Real value for money.

03/03/2010

Adrian Boulding, Pensions Strategy Director, explains why employer pension contributions are becoming even better value.

One of my favourite numbers that I like to share with employers is how much better value it is for them to pay pension contributions than to pay cash. The numbers are really dramatic, even for ordinary workers who aren’t worried about things like higher rate tax.

So take a typical employee on average earnings, paying basic rate tax and the standard rate of national insurance. This sort of worker will make up the bulk of most companies’ payroll.

Putting £1 in their pension plan costs the employer £1. Simple.  But putting £1 into their pocket costs the employer £1.63. That breaks down into the £1 that the employee now has available to spend plus 29p of income tax, 16p of employee’s national insurance and 18p of employer’s national insurance.

As any finance director will tell you, all this comes from the employer’s cash flow.

This is why company pension plans are such great value. There’s 63p spare to play with, and it can be split several ways.

Some of it can go in higher pension contributions, to help sweeten the pill for the employee, recognising that most people would like more than £1 in their pension if they are giving up £1 in their pocket.

Some of it should go on promoting the pension scheme as, even though it is enormously tax efficient, we still need to make a song and dance to get people to appreciate pensions. But the rest can be retained in the employer’s business, strengthening their cash flow.

Now, if you were paying attention in Alistair Darling’s two big set piece speeches last year, his Budget in April and Pre-Budget Report in December, you will have noticed two increases to national insurance to take effect from April 2011. Perhaps he thought it didn’t sound so bad when he announced the rise in two 0.5% stages.

And the more somnolent amongst us may not have noticed that when he calmly said that the increase applied to all national insurance rates, he meant it applied to both employee and employer rates.

So it’s not a 0.5% rise in national insurance, it’s a 2% rise. Which means lots of lolly for our cash strapped Chancellor, but also that employer pension contributions are becoming even better value.

From April next year, while it still only costs an employer £1 to put £1 into his employee’s pension scheme, it will cost a whopping £1.67 to put £1 into his employee’s take home pay.