Salary Sacrifice via work – Observations.

[DelianLeague]

Hello all,

It’s that time of year again when many people receive emails from their place of work, reminding them to review and choose the benefits that suits ‘their lifestyle’. Delian League has recently made some interesting observations regarding workplace salary sacrifice, especially when it comes to pension contributions.

As I seem to be one of the go to people where I work (for some reason) that gets asked questions about SS, Investing, pensions, tax etc. I have realised that many of my workplace colleagues are now contributing a lot less into their workplace pension schemes than before. It struck me that this could have a very adverse effect on an employee’s wealth in the future.
I was really surprised about this as I really like Salary sacrifice as a way of saving and paying less tax.
As far as I can see, the main reason is that about three years ago at the company that I work for in pre salary sacrifice days, if the employee paid 7% into their pension, the company would put in 11%. So, 7 is a great incentive to put in and get 11 free. Most people understood this and so 18% of salary went into their pension each month.

Now with Salary Sacrifice, we don’t have the benefits any more (as such). We get 16.5% of our basic salary given to us and then we select the benefits that ‘suits our own individual lifestyle’. A lot of employees that I have talked with tell me that they are putting (minimum payment) of 9% from their benefit package into their pension only.
Quote from a college: “Delian, how much do you think I should be contributing to my pension”?
Me: “oh, it depends on your circumstances, etc. etc. etc. Blah, blah, blah, but a very loose rule of thumb would be to half your age and contribute that amount in percentage”.

- Horrified look on colleges face.

“But being age 40 that would mean 20%”!!

Then I reminded him that when he started here at age 30, he was contributing 7% + the 11% employee contribution thus getting 18%. This contribution was more than half his age as a percentage.
Now he is 40 years old and only contributing 9% because for people that don’t always understand long term investing and without being incentivised, that is what they will do. Buying more holidays and cycle/car schemes are what seem to matter.
It might very well be different in companies that are within say, for example the financial industry because the average employee would I imagine be more switched on about their pension and finances in general but for the many employees in other sectors then I hope that what I have found is not widespread.
I wonder if there are any stats around this area.

D.L.

[vand]

Surely, the immediate questions they need to answer for themselves are:

- when to I hope to retire?
- what lifestyle and level of spending do I think I will need?

With those two datapoints it can all be worked backwards from there. Just point them to the classic MMM article "The Shockingly Simply Maths behind Early Retirement."

(the "Early" is optional I guess)

[BullDog]

I never ceased to be astonished by otherwise highly intelligent, very educated people at work who have zero or near zero understanding of personal finance.

[pje16]

I was really surprised about this as I really like Salary sacrifice as a way of saving and paying less tax.

I imagine as you say this you get the huge benefit of SS not only saving on tax but also NI (with the 1.25% increase this month)
I have saved this way for years and it has boosted my pension pot way beyond what I ever thought it would be

[Wuffle]

I hate to burst the bubble, but if EVERYONE went down the salary sacrifice route....... I will give you a minute.

W

[pje16]

I've had a minute
please explain

[Wuffle]

The tax rate will go up to compensate govt for the shortfall.
The whole tax system is designed to bamboozle.
It is not, and has never been and will never be part of the national corriculum.
That is strategic.

W.

[pje16]

You could say the same for any scheme that saves tax
What if EVERYONE had an ISA
If something bamboozles you don't touch it or learn about it
What on earth has the national curriculum got to do with it

[James]

The tax rate will go up to compensate govt for the shortfall.
The whole tax system is designed to bamboozle.
It is not, and has never been and will never be part of the national corriculum.
That is strategic.

W.

I'd be happy for them to just put spelling back on the national corriculum.

[Wuffle]

I have been educated, which rather makes my point.
Many thanks.

W.

[Wuffle]

I have been educated, which rather makes my point.
Many thanks.

W.

[pje16]

Why post twice
is that for each of my eyes
being educated does not make any point
Why do you think tax system is bamboozling

[Wuffle]

pje16,

At risk of making myself look foolish with more spelling errors....

(i) My mouse is a bit knackered and sometimes 'double clicks' when I don't want it to.

(ii) A good question that deserves a considered answer.

I think there are 2 elements. 'Bamboozle' was too brief to unravel a complex picture.
Firstly, across all socio-economic groups, an unwillingness to untangle the tax system by individuals holds up the tax take from the govts point of view.
Some are greedier than they are idle, but quite a lot aren't.

Secondly, the tax system appears to me to be a subtle marketing tool of socio-economics.
I have held the hands of enough of the lower socio economic classes through their pay slips to know that there is widespread ignorance.
From this position of ignorance, headlines such as 40% high rate tax and IHT for rich people make it through the fog.
This goes further than you might think towards subduing them.
The reality of the complex tax system, that much of the headlines can be manipulated away, has a harder time being seen through the fog.
It isn't really seen at all and I don't think that is an accident.

W.

[pje16]

OK thank you
but I don't think salary sacrifice is too difficult to understand
a lot of things amaze me about people
checking bank statements, credit card spending, household bills
none of those are rocket science

I manage payroll for a few employees
last weekend I told one of them that HMRC had reduced their personal allowance
I couldn't think of why so I showed the form to her and said she didn't know why either
I said HMRC should have written to you as well
"Oh yeah I think I got something from them"
I have known all of them for years, explained furlough to them and said if you get anything from HMRC or anyone else about your pay and you don't understand I can help you
I just don't get some peoples apathy