Potential Downsides of Salary Sacrifice Pensions
Whilst a salary sacrifice scheme has its advantages, there are also some potential downsides which should be considered. One of the main concerns, as mentioned previously, is that it could reduce your salary to a level below the national minimum wage.
This is illegal, and employers must ensure that the salary after sacrifice does not fall below this level.
Earnings related benefits can also be impacted. Therefore, as your salary decreases, so does the amount you receive in benefits.
Examples of these benefits include statutory maternity pay or contribution-based benefits. It might also affect your entitlement to state benefits.
Unfortunately, your ability to borrow money may also be impacted. It may affect the amount you can borrow for a mortgage or loan as these are often based on your salary, which will be decreased.
According to MoneyHelper, most mortgage lenders are willing to base their lending decision on your pre-sacrifice income. On the other hand, it may be necessary to provide proof of your original salary.
However, your employer may be able to provide you with a letter to confirm what your pre-sacrifice salary was, and your mortgage can be based on this amount.
Furthermore, remember that entering into a salary sacrifice lowers your gross pay. This means that you should consolidate the potential impact on your future entitlement to means-tested state benefits.
The final drawback is that if your employer decides to opt out of the scheme, you would lose the additional pension contributions and tax savings that you have been building up.