacrifice. If your salary falls below the National Minimum Wage you will be removed from other salary sacrifice schemes in the following order:

  • Sports membership (first to be removed)
  • Childcare Vouchers (second to be removed)
  • Cycle to work (last to be removed)

 


Finance Division
28 August 2016

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