Car Salary Sacrifice schemes

How a Car Salary Sacrifice scheme can influence your LGPS benefits

Under a Car Salary Sacrifice scheme, you as an employee, and a member of the Local Government Pension Scheme (LGPS), have the opportunity to lease a car through your employer, in exchange for reducing your entitlement to cash pay.

There are advantages to using this scheme, as you will pay less tax and National Insurance contributions as a result of earning less in take home pay.

There are considerations to take into account however, when it comes to thinking about your LGPS pension benefits.

As the Car Salary Sacrifice scheme is non-pensionable, which means that any pay you reduce in exchange for the leasing of a car will not be protected from a pensions point of view, you will stand to lose value on your pension account as a result of using this scheme.

This is because the lower pay (post salary sacrifice) will be used to calculate the value of your eventual pension benefits. This could have an impact on both your final salary benefits (benefits accrued prior to 1 April 2014), and the current build up of your CARE benefits.

This webpage aims to provide information to you about how you could be affected, and any steps you can take to protect the value of your pension.

So if I’m earning less, do I pay less contributions towards my pension?

Yes. If your pensionable pay reduces under the Car Salary Sacrifice scheme, the amount you pay towards your LGPS pension will also reduce. This is because your contributions are calculated as a percentage of your pensionable pay after the salary sacrifice deduction has been made. In some cases, the reduction in pay may also move you into a lower contribution band, reducing the percentage you pay. However, even if you remain in the same contribution band, your contributions will still be lower because the percentage is being applied to a lower amount of pay.

If you join the Car Salary Sacrifice scheme, then the relevant payment in respect of your non-cash benefit will be taken from your monthly pay before any other deductions are made.

Therefore, the monthly pay left after that deduction has been made will be what is used to base your contribution rate for the LGPS upon. As an example, if you had a salary of £20,000, your standard contribution rate would be 5.80% of your pay. If you then joined the Car Salary Sacrifice Scheme, and substituted £3,000 from your annual salary in return for the lease of a car, then your new annual pay figure would be £17,000, and your contribution rate would change to 5.50%.

See the latest  employee contribution rate table

Will I build up less pension?

Since the implementation of the CARE scheme in 2014, you build up a pension based on your pensionable earnings during each scheme year (1 April to 31 March).

Therefore, if you begin a Salary Sacrifice scheme which isn’t ‘pensionable’, such as the Car Salary Sacrifice scheme, your pensionable pay will not include the amount sacrificed in exchange for the non-cash benefit received, for the duration agreed with your employer.

For example, if your earnings prior to beginning the Salary Sacrifice scheme were £20,000, and you lose £3,000 for the provision of a car, then this will take your pensionable earnings down to £17,000, which would then be used to calculate your pension build up for that year. 

What about my pension benefits accrued prior to the introduction of the CARE scheme? (Final Salary Benefits)

All benefits accrued before 1 April 2014 are calculated using your membership (prior to April 14), and pay at date of leaving (final salary).

Therefore, if you join a Car Salary Sacrifice scheme, your final pay at date of leaving will be affected by the deduction to your salary, and will result in your pension benefits being reduced in comparison to your full final pay figure prior to Salary Sacrifice.

Are there any other affects to my pension that I should be concerned about?

If you die in service while a member of the LGPS, a lump sum death grant equal to three times your assumed pensionable pay will be payable your chosen beneficiaries or next of kin.

If you have taken a drop in pay as a result of a Car Salary Sacrifice scheme, this amount would be reduced accordingly.

Death grant with Salary Sacrifice of £3,000:
£17,000 x 3 = £51,000

Death grant without Salary Sacrifice:
£20,000 x 3 = £60,000