A suitable sacrifice

Pensions experts are warning that strong suitability checks are required for salary sacrifice where employers keep NI contributions, John Greenwood reports

The sense of uneasiness around salary sacrifice arrangements has been increased by an attack on those advisers setting up schemes that pass all employer’s NI savings to the employer.

Steve Bee, head of pensions strategy at Scottish Life, has warned that salary sacrifice for pensions schemes that do not pass on the employer’s NI saving to the employee could be leaving some staff worse off in net terms because of the loss of state second pension they will suffer.

Bee says intermediaries need to be absolutely clear they have flagged up all the potential negatives to staff before they go into salary sacrifice arrangements, and argues that for some employees the decision to give up salary should be considered in the same way as contracting out of the state second pension.

Bee says: “I think advisers and employers need to be wary of making blanket assumptions on suitability of salary sacrifice arrangements. While salary sacrifice might be good for employees in general, it’s not necessarily good for some employees as individuals.”

While agreed notional salaries can get around issues of earnings multiples for mortgages, it is the affect on S2P that Bee is most concerned about.

An average earner will see their pension contribution boosted by around one-third if they opt for salary sacrifice with all the employer’s NI handed over, and roughly half that figure if their employer holds back all his NI. While many salary sacrifice schemes are set up on the basis of the employer sharing his NI contributions with the employee, for cases where they do not, there will not always be enough of an incentive to compensate staff for loss of benefits, says Bee.

Earnings above the upper earnings limit, currently £34,840, are not taken into account when calculating the earnings-related S2P pension benefits, and low earners are similarly not affected. But some average earners will see their S2P reduced.

Andy Cheseldine, a consultant at Hewitt says that, for the overwhelming majority of people, the benefit in terms of increased contributions to their pension will outweigh the small loss of NI contribution and subsequent reduction of S2P. Furthermore, he argues, the levelling down of S2P accrual is going to make the issue even more irrelevant.

“From 2012 we are start moving towards a flat rate for S2P anyway so for the majority a reduction in the amount of NI contributed will not make any difference,” says Cheseldine. “If you run the numbers on the examples it is very rare indeed that somebody is worse off. If you were over age 55 then it could conceivably in some cases be an issue but for people younger than that losing out would be very rare.”

Bee argues that while the number of cases may be low, advisers need to be wary of directing staff towards salary sacrifice in a wholesale manner, given that it may not always be good for them.

Kim North, director, Technology & Technical says: “When training as an IFA, I was taught that the most ethical way to do salary sacrifice is in a way that the employee benefits from the employer’s national insurance contributions. Where it is not done in this way the employer and adviser are acting in a misleading way as they are not telling, and are not required to tell the employee that the employer is profiting from them opting into the scheme, even though it could be to their disadvantage.”

Some experts predict that the changes at the top of HM Revenue & Customs could mean tougher times for a wide range of tax-based advice propositions. Since his appointment in November in the wake of the lost data discs debacle, Dave Hartnett, the new acting chairman of HMRC, has made clear his intention to address tax avoidance in the UK.

“He has set out his stall as an anti-avoidance chairman,” says Mike Warburton, tax partner at Grant Thornton. “His plan is to rid the country of tax avoidance by 2009. If he decides that salary sacrifice is avoidance then we can expect a challenge accordingly.”

Warburton points out that HMRC and the Treasury could not get rid of salary sacrifice without primary legislation, and given that the Revenue’s own regulations specifically explain what is and isn’t acceptable practice in the realm of salary sacrifice, then it would need a major shift of position to change the status quo, says Warburton. Other commentators have questioned whether salary sacrifice for cars or work canteens could come under the axe sooner rather than later.

While salary sacrifice in principle looks safe for the moment, advisers setting up schemes may want to make sure they have done everything possible to ensure that losers do not slip through the net. Otherwise they could be creating problems further down the line.