If you don't pay National Insurance Contributions
If you don’t pay National Insurance Contributions (NIC) because you've reached state pension age, or you earn less than the Lower Earnings Limit, you will not benefit from salary sacrifice (because it’s designed to save you NIC).
But if you do participate, you won’t be any worse off – as long as your other entitlements are not affected. Telefónica would also then save on NIC.
If you receive state benefits
If you receive state benefits these may be affected if you choose salary sacrifice. That’s because you will be reducing your declared earnings and NIC that are used to calculate some state benefits.
Most contribution-based state benefits (benefits based on National Insurance) are calculated on the period for which you pay NIC and not specifically your level of earnings or actual NIC paid. So long as you continue to regularly pay NIC you will continue to accrue rights to state benefits.
For more information on NIC click here.
How salary sacrifice works with both parts of your state pension
Basic State Pension
As long as you carry on earning more than the Lower Earnings Limit salary sacrifice won’t affect your Basic State Pension.
State Second Pension
If you earn less than the Low Earnings Threshold or more than the Upper Accrual Point, salary sacrifice won’t affect your State Second Pension. If you earn between the Low Earnings Threshold and the Upper Accrual Point, there may be a small reduction to your State Second Pension when you retire (because of your reduced NIC). By choosing salary sacrifice you will receive an increase in your take-home pay. If you like, you can invest the difference, which could offset the reduction in your State Second Pension.
The State Pension comes in two parts:
- The Basic State Pension is a flat rate amount paid to everyone who has a full NIC record, so the amount of Basic State Pension you get will be reduced if you have less than a full NIC record
- The State Second Pension is based on your earnings in each year of your working life. It was introduced to replace the State Earnings Related Pension Scheme (SERPS). It provides an additional pension, based on a proportion of your earnings during your working life since April 2002, as long as you’ve worked for an employer and paid full Class 1 NIC. Any additional pension that was previously saved up under SERPS before April 2002 is unaffected by the State Second Pension.
You can ask the Department for Work and Pensions for an estimate of how much State Second Pension you’ve earned so far, and the amount you’re likely to have at State pension age. For more details, go to the Directgov website.
More questions answered
Does salary sacrifice affect my final salary figure?
No. Salary sacrifice doesn't affect the salary figure that’s used for other calculations, like your mortgage or other pay elements (such as bonuses). Nor will it impact the calculation of any of your pension benefits (apart from refunds if you leave the Plan early).
What if I leave the Plan early?
When you make pension contributions using salary sacrifice, they do not count towards the early leavers’ refund.
If you leave within 3 months of joining the Plan, you will receive no refund of your contributions.
If you leave between 3 months and 2 years after leaving the Plan, you will need to transfer your pension to one of the many available alternatives (a pension scheme provided by your new employer or an insurance company). We strongly recommend that you do this in order to maintain your retirement savings.
How do I opt-out?
If you choose not to use salary sacrifice and still want to contribute to the Plan, you can opt-out by changing your preferences on Telefónica Rewards.
How do I know what’s best?
Telefónica cannot give you financial advice. If you are unsure about any aspects of salary sacrifice, talk to an Independent Financial Adviser (IFA) or visit the HM Revenue & Customs website.
To find an IFA in your area, go to www.unbiased.co.uk or phone 0800 085 3250.