The next step

On pension salary sacrifices

[Further Information]

On EPPs

[Further Information]

http www direct gov uk prod consum dg groups dg digitalassets dg en over50 documents digitalasset dg 180199 pdf

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What’s happening to your NI next April?

Scheme types

There’s a bewildering choice of private pension plans you can join. These can be categorised into two types: money purchase schemes, sometimes called defined contribution schemes, where you, and possibly your employer, pay premiums into a fund which you can draw as a pension when the time comes; and final salary schemes, sometimes called defined benefits schemes because the amount of pension you’ll get is linked to the length of service you’ve put in as an employee or director. Both types can benefit from an NI subsidy where you “contract-out”.

What’s contracting-out?

Most of you will have heard the phrase contracting-out; this is where you choose not to take part in the State Second Pension scheme, S2P, previously known as SERPS. This is an earnings-linked pension paid by the government in addition to the basic state pension. The more you earn, the more NI you pay and so the greater S2P you’ll receive. Where you opt (contract) out of S2P in favour of a private pension you pay less NI. In the case of a money purchase scheme you continue to pay the full amount but the Taxman refunds some of this, and the NI paid by the employer, and pays it into your pension fund. From April next year contracting-out comes to an end and the NI refunds will stop.

Will you be worse off?

The loss of the NI refund could be significant as it’s worth between 3% and 7.4% of your earnings between a lower limit, currently £5,304, and £40,040 per year. This will reduce the amount going into your pension fund and therefore the amount you can expect to have in retirement. On the other hand, the government has promised to increase the state pension. This will compensate you to some extent, but there’s no guarantee this will be worth as much as the pension you could have bought with the NI rebate.

Should you put more in?

It’s the million dollar question - are pensions a good investment? We can’t answer that but what we can say is that there are still ways to use NI savings to boost your fund.

Tip. Where you’re paying into a money purchase scheme, such as a self-invested personal pension (SIPP) or stakeholder scheme, you can save NI by swapping your personal contributions for an equivalent amount, paid directly into your fund, by your company. You can do this using a salary sacrifice arrangement (see The next step). You’ll save NI of between 2% and 12% which you can plough into your pension fund if you want. Your company will also make NI savings. Alternatively, similar NI savings can be made where your company sets up an occupational pension scheme, e.g. an executive pension plan (EPP) and pays contributions for you (see The next step).

More info. The Department for Work and Pensions has published a booklet on the end of contracting-out. It’s a little long winded but if you concentrate on the sections relevant to you we think it’s worth reading (see The next step).

For information on pension salary sacrifices (TX 12.02.02A), further information on EPPs (TX 12.02.02B) and a link to the DWP booklet (TX 12.02.02C), visit http://tax.indicator.co.uk.