UK Engineers Pension Scheme 1

[ubrben]

Question for all the UK engineers here. My company is introducing a new payment scheme whereby the way tax is paid changes as follows:

1 - Stop making pension contributions as a deduction from salary
2 - Company pays pension contribution directly
3 - Company reduces gross basic salary by an amount equal to the contributions
4 - Pay less national insurance as a result meaning take home pay will go up.

We will be automatically entered into the scheme, but we can opt out if we want to.

Apparently all pay awards, overtime, etc will apparently be based on the original gross salary, not the reduced one. whether I trust them or not is another matter

Question to anyone who's seen this type of scheme introduced where they work - should I opt out or allow myself to be included?

Ben

 

[HamishMcTavish]

Sounds fishy to me...

The Pensions Act coming into effect soon places duties on employers to make minimum contributions via stakeholder pensions. Employees are also supposed to make minimum contributions but they receive tax relief against them - roughly for every £80 you contribute you receive the benefit of £100

Surely if you subscribe to this scheme you will get caught by the "benfit in kind" type rule where you will end up paying personal tax on the benefit gained (similar to the company car situation?)

Also - how will you know how much pension your Company is actually contributing on your behalf? Normally if you got cost of living increase your contributions would also go up but how is your company going to guarentee that the contributions they make on your behalf will keep pace?

I'm no lawyer or accountant so if i were you i'd ring HMRC and ask if this is legal!

Regards, HM

No more things should be presumed to exist than are absolutely necessary - William of Occam

 

[SomptingGuy]

We have had that here for quite a long time. My pay slip has 3 lines in it:

*NOTL SAL X
*PENSION Y
&BASICPAY Z

* = NON-PAYABLE

(Note that X=Y+Z)

Pension isn't taxable whether it's part of your pay or not, but your basic pay is subject to National Insurance to both you and your employer, so in theory it's in both your and your employer's interest to do this.

Because of this, my employer offered us a sweetener to opt in. For the first year they gave us back half of their savings.

My feeling is that it's a loop-hole that'll be plugged at some point by the government. Use it while you can. Everything is in writing. Keep copies.

I haven't tried getting a mortgage based on my notional salary yet though, or read the small print of last year's P60. I'll be checking this year's quite closely.

- Steve

 

[corus]

It sounds to me as if the company is reducing your salary in order to pay themselves to pay into the pension scheme, which you'll get back as a kind of savings scheme. The profits from the pension scheme will go towards paying the director's pension when he retires at 50. Is the man who thought this up called Madoff?

Personally I'd forget about pensions and engineering and go and head up a bank and retire on 650k after a couple of years work. Apparently you don't even need any banking qualifications!

corus

 

[ubrben]

Thanks for the reply. I think SomptingGuy has summed it up perfectly - in principle your notional salary is the same and your basic gross pay is lower, hence any mortgage applications, pay rise, overtime, etc should be based on the notional salary.

I guess the crux of the issue is the level of trust you have in you company to adhere to what they say and a bank to believe you when you state your notional salary on an application.

Ben

 

[SomptingGuy]

In very approximate and simple terms, your nett salary increases by about 10% of your pension contribution. Enough for a good night out once a month (depending on the size of your pension contribution and your definition of "good").

- Steve

 

[Ussuri]

Its called salary sacrifice and is a scheme operated by the government.

This is the way my pension scheme works. It does give you more take home pay but there is a catch. Your state pension is based on your salary after the 'reduction' so salary sacrifice means your state contributions are less and consquently your state pension will be less.

You need to make the call if that will be an issue for you. Its more of a problem if you are in the lower tax bracket I think.

http://www.hmrc.gov.uk/specialist/salary_sacrifice.htm

 

[csd72]

In Australia this is called salary sacrifice and is often a way of reducing your tax burden. You should check to see what the relative tax benefit is.

One thing to note is that, as I have been recently told, the tax refund for the amount you pay from your salary into the pension by the normal method is not usually refunded until the end of the year. One benefit for your companies scheme I suppose.

 

[zdas04]

I thought the US tax law was the only one with these screwy schemes. We had something kind of similar in the late '90's and like everyone else, I bought into it. When I retired in 2003, I was able to package all the bits and pieces into a couple of accounts, but "after tax" and "before tax" potions require very careful handling to prevent paying taxes on the stuff you already paid tax on and vice versa.

Once you buy into something like that (and it really wasn't a bad deal), count on paying part of the savings to a tax accountant in retirement. In my case it isn't a huge cost, but some of the folks who retired at the same time as I did weren't very careful about the accounts and have gotten themselves in trouble and the interest/penalties have more than eaten up any notional savings.

David

 

[SomptingGuy]

For the vast majority of UK employees...

Tax is simple and largely handled by your employer. Regular overpayment followed by annual rebates is rare. Tax accountants are rarely required. Once the money is in your bank, you can forget about tax.

Once you get into high-rate tax it can get more complicated. You may be asked to fill out an occasional tax return some years.


- Steve

 

[HamishMcTavish]

good link ussuri! star for you

somptinguy - more and more people i know are being asked to do self-assessment... since i've been contracting it is a royal pain in the behind

cheers all, HM

No more things should be presumed to exist than are absolutely necessary - William of Occam

 

[ScottyUK]

I got a couple of tax returns but they obviously concluded that I have nothing to interest them - certainly I have no money; I have a wife instead - and wrote to me to say that they would not be bothering me agian unless my circumstances changed significantly. I won't be going out of my way to arouse their interest again.


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If we learn from our mistakes I'm getting a great education!

 

[ajack1]

It is certainly one of the best ways of avoiding tax / national insurance contributions I am aware of for both individuals and companies up until I can afford an apartment in Monaco.

 

[ubrben]

Thanks for the replies. I've decided to opt out - simply because I don't have enough confidence in the info I currently have to make the decision.

I can opt-in next year so I won't lose too much if I decide it is the right option later.

Ben

 

[oneintheeye]

happens here, by 'reducing' your salary you pay less tax but still pay into the pension so are better off. I'm sure there is some win in it for company but believe thats the principle. Pension funds are exernally audited and monitored so it will be hard to do anything illegal.

 

[Gymmeh]

so your saying you dont have to fill out 300 check boxes and add a bunch of number together and claim everything you did over the last year, and hire a accountant to make sure you did it right?

does anyone want to hire an Mech Eng from the US?

 

[oneintheeye]

we dont have to do anything. all sorted by the company. Dont think I've ever filled any kind of tax form in.

Unless your contract but then your self employed effectively.