Impact of salary sacrifice on pension arrangements

How the salary sacrifice scheme will affect my pension

If you join a salary sacrifice scheme you will pay less pension contributions as your contribution will be based on the pay you receive less the sacrificed amount – so contributions will only be deducted from the post sacrificed amount. However, although you will be paying less pension contributions while you are in the salary sacrifice arrangement it is important to note that there will be a lasting reduction to the pension benefits that you will receive.

Since April 2014 the Local Government Pension Scheme (LGPS) is a Career Average Revalued Earnings scheme (CARE). The CARE scheme uses your pensionable pay at the end of each financial year to calculate your pension benefits for that year. The sacrificed amount will not be counted in that calculation. Therefore, for the duration of a salary sacrifice contract your pension benefits for that term will be less than they would have been had you not been in such an arrangement.

Example

Actual pensionable pay £18,000

Sacrificed amount £3,000

Pay used to calculate pension benefits £15,000

What pension benefits would be without sacrifice:

£18,000 x 1/49th = £367.35

What pension benefits would be with sacrifice:

£15,000 x 1/49th = £306.12

So, in this example your pension would be £61.23 a year lower by being in the salary sacrifice arrangement. The pension accrued is then credited to your record and will not change even after the salary sacrifice period has ended.  The CARE scheme calculates pension benefits each year and this will make a lasting reduction to your pension benefits for the period that you are in the salary sacrifice arrangement.