bonus sacrifice

lexington013

Hi, i received a letter from my employer stating that as from next year im able to sacrifice my bonus to be paid into my pension without paying tax or NI. This could be around 17k gross per annum. im planning on working for the next 10 years before retiring at 55. Any thoughts on this bonus sacrifice scheme? I have about 55k in savings and outstanding mortgage of 160k.

bigadaj

Not a bad idea, as you are getting an immediate uplift of 42% assuming all is at higher rate tax. If I were you I would see if they would split the employers ni as well, as this is another 6 or 7%.

Also worth considering what funds you can invest in and options on these as well as performance.

What are you plans for your mortgage and what other pension plans have you in place?

webmasterpolo

Hi Lexington

I take it this means your £17K bonus goes directly into your works pension?

Will the employer contribute anything in addition to this bonus?

Does your employer offer salary sacrifice for your pension already? If they do surely you could already be doing this with your bonus (or the equivalent in salary) and this isn't a big change.

My thoughts would be if you don't have enough in your pension now, then it looks like an option worthy of strong consideration. Perhaps you should seek financial advice on a number of areas.

For example if you have £55.000 in savings and £160,000 in debt, you might want to examine if that's the best plan depending on the rates on both.

-Web

atush

Given you mentioned 55K savings but not a pension I am going to assume you dont have a pension (although you should do soon with auto-enrollment). so you should probably start putting these bonues into a pension.

A, you dont have one and need one (a pension)
B, you will get tax relief and NIC back
C, you have 55K in savings so don't need the cash

bilbo51

If you don't need the bonus, then salary sacrifice is a good way of saving it for later - especially if your employer contributes some or all of the NI they will be saving too!

lexington013

Thanks for all your replies. I should have been a little clearer. I have been in a pension scheme (previous employer & current employer) for the last 20 years. Currently contribute 15% per annum and employer contributes 10%, so 25% in total.
i am a higher rate tax payer. The thought of saving 40% tax and NI on my bonus is pretty appealing. The only other thought which i have previously done with yearly bonus is to pay off chunks of the mortgage (locked into 5.6% for next 5 years, can pay off 10% per annum). will look to switch to a money offset mortgage once im out of the mortgage penalty period. Like us all want to make my money work as hard as possible for me........:)

jamesd

What I'd be inclined to do given that picture is look to switching into an interest only mortgage with a planned end date just before state pension age. Then use the bonus sacrifice and reduced monthly mortgage payments to accumulate a larger pension pot. Finally, use a tax free lump sum from the pension to clear the mortgage. That'll effectively be paying off the mortgage with tax relief money, the best deal there is - tax relief on your mortgage capital payments.

Better still would be a planned end date fifteen years after state pension age, then use the state pension to do most of the mortgage clearing. This relieves you of the need to clear the mortgage until your higher income from the state pensions starts, thus increasing the income you can prudently take before then. That's particularly valuable to someone planning to retire as early as you.

In general, the longer you can leave the mortgage clearing, whether with interest only or repayment, the greater your income during early retirement can be. Then the state pensions provide the income boost to finish the job.