Are you considering participating in an electric car salary sacrifice scheme but concerned about its potential impact on your pension? It’s a valid question that many employees have when presented with the option to sacrifice a portion of their salary to enjoy a cost-effective way of getting their hands on a new electric vehicle.
In this article, we will explore whether participating in an electric car salary sacrifice scheme can affect your pension and how you can take steps to better understand your own position.
Does Salary Sacrifice Affect a Pension?
Participating in a salary sacrifice scheme entails a reduction in your salary, which could potentially influence your pension contributions and your retirement income. However, the impact of an EV salary sacrifice on pension contributions ultimately depends on the type of pension plan you have, as they operate differently.
Most UK employees are in a defined contribution pension scheme, and the good news is that EV salary sacrifice doesn’t usually affect these types of pensions. However, for those in a defined benefit scheme, such as the Teachers Pension Scheme (TPS) or Local Government Pension Scheme (LGPS), salary sacrifice can affect pension benefits. Individuals in this situation should therefore carefully consider the implications for their retirement planning.
Let’s explain why the situation differs depending on the pension scheme you are enrolled in.
EV Salary Sacrifice and Defined Contribution Pensions
The most common type of workplace pension in the UK is a defined contribution scheme. Under this arrangement, an employee and their employer will contribute a set percentage of the employee’s salary into a pension each month. The eventual retirement income that you receive will depend on the amount contributed and the investment performance.
If you are part of a defined contribution pension scheme, joining an EV salary sacrifice program will not alter the pension benefits or income that you will receive, or the pension contributions that you need to make. This is because your pension contribution is typically calculated based on your gross salary before any salary sacrifice deductions are made.
Similarly, if you have other private personal pensions such as a personal pension or Self Invested Personal Pension (SIPP) that you are paying into or hold, these will be unaffected too.
EV Salary Sacrifice and Defined Benefit Pension Schemes
The way that defined benefit pensions work means that an EV salary sacrifice scheme could affect your pension contributions and the eventual retirement benefits that you receive.
Defined benefit pensions, or final salary pensions, as they are also known, guarantee a specific income each year based on factors like your salary and the length of time that you have worked for your employer. With a defined benefit pension your pension contributions and the final pension benefit are calculated after your salary sacrifice has been deducted. This may mean that you will need to make a lower pension contribution while you are in the salary sacrifice scheme.
How much pension income you receive at retirement could also be lower as a defined benefit pension is calculated using either the size of your salary that you were receiving at the time you left your employment or your average career earnings during the time that you were employed by the company. Either way, the reduced salary created by salary sacrifice could lower your pensionable earnings, affecting the final pension amount you receive.
Ultimately, you will want to work out whether any reduced pension benefit that you might get is outweighed by any of the cost savings or other benefits of joining an EV salary sacrifice scheme.
Does an EV Salary Sacrifice Affect the State Pension?
The state pension is determined by the National Insurance Contributions made throughout your working years rather than your salary, making it generally unaffected by salary sacrifice arrangements.
To qualify for the full new State Pension, you need 35 years of Class 1 National Insurance Contributions (NIC), which are compulsory if your gross pay exceeds the lower earnings limit of £533 per month (for 2023/24). As long as your gross pay remains above this threshold, participating in a salary sacrifice scheme will not impact your State Pension entitlement.
How to Understand the Impact of an EV Salary Sacrifice Scheme on Your Pension
Assessing the potential impact of a salary sacrifice scheme on your pension before you join an EV scheme is vital. Here are steps you can take to help you understand what it could mean for your pension:
- Identify your pension type
Review your pension paperwork or speak to your employer to find out what kind of pension scheme you belong to and how it works. Clarify whether it is a defined contribution or defined benefit scheme. In the case of a defined benefit scheme find out how the final pension benefit is calculated. Understanding the specific rules and regulations governing your pension scheme will help you determine the potential impact of salary sacrifice.
- Consult a financial expert
Pensions can get complicated quickly and everyone’s financial situation is different. By running through the calculations relating to your salary sacrifice scheme and pension an independent financial adviser can provide specific insights into its likely impact on your contributions and benefits.
- Explore mitigation strategies
If you are worried that participating in an EV salary sacrifice could harm your pension income there may be ways to overcome this. For instance, some defined benefit schemes calculate your final pension based on your salary during the final few years of your employment. Refraining from any salary sacrifice during this period or just before you retire could be a workaround, although it would necessitate you finding an alternative means of transport.
The Final Word on How an EV Salary Sacrifice Scheme Could Affect Your Pension
An EV salary sacrifice scheme may impact some types of pensions, notably defined benefit pension schemes, potentially leading to reduced contributions and a lower future retirement income. However, it is unlikely that joining an EV salary sacrifice scheme will affect a defined contribution pension scheme or the new State Pension.
Salary sacrifice schemes can have significant implications on both pensions and mortgages, but it is important to note that even if your pension benefits are reduced, this decrease could be offset by the overall cost savings of running an electric car through salary sacrifice, making it a worthwhile trade-off.
Regardless, individuals should always assess the implications thoroughly, seek expert advice, and stay informed about their own pension status. By doing so, you can mitigate the risks associated with a reduced pension, ensuring a secure financial future while benefiting from an EV salary sacrifice scheme.
Learn more: What is a Salary Sacrifice Car Scheme
This article is not financial advice. The impact of an EV Salary Sacrifice Scheme on pensions can vary based on individual circumstances and pension scheme rules. It is advisable to consult financial advisers and pension scheme providers for personalised guidance.
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Richard Eagling is a financially qualified journalist with over 25 years of experience in financial reporting.
With over two decades at Moneyfacts as the editor of Investment Life & Pensions Moneyfacts, he was most recently Managing Editor at NerdWallet UK.
Richard’s a regular media contributor, his expertise has been published in The Guardian, Daily Mail, Sky News, Financial Times and The Telegraph.