Under a salary sacrifice scheme the council allows you to lease a car or purchase household or electrical items under a salary sacrifice arrangement. This means that your monthly gross salary will be reduced, resulting in an initial saving on tax however your tax code may be adjusted the following tax year following your P11D submission, National Insurance and pension contributions.
This guidance explains how this arrangement will affect your LGPS pension and gives details of how you could pay additional contributions to offset the reduction in your pension. (Members of other pension schemes should contact their provider to understand their position.)
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.
Death benefits
The salary sacrifice scheme will also affect death benefits payable including the death in service grant, as the pay used to calculate the benefits would also be the post-sacrificed amount.
Benefits accrued before 1 April 2014 in the final salary scheme
Benefits under the final salary scheme would be based on the reduced pensionable pay figure, after the salary sacrifice had been deducted.
Final pay is normally based on the pensionable pay earned in the final year of leaving, so if you leave during the period that pay is reduced, or within 12 months of cessation of the salary sacrifice, your pension benefits could potentially be affected. However, if the final pay figure would be higher using either two of the immediately preceding years prior to leaving, that year can be used. It is not possible to use the best average 3 in 13 years protection in this circumstance.
You can pay towards Additional Pension Contributions (APC) to cover your lost pension. You will need to find out how much pensionable pay you have lost during your period in the salary sacrifice arrangement. You will be able to see the amount of pensionable pay reduction on your payslip once your salary sacrifice deductions start.
You can access the online system here - Buy extra pension calculator: LGPS (lgpsmember.org) to calculate the cost of buying back your lost pension. To buy back your lost pension, you must complete the online application. You will have the option to buy back your lost pension as a one-off lump sum payment or monthly over a minimum period of 12 months.
This guide gives general guidance only. For further information, please call the LPPA Helpdesk on 0300 323 0260.