Am I better off quitting my pension or paying double?

Published on Saturday 8 March 2008 14:26

MY EMPLOYER has asked staff to increase contributions into the final salary pension scheme, which has a deficit. I have been paying 5% of salary for 30 years, and am due to retire in 10. Now we have to pay 10%.

The company also wants us to engage in salary sacrifice, which I understand can cut my national insurance bill. I am a higher-rate taxpayer.

Is it sensible for me to agree to this request or would I be better off leaving the pension scheme and making alternative arrangements? I am currently on target for a full pension at 60.

TB, Edinburgh

Keith Gourlay, head of actuarial consulting at Mercer Scotland, writes:

AS A result of low interest rates and ever-increasing life expectancy, the cost of final salary pension schemes has increased over recent years. Many employers are asking their employees to share the burden of this additional cost by increasing the member contribution rate.

Without knowing the benefits payable from the scheme, it is difficult to determine the total cost of the benefit package. However, as a general rule, the older the member is, the more expensive is the annual cost of benefits and it is likely that the employer is paying a significant contribution in order to finance your accruing benefits. By opting out, you may lose the benefit of these employer contributions.

You do not say if your employer will make alternative provision if you opt out of the final salary scheme. For example, employers sometimes offer, as an alternative, membership of a defined contributions arrangement with significant employer contributions. If this is the case then you should compare the expected alternative benefits with those payable from the final salary scheme.

In terms of the security of the final salary benefits, as long as the employer is trading and is able to pay contributions, there should be little to worry about. In the event of the employer becoming insolvent, it is likely that the Pension Protection Fund (PPF) will step in and pay members' benefits, but there are limits on the amount of benefits payable through the PPF. If you have accumulated a large pension then you may find that there is a reduction in benefits payable should the scheme have to be rescued by the PPF.

Finally, a salary sacrifice arrangement is fairly common. To put it simply, the employer pays all of the member's contributions into the pension scheme and balances the books by paying a lower salary to the member. Because the member receives lower pay from the employer, there is a saving on both employer and employee national insurance contributions. However, for a higher-rate taxpayer the NI saving is likely to be small, since the rate of NI payable on earnings above the upper earnings threshold (currently 34,840) is only 1%.